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Islamic Banking
Expands From
Gulf To IndiaPRESENTED BY:
SWATI RANKA(41)
NIDHI SHAHI(53)
RAHUL PATEL(37)
KOMAL SHAH(49)
DEEPA YADAV(60)
Introduction of Islamic Banking System of banking or banking activity that is consistent with the principles
of Islamic Laws (Sharia) which is against the collection or
payment of interest commonly called ‘Riba’.
As a genre of financial services, Islamic banking denounces the very idea
of interest rates, and rests on profit-sharing principles
.
Prohibits investing in business of making money out of money, upholding
the belief that wealth is generated through actual trade and investment.that
are considered unlawful or ‘Haraam’.
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The book ‘Future of Money’ by Bernard Lietar, he expertly
highlights the intrinsic dangers of ‘interest’.
He illustrates how interest is a direct cause of inflation, wealth
imbalance contributing to the rich getting richer and the poor
getting poorer.
Islamic Banking has a huge market potential in India.
History of Islamic banking
Traced backed 8th Century(Muslim countries)
Modern Islamic Banking 1963(Egypt) by Ahmad EL Najjar.
Islamic Development Bank 1975.
Dubai Islamic Bank 1975.
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With presence in over 60 countries and a 15% CAGR, it has estimated
designated assets worth $1.3 trillion in more than 400 financial institutions
offering Sharia compliant products
Al Rajhi($28 billion)
Truths of Islamic Banking
• Charging of interest is prohibited in all monetary
transactions.
• Supervised by a board of Islamic scholars and clerics
• Sharia banks do charge interest – they just give it another
name.
Reasons to come to India
Vibrant democracy, good socio economic principles, good business climate
Inclusive growth
Financial inclusion of Muslims
Corporate sector
Counter terrorism
Entrepreneurship
Investment framework
Bankruptcy
Stock market
Porters five
forces model
-
-
Against
the banking approach
two sets of rules: one is based on the ideal objectives of Shari’ah which is applicable in normal conditions
other is based on some relaxations given in abnormal situations
mostly relying on the second set of rules
misunderstanding among majority community has to be addressed; Islamic banking is not just for Muslims.
OVERVIEW (issues to be addressed)
The Shariat prohibits the collection and payment
of interest.
Banks don’t pay interests on deposits; nor do they
charge interest on loans.
used to finance projects on ownership basis.
only current accounts comply
For instance, in case of a housing loan
An Islamic bank, however, cannot invest the
money just anywhere:
the Shariat prohibits investment in businesses
considered haraam, such as those related to
alcohol, pork or pornography.
Problems in implementing
Re-training of staff
Shortage of expertise
Issues with adopting Islamic
Banking – From a regulatory perspective
Except a basic offering like current account,
Al Wadiah (for saving bank account): Section 21
of the Banking Regulation Act.
Mudarabah(for term deposit or investment): Here
again, Section 21 of the BR Act
Mudarabah, Musharakah (for project finance and
SME credit): Sections 5, 6 of the BR Act
Ijarah (for home finance): Section 9 of the BR Act
Istisna (leasing, buyback): Besides the usual curbs
on acquiring immovable property, offering
Issues with adopting Islamic Banking – Constitutional position
two aspects to evaluate:
a) The role of state, if any, in a venture like this
b) The role of such financial institutes and its
possible impact on demography
Scenario (a)
Scenario(b)
Products trends
Musharakah (joint venture):Musharakah is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata.
Mudarabah (profit sharing): The investor provides capital to the entrepreneur to undertake a business or investment activity. Profits are shared on a pre-agreed ratio, while losses are borne by the investor alone.
Murabahah(cost-plus financing) : where the bank buys the item and sells it to the customer. The sale price includes a profit margin agreed upon by both parties and is repaid on a deferred basis.
Sukuk: Sukuk is an Islamic bond that represents proportionate beneficial ownership in the underlying asset. The issuer provides collateral security over the assets to sukuk holders to secure payment of the sukuk.
Sukuk do not pay interest; rather they generate a return through actual economic transactions in the form of sharing or leasing the underlying assets.
Success with sukuk: According to a Standard & Poor’s report, assets of the top 500 Islamic banks expanded 28.6% to a total $822 billion at the end of 2009, compared with $639 billion at the end of 2008. ―Only recently, the Indonesian government sold more than $850 million worth of sukuk bonds to domestic retail investors,‖ says Samir Nair, partner (business advisory services), at Ernst & Young.
Takaful(islamic insurance):which offers joint risk-sharing in
the event of a loss by one of the participants.
Sareshwala’s list is a unit-linked insurance product,
developed by insurance company Tata-AIG.
Ijara(lease): the Bank makes available to the customer the
use of service of assets / equipments such as plant, office
automation, motor vehicle for a fixed period and price
bai al dayn securities: It refers to the sale of a debt arising from trade and services transaction in the form of a deferred payment sale. The customer sells this debt to the Bank at a discount.
In Malaysia, for example, Bai Al Dayn is the basis for the sale and purchase of Islamic securities, debt certificates, and various products.
In the Middle East, the majority of scholars consider the trading of debt to be similar to the trading of money and therefore ribawi or riba or (interest)-bearing.
conclusion
Islamic banking has a good prospects in india, given the diverse indian canvas and holds good for india from a development point of view.
When America,UK, Germany, France etc. are accepting Islamic Banking why we shlould not enjoy this alternative banking. Even World Bank accepted ethics of Islamic Banking earlier. Now it is the right time for india.
On the other hand, there are provisions for interest-free banking even now. Banks can invest in zero-coupon bonds, short-term treasury bills and corporate bills — all of which are based on implied interest rates, but don’t actually pay interest
Any bank can offer you a portfolio account where your money is invested in non-interest-bearing securities. Individuals can open non-interest bearing current accounts. All of them in a sense comply with doctrine of Islamic Banking.
Those who support the plea for an alternate financing channel to support the Muslim community need to realize that India’s banking is ―inclusive‖ and the reluctance of some Muslims to use banks is a case of self-exclusion, not discrimination.