al huda presentation on islamic banking by muhammad asad bok

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Presentation onIslamic Banking

By

Muhammad AsadHead of Islamic Banking Division

The Bank of Khyber

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History of Islamic Banking in NWFPHistory of Islamic Banking in NWFP Decision by the Government of N.W.F.P to convert the Bank of Decision by the Government of N.W.F.P to convert the Bank of

Khyber into Islamic Bank:Khyber into Islamic Bank: December 2002December 2002

Establishment of Islamic Banking Division:Establishment of Islamic Banking Division: January 2003.January 2003.

Formation of Shariah Supervisory Committee: Formation of Shariah Supervisory Committee: January/February 2003January/February 2003

Permission from the State Bank of Pakistan:Permission from the State Bank of Pakistan: September 2003September 2003

Start of Operations:Start of Operations: November 23, 2003 (27November 23, 2003 (27thth Ramazanul Mubarak) Ramazanul Mubarak)

BOK ACT AmendedBOK ACT Amended:: July 2004July 2004

Five Branch out of Twenty nine converted into Islamic Banking Five Branch out of Twenty nine converted into Islamic Banking Branches.Branches.

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Shariah Supervisory Committee of Shariah Supervisory Committee of BOKBOK

ChairmanChairman Prof. Khurshid AhmadProf. Khurshid Ahmad

MembersMembers Justice (R) Mufti Muhammad Taqi UsmaniJustice (R) Mufti Muhammad Taqi Usmani Prof. Dr. Mehmood Ahmad GhaziProf. Dr. Mehmood Ahmad Ghazi Mufti Ghulam-ur-RehmanMufti Ghulam-ur-Rehman Dr. Shahid Hasan SiddiqueDr. Shahid Hasan Siddique Syed Muhammad AbbasSyed Muhammad Abbas

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Functions of the Shariah Supervisory CommitteeFunctions of the Shariah Supervisory Committee

Approval of all systems, Documents and Approval of all systems, Documents and Manuals to be Shariah Compliant.Manuals to be Shariah Compliant.

Quarterly Shariah Review.Quarterly Shariah Review. Guide for enhancement of Islamic Guide for enhancement of Islamic

Banking and conversion of the Bank of Banking and conversion of the Bank of Khyber.Khyber.

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Philosophy of Islamic Banking and FinancePhilosophy of Islamic Banking and Finance

Islamic Shariah prohibits ‘interest’ but it does not prohibit all Islamic Shariah prohibits ‘interest’ but it does not prohibit all gains on capital. It is only the increase stipulated or sought gains on capital. It is only the increase stipulated or sought over the principal of a loan or debt that is prohibited. over the principal of a loan or debt that is prohibited.

Creating financial activities in an Islamic set-up which isCreating financial activities in an Islamic set-up which is Asset-BackedAsset-Backed with ability to causewith ability to cause ‘Value Addition’.‘Value Addition’.

Diverting funds to those activities which have highest ‘value Diverting funds to those activities which have highest ‘value addition’.addition’.

Distributing the ‘value addition’ among different sectors of the Distributing the ‘value addition’ among different sectors of the economy.economy.

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What is Islamic Banking?What is Islamic Banking?Islamic Banking can be defined as banking in consonance with the ethics and value system of Islam and governed by

the principles laid down by Islamic Shariah, the principles laid down by Islamic Shariah, the conventional good governance, andthe conventional good governance, andThe risk management rules.The risk management rules.

Islamic Banking is a tool to implement the Islamic Islamic Banking is a tool to implement the Islamic Economic System, pooling resources, diversion of Economic System, pooling resources, diversion of resources to most profitable and development projects and resources to most profitable and development projects and distribution of income among contributors of Funds. distribution of income among contributors of Funds.

Islamic Banking is developing to provide all the services Islamic Banking is developing to provide all the services offered by any conventional bank in a more responsible offered by any conventional bