al huda centre of islamic banking and economics 3 rd international conference on islamic banking and...

Al Huda Centre of Islamic Banking and Economics 3rd International Conference on Islamic Banking and Takaful

Amer Khalil ur RehmanIslamic Corporate Head

Islamic Banking ServicesAskari Bank Limited

2nd November, 2009

Disclaimer: Views expressed here in a personal capacity

An Introduction to Islamic Banking and Finance; Principles, Concepts and Philosophy


Learning Objectives

• Increase Awareness about Islamic Banking and Finance

• Including;

The Prohibition of Riba in Major Religions

Riba in the Quran and Hadith

Main Principles of Islamic Economics

Differences between Conventional Vs Islamic Banking

Basic Concepts and Philosophy of Islamic Banking;


Background: Prohibition of Riba


• Interest, Usury, or Riba is forbidden in all major religions e.g.

Judaism (Deutronomy 23:19)

Christianity (Thou Shall not lend upon usury..)

Islam (Religion of over 1/5th of world population)

• Foreign Banks,

RBS (ABN Amro Bank), Citibank, Deutsche Bank, Hong Kong & Shanghai Banking Corporation, Merrill Lynch, Standard Chartered, Union Bank of Switzerland etc, doing Islamic Banking for profit.. and market size potential.. and not (necessarily) for religious reasons..

• Vision: Singapore Eateries & Fast Food Chains!

Why Islamic Banking? What is its Market Potential?


Judeo Christian Tradition

“Thou shalt not lend upon usury

to thy brother,

usury of money,

usury of anything that is lent upon usury”

(Deutronomy 23:19)


“He that hath not given forth upon usury,

neither hath taken any increase,

that hath withdrawn his hand from iniquity,

hath executed true judgment between man and man,

hath walked in my statutes,

and hath kept my judgments,

to deal truly; he is just He shall surely live, said the Lord GOD”

(Ezekiel 18: 8,9)



“He that by

usury and unjust gain increaseth

his substance, He shall gather it for him

that will pity the poor”

(Proverbs 28:8)



“In thee have they taken gifts to shed blood;

thou hast taken usury and increase,

and though hast

greedily gained of thy neighbours by extortion,

and hast forgotten me, said the Lord God.”

[Ezekiel 22:12]



Introduction to Islamic Banking


Islam

Aqidah(Faith & Belief)

Shariah(Practices & Activities)

Akhlaq(Morality & Ethics)

IBADAT(Man to God Worship)

Muamalat(Man to Man Activities)

Political Activities Economic Activities Social Activities

Banking & Financial Activities

Islam and Shari’ah

A balanced approach is required by Islam

Our Focus


Sources of Fiq’h in Islam• Quran

• Sunnah

• Ijama’e Ummah (Consensus of the Ulema)

• Ijtehad / Qiyas

(AAOIFI Shariah Standards: through Ijtama’ee-Ijtehad)

Accounting & Auditing Organization for Islamic Financial Institutions’

Shariah Standards Accounting Standards, Auditing Standards &

Governance Standards


According to the Quranic verses.. (summary)

• Taking interest has been equated with rejecting faith.. (Al-Imran)

• God deprives interest of all blessings.. (2:276)

• Even [Just] Saying: “Trade is like Interest” is forbidden..

and would attract punishment on the day of judgment… (2:275)

• O (Muslim) Believers (Not Non-Muslims!!)

if indeed you really are Believers and fear God then give up interest.. if not then take notice of war from Allah and his Messenger…

(2:278-279)

• Detailed severe punishments mentioned in Quran

for those who make war upon Allah and his Messenger.. (5:33)

(Caution: Role of State not Individuals. Additional context 5:32)


“God deprives interest of all blessing, but blesses charity; He loves not the ungrateful sinner”

(The Cow – Sura Al-Baqara 2:276)

Riba in the Quran


Fourth Revelation:

“Those who benefit from interest shall be raised like those who have been driven to madness by the touch of devil; this is

[just] BECAUSE THEY SAY: “Trade is like interest”

while

God has permitted trade and forbidden interest…”

(The Cow – Sura Al-Baqara 2:275)

Riba in the Quran


Fifth Revelation:

“O believers, fear Allah, and give up what is still due to your from the

interest (usury), IF [indeed] you are true believers[!!!].

If you do not do so, then take

Notice of War from Allah and his Messenger. But, if you repent, you can have your principal. Neither should you commit injustice, nor should you be subjected to it.”

(The Cow – Sura Al-Baqara 2:278-9)

Riba in the Quran


Riba in Quran (Related in context to 2:278)“The only reward of those Who make War upon Allah & his Messenger,

and strive after corruption in the land, will be that they will be

1. Killed

2. Or, Crucified,

3. Or, have their Hands and Feet on alternate sides Cutoff,

4. Or, will be Expelled out of the land.

• Such will be their degradation in the world, and • in the hereafter, theirs will be an awful doom.

