Vision of Islamic Banking

Presen Outline
‡ Philosophy of Islamic banking. ‡ Vision ‡ Objectives ‡ Inception of Islamic banking ‡ Current Status of Islamic banking ‡ Way Forward

Presen Philosophy
‡ Islam is a complete religion providing comprehensive code of life ‡ Islam is not confined to some moral teachings, some rituals or some modes of worship ‡ It rather contains guidance in every sphere of life including socio-economic fields ‡ If such guidance and rules are followed by, it is very useful for the welfare and well being of all human being.

Presen Philosophy

Allah (SWT) has ordained in Holy Quran

³Allah has permitted trade and prohibited Riba´

Presen Vision

Establish Islamic Banking as banking of first choice to facilitate implementation of an equitable economic system providing a strong foundation for establishing a fair and just society for mankind

Presen Objectives
1. Equitable Distribution of Wealth ‡ Islam encourages fair and equitable distribution of wealth. Hence, it does not promote concentration of wealth in few hands ‡ Riba, Maysir & Gharar cause unfair distribution of wealth ‡ All permissible modes are beneficial for the economy, however some of them are more preferred and encouraged by Islamic Shari¶a such as Contracts of Equities (Uqood ul Musharakat) which facilitate equitable distribution

Presen Objectives
‡ Islamic banking, being a part of Islamic Economic System, should play an active role to achieve this objective ‡ For this purpose, Islamic banking transactions should primarily be based on Musharaka/Mudaraba (Profit & Loss sharing basis) so that the capital flows from wealthy class to the poorer ‡ The ratio of equity based transactions to trade based transactions should increase to achieve the real benefits of Islamic banking

Presen Objectives
2. Asset Backed Financing ‡ Where Uqood ul Musharakat (Profit & loss sharing contracts) are not possible or feasible, Uqood Ul Mubadalat (Exchange contracts) such as Murabaha, Ijarah, Diminishing Musharakah, Salam & Istisnaa etc. may be used ‡ These asset backed transaction also cause to decrease the level of inflation from the economy, provided they are completely genuine and Shariah compliant transactions.

Presen Objectives
3. Fulfilling Customer Needs ‡ Islamic Financial Institutions should evaluate the extent to which basic requirements of the community have been fulfilled through Shari¶a Compliant range of products ‡ A wide range of products fulfilling basic needs of the masses increase people¶s confidence in Islamic banking and its true spirit

Presen Objectives
4. Shari¶ah Compliance ‡ The long term sustenance and survival of Islamic Financial Institutions demands high level of Shari¶a Compliance and adherence to Shari¶a principles ‡ Products which may technically be Shari¶a Compliant but defeats the true spirit of Islam or gives way to Heelah must be discouraged ‡ A high reliance on such products raises skepticism against the commitment and integrity of industry participants

Islamic Banking Inception & today

Inception of Islamic Banking
1. Cooperative banks in the sub-continent: o Cooperatives in Hyderabad Dakan (1940s) o Cooperative bank in Karachi (1950s) Pilgrimage fund in Malaysia (1950s) full-fledged bank in 1967 Saving bank in Mitghamr, Egypt (1963) Nasr Social Bank, Egypt (l97l), was created as an interestfree commercial bank Dubai Islamic Bank (1974) Islamic Development Bank (1974) In 80s different initiative were taken in Pakistan, Iran & Sudan. Islamic Mutual funds started to emerges In 90s AAOIFI, Harvard Islamic Finance Forum, Dow Jones Islamic Index were established In 2000-05, several Islamic Bonds (sukooks) were issued. Key infrastructure institutes established including IFSB, IRA (Islamic Rating Agency), CIBAFI, ARCIFI.

2. 3. 4. 5. 6. 7. 8. 9.

