THE CAPITAL STRUCTURE OF ISLAMIC BANKS

UNDER THE CONTRACTUAL OBLIGATION OF PROFIT

SHARING

Submitted To : Mr Zeshaan Ghafoor

Submitted by : Haseeb Razzaq CMS : 25395

MS : Accounting and Finance

Date :30/8/2019
Introduction and Background:

The discussion topic in this paper are Capital Structure,Islamic banking and
Conventional or Commercial banking (Non Islamic Banking). Capital
Structure means that how a firm and organization deal or finance its overall
operation and growth by using their different sources of funds.In capital
structure debts are come in the form of bonds issues and equity is
classified as a retained earning etc. Now discuss about the capital structure
of conventional bank and Islamic bank. In conventional bank the capital
structure are totally based on interest. In conventional or commerciall
banks ( non Islamic banks) investement are totally based on interest. In
conventional or commerciall banks when investment decrease the market
value and rate of return of shareholders also decrease . One important
thing that financial risks are always include when your investment
decrease. In conventional bank if you barrow any amount for a specified
period when the period will be complete you will be pay some additional
amount.These all things are against from Islamic shariah rules also creat
unequall distribution of wealth in a society.These are western banking
system. All of these situation the need of Islamic banking are necessary for
society and banking system. In Islamice Banking system , the capital
structure are based on equity in which the shareholder equities and
investements are based on profit and loss sharing (PLS). In Islamic banking
system there is no charge of interest. Islamic bank provides account for
which offer profit and loss. Islamic bank also reduce the chances of risks
and also create or increase the investment. In Islamic bank when the
investment increase then the market value and rate of return of
shareholder also increase. There is no financial risks in Islamic bank system.
The Islamic bank or Islamic finance and shairah compliant are banking
activities that are based on Islamic law (shariah rules) and the practical
application through the Islamic economics. Islamic Banking also include
some other modes that are Mudarabah (Profit and Loss Sharing) , Wadiah
means safekepping, Musharaka (means joint venture) , Murabahah ( means
Cost-plus) and Ijara (means leasing). Islamic banking system prohibit riba.
Riba means interest define as interest pay on all loans of money.
Investment in business that provide goods and services ( pork and alcohol)
etc are haram in Islam. Although the Islamic bank and finance contain
many prohibition such as on consumpation of alcohol,gambling and
uncertainity etc. In Islamic Banking interest bearing deposits are not
allowes . In Islamic banking profit sharing investment accounts are used.
They accounts are according to Shariah-e- Islamice P.S.J accountns are
different from conventional deposits because of the contract between the
depositors and the bank is not a debt contract ,but the depositors are
reduced to accept the losses.

Instead of conventional banking gambling,riba, and gharar are three main

things that are prohibited in Shariah Law. Gharar creats uncertainity. In
Islamic banking structure different components are follow Musharakh,
Mudarabah, Ijaraha, Salam, Murabah and Istisna.

Musharaka simply means joint venture or partnership structure in Islamic

banking sector that the partners are share profit and loss. While Mudaraba
are a contract between two parties in which one party invest and other
parties manage all management process . The investment party are owner
and other management party are agent. Ijaraha means rent and it is part of
shariah compliance.

In conventional banking and Islamic banking there are different from

another , in conventional banking structure how the bank structure setup.
The main purpose of conventional banking sectore are collect the money or
deposit from peopleand also give loan to people at interest base. In
conventional banking mobilize the funds in order to make money.
Conventional bank doesnot concern the loss of their clients they just
concern their own intrust or profit. Conventional banking sector are invest
in all projects if they are benefit for their capital structure. In conventional
Banking sector the investment structure are mostly non-shariah compliant

Like Hoteling, insurance, Alkohl making products ,etc.

In Islamic Banking Sector there compliance departments that are following
and monitor their structure, management and investment process. The
audit commite of Islamic Banking Sector cheak their anuall report if they
find any missrepresnt or illegal items that are not related to Shariah
Compliance Law then they baned that department. Islamic Banking system
are promotes the chances of reduction of risk and also creats the more
chances of investment stability. Islamice banking system lend money to
those who need money .Islamic banking system also provide that are based
on profit and loss.

Islamic Banking system are playing a vital role in the Financial and banking
sector of world. Islamic banking system are more succesfull as compared to
conventional banking system. There are 300 banks and 250 mutual funds
that are working around the world.

In Pakistan there are many Islamic that are working. That name are Mezaan
Bank, Dubai Islamic Bank, Al Baraka Bank, Bank Alfalah , Askari Bank And
MSB Muslim Commercial Bank. In 1979 the Islamic Bank system was
introduced and started work. The BankIslami Pakistan was the first Islamic
bank in Karachi.Now the Mezaan Bank are the first and largest Islamic Bank
of Pakistan that are playing a vital role in banking sector of Pakistan.

Assumpations.

 Investment Increase
 Market value and rate of return of shareholder also increase
 No Financial Risk

Problem Statement.

In conventional Banking System the main purpose is to generate money

and give loan to people at interest base. The interst base system are not
suitable for the accounts or clients. Because if anyone take loan to
conventional bank they will charge interst about that loan and give a date
to return of that loan with some additional amount (interest). So in these
case the depositor or creditor are bearing some loss. Simple that
conventional Banking System just like capitalism system . The capitalism
system are not suitable and promote unequall distribution of wealth and
natural resource. So in all these situation the Islamic Banking System are
more good and suitable for society and world as compared to conventional
Banking System. Islamic Banking System promote the reduction of risks in
investment and also stable the investment. In Islamic Banking System
investment are based on profit and loss sharing.. Islamic Banking System
structure depend on Shariah compliance rules… But the main problem in
promoting and developing the Islamic banking system are that the
European Banking system.. Islamic Banking System is under jurisdiction and
also not allowed in European countries. But now the Islamic Banking
System are developing time to time in the whole world. And the world
community understanding that the Islamic Banking System are more
suitable and stable the investment and reduces the chances of risk in
investment . Islamic Banking system are the mixture of debt and equity.
Conventional banking system are totally debt base sytem.

Relaed Articles…. ( I read this articles and understand the capital

structure of conventional and Islamic Banking)

Capital Structure and Financial risks in non conventional banking system,

Profit sharing investement accounts in Islamic banks, Lack of profit Loss
Sharing in Islamic banking,A theory of Profit Sharing under adverse
selection, The case of Islamic Venture Capital,Musharakah Tijarah cross-
Broder Financing ,concept, Structure and Salient Features.