(Quran: The Table Spread - Al-Maida Chapter 5: Verse 33-34)

• Caution: Role of State not Individuals to implement Shariah. See Context 5:32)

Save those who repent before ye overpower them. For know that Allah is Forgiving, Merciful.


Important Caution: Duty of the State (Not Individuals) to implement Shari’ah Law..

• Taking one life is equal to killing mankind..

• “..Whosoever killeth a human being, other than man-slaughter or corruption in the earth, it shall be as if he killed all mankind,

and whoso saveth the life of one,

it shall be as if he had saved the life of all mankind...”

(Quran: The Table Spread - Al-Maida Chapter 5: Verse 32)

(i.e. Individuals need to refrain from Vigilantism!!…)


Riba in Hadith“The Prophet cursed

the receiver and

the payer of interest,

the one who records it and

the two witnesses to the transaction

and said: “They are all alike (in guilt).”

(Sources: Jabir ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed)


The Holy Prophet said: “Even when interest is much, it is bound to end up in paltriness.”

(Sources: Ibn Mas`ud, Ibn Majah, Musnad Ahmad)


Muamalat (civil transactions) should be..

• Free from Riba (an increase without ‘iwad or equal counter-value)

• In Compliance with (objectives of i.e. Maqasid - e - ) Shariah

• Devoid of Gharar (uncertainty, indeterminacy)

• Free from Qimar (gambling) and Maysir (games of chance)

• Free from Ghishsh (fraud) and Khilabah (cheating)

• Entitlement to profit depends on liability for risk

• Contracts based on free mutual consent

• “What is not explicitly prohibited is permissible”


• "The very objective of the Shariah is to promote the welfare of the people, which lies in safeguarding

• their faith, • their life, • their intellect, • their posterity and • their wealth.

• Whatever ensures the safeguarding of these five serves public interest and is desirable."

Al-Ghazali

Shariah and Maqasid-e-Shariah


Shariah and Maqasid-e-Shariah

• "The basis of the Shariah is wisdom and welfare of the people in this world as well as the Hereafter.

• This welfare lies in complete justice, mercy, well-being and wisdom.

• Anything that departs from justice to oppression, from mercy to harshness, from welfare to misery and from wisdom to folly, has nothing to do with the Shariah."

Ibn al-Qayyim


Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

Equity (Capital) Market

Debt Market

• Forms of Contracts• Instruments• Securities

• Forms of Contracts• Instruments• Securities

Human Financial Needs


Islamic Mode Description Shariah Permissibility Source

Quran Sunnah Ijma’a(Consensus)

Trade Based (Debt Creating) Modes (Low Risk Category)

Bai’ Murabaha Cost Plus Profit Sale Yes Yes Yes

Bai’ Istisna`a Sale on Order Yes Yes

Bai’ Salam Commodity Sale Yes Yes Yes

Semi-Debt Creating Mode (Medium Risk Category)

Ijarah Leasing Yes Yes Yes

Sharing (Non-Debt) Modes (Full Risk Category)

Musharakah Joint Venture

Profit Sharing

Yes Yes Yes

Mudarabah Trustee

Profit Sharing

Yes Yes Yes


Islamic Banking

ClientGoods & Services

money

ConventionalBank Client

money

money + money (interest)

vs

Islamic Financing


Conventional Vs Islamic Economics Difference in Factors of Production

Conventional

• Land

• Labour (+Entrepreneur)

• Capital

Islamic

• Land

• Labour(incl. Entrepreneur)

Capital

Conversio

n..


Frequently Asked Questions (Some Common Misconceptions…)

• Form Vs Substance Issue

• Are Mudarabah & Musharakah “the ideal modes”?

• Are Fixed Returns possible in Islamic Banking?

• Can Returns be the same as Conventional?

No! Trade Based modes are the ideal modes![Allah has permitted Trade and Forbidden Riba (2:275)]

Yes! Through Fixed Rental Income or Fixed Profit on Sale Transactions

Yes! e.g. If Cost of Cow is same!!

since US$ / Kilo Haram Meat ≠ US$ / Kilo Halal Meat!!!


Frequently Asked Questions (Some Common Misconceptions…)

• Impact of Inflation and Time Value of Money

• Banking is 600 years old, so how can there be Role for Bank in Islam?

• Islamic Banks share Profits, would they also share losses?

• Can Islamic Banks get funds from Conventional Banks? if yes, why?