Islamic Banking - a Success Story
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ 500 + Islamic financial institutions $ 500 - 600 bn in funds 250+ Shariah compliance mutual funds with $ 300bn funds 207+ International Islamic sukuks issued till 2007 with a 73% Growth in comparison with 2006 133 + Takaful companies operating world wide Post graduate degrees offered in Islamic banking by major academic institutions Important database system (HIFIP) Shariah & Accounting Standards for the Industry (AAOIFI) Recognition by IMF, World Bank and Basel Committee

Sources ‡ CIBAFI, Insurance Daily,

Islamic Banking - a Success Story ‡ More then 60 countries have ISLAMIC BANKING Institutions
± Approx 37 Muslim countries including Kuwait, Dubai, Saudi Arabia, Iran Malaysia Brunei and Pakistan ± Approx 23 non-Muslim countries including USA, UK, Canada, Switzerland, Srilanka, South Africa and Australia

Islamic Banking - a Success Story Different types of IFI have emerged globally ‡ ‡ ‡ ‡ ‡ ‡ ‡ Islamic Commercial Banks Islamic Investment Banks Islamic Units of conventional banks Islamic Funds Islamic House Financing Schemes International Financial Market International Institutions of Islamic Banking

Islamic Banking - Institutional Evolution
‡ Many foreign banks now have Islamic windows. ± Citibank ± ANZ ± ABN AMRO ± Goldman Sachs ± Kleinwort Benson(German) ± Hong Kong Shanghai bank ± Saudi American bank ± Saudi British Bank ± UBS AG

‡ Main Groups ± DMI ± Al Baraka ± Al Rajihi ± Kuwait Finance House

‡ In Pakistan
± Meezan Bank ± Al Baraka

Presen Current Status & Growth Islamic Banking ± in Pakistan
‡ Legal framework in place, licenses available for ± Islamic commercial bank ± Islamic Subsidiary of a conventional bank ± Stand alone Islamic branches of a conventional bank ‡ Legal framework hybrid of Bahrain and Malaysian model

Presen Current Status & Growth Islamic Banking ± in Pakistan
‡ ‡ ‡ ‡ ‡ Shariah Board established at SBP Islamic products available to cover 85% of the services offered by conventional banks Liquidity management products being developed Shariah audit developed by SBP Rupee denominated Sukooks has been issued

Presen Current Status & Growth
‡ Full Fledged Islamic Banks - 6  Meezan Bank  Al Barakah Islamic Bank  Dubai Islamic Bank  Bank Islami Pakistan  Emirates Global Islamic bank  First Dawood Islamic Bank ‡ Many conventional banks operating Islamic Banking Branches: Bank of Khyber,MCB, Bank Alfalah, Habib Metro Bank, Bank Al Habib, Standard Chartered Bank, Soneri, HBL, UBL, Askari, NBP, RBS etc. (12)

Presen Current Status & Growth

Presen Current Status & Growth
‡ Branch network of IB participants by Dec,08 ± Rs. 525 + ‡ Asset base of IB ± Rs. 235 bln+ ‡ Deposit base of IB ± Rs. 169 bln+ ‡ Growth rate in 2006 around 65% ‡ Share of IB in the overall Banking system stands at 4.3%

As of June, 2008

Key Management Challenges

Key Management Challenges
‡ Skepticism & Lack of awareness ‡ Lack of trained Human Resource ‡ Solutions for Liquidity Management ‡ Islamic Inter-bank Market ‡ Ensuring Shariah Compliance ‡ New Product Development & Research

Key Management Challenges
‡ Availability of Takaful ‡ Weak Regulatory/Legal Frame work ‡ Risk Management Frame work

Way Forward

Presen Way Forward
In order to meet above mentioned objectives, following steps will be helpful in moving towards the right direction: ‡ Strict compliance to SSB / SA Guidelines & AAOIFI Shari¶a Standards ‡ Use of true modes such as Mudaraba / Musharaka (Profit & Loss Sharing) which includes Joint Ventures, Venture Capital, Private Equity etc. ‡ Paying higher return to depositors and charging lower financing charges as compared to conventional banks in order to boost public confidence

Presen Way Forward
‡ Legal / Taxation laws should be modified to facilitate asset backed transactions and true implementation of Shari¶a guidelines ‡ Banks must carry out regular and organized audit activity to ensure proper utilization of depositors¶ funds and to avoid fake transactions at customer end. ‡ Depositors¶ money should not be allocated to high risk ± low profit asset classes in order to raise profitability of shareholders

Presen Way Forward
‡ µFit & Proper criteria¶ for the eligibility to become a Shari¶a Advisor/SSB member must be laid down in all jurisdictions ‡ Adequate resources must be allocated to facilitate Research & Development and education of masses


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