Financial Contracts / Transactions existed over 1400 years agoUnder lying modes / Financial Contracts form the basic building block

Yes! BUT!!!! Only if they actually occur, despite diversification; Since Risk Beta of Banks is closer to the Market Risk Beta!!!

Prevent Riba!!! Or Speak against Riba? Or just Consider it wrong?


Is Benchmarking with Conventional permissible?• Confusion due to Mixing of Shariah Issues with Pricing Decisions

Tiers Islamic Bank Depositor Islamic Bank Financee

Tier 1. Mudaraba I Rab-ul-Mal I Mudarib I

Tier 2. Mudaraba II Rab-ul-Mal II Mudarib II

“Return” “Profit Spread” “Financial Costs”

Unfair to Depositor X X 4% 2% 6%

Unfair to Financee X 14% 2% X 16%

Fair As per IFSB 10% 2% 12%

Tiers Conventional Bank

Depositor Conventional Bank

Borrower

Interest on Deposits

Interest Spread

Interest on Borrowing

Market Rates 10% 2% 12%

Market Based Returns are not just permissible! IFSB prefers / recommends them as they are Fair and Equitable!!


Client

Client

Halal

Restaurant

Owner

Islamic Banking

Halal

Abattoir /

Butcher

Shariah

Advisor

Onus Onus

Onus Onus

Onus Shifts!!


Bai’tan fil Bai’…

Why reliance on Shariah Advisor and Onus Shift is Essential?


Value Addition Offered by Major Islamic Modes..

Islamic Finance Conventional Finance ‘Equivalents’

Intermediated Intermediated Not intermediated

Murabaha None None

Salam None Future Contracts

Istisna`a None None

Ijarah Leasing Leasing

Musharakah Shareholding Venture Capital

Mudarabah None Venture Capital

ICI and Fayzan Manufacturing Mudarabah

Interesting Solution to the Privatization Dilemma!!


Round Trip Commodity Quantity Sold (Sale Price)

Purchased(Cost Price)

CashFlows

1. In Madina Rice 10 Kg DH 100 DH 100

2. In Madina Lentils (DH 100) (DH 100)

3. In Damascus Lentils DH 200 DH 200

4. a In Damascus Rice 10 Kg (DH 50) (DH 50)

4. b In Damascus Rice 30 Kg (DH 150) (DH 150)

5. In Madina Rice DH 300 DH 300

TOTAL DH 600 (DH 300)

‘Income’/ Positive Cash Flows

DH300

Bai’ Salam – an illustration


Istisna

Istisna

Parallel

Istisna

Cash

Flows

Mode Selection & Istisna

IstisnaTax

Benefit

IstisnaShort

Term

Murabaha

Ijarah

D. M.


IstisnaParallel

Istisna

Buyer

Mode Selection & Istisna

Buyer Seller

Customer Bank

Seller

Air Bus


Islamic Deposit Product Modes• Mudarabah

• Qard

• Wakalah tul Istismar

• Musharakah

Other Modes

• Amanah

• Waddiah


Depositors Askari Islamic

Weightage System

Pool of Funds

Businesses/Corporates

Profits Financing

ProfitsDeposits Equity


Asset Side Products

1. Murabaha

2. Ijarah(Consumer /Corp. Industrial Equipment)

3. Diminishing Musharakah (for Consumer /Corporate)

4. Salam

5. Istisna’ (for Construction/ Machinery/ Manufacturing)

Liability Side Products

1. Pak Rupees Chequing Accounts Askari Islamic Current Account Askari Halal Savings and Notice Account (AHSAN) AHSAN MUNAFA AHSAN MASRAFI

2. Foreign Currency Chequing Accounts Askari Halal Foreign Currency Current A/c Askari Halal US Dollar Savings Account

3. Askari Halal Investment Accounts (AHIA) Askari Islamic Investment Certificates (AIIC) Askari Khas Islamic Deposit Account(AKIDA) Askari Islamic Term Quality Deposit(AITQAD) Askari Halal Certificates of Aasaan Monthly Mudarabah (AHCAMM) Askari WAKALAH-TUL-ISTISMAR

Askari Islamic Banking Products


Motivating Factors

COBM (Cost of Being a Muslim)(Cost of Being a Muslim)


• Any Questions?

[email protected]

[email protected]

[email protected]


43

PAKISTAN THALASSAEMIA WELFARE SOCIETY “THALASSAEMIA” “HOUSE”

TIPU ROAD RAWALPINDI

Jazakumullah-e-Khair!


Jazakumullah-e-Khair!

al huda centre of islamic banking and economics 3 rd international conference on islamic banking and...

Documents

rd international conference

philosophy slide

takaful introduction

prohibition of riba

takaful background

takaful islam

usury deutronomy

usury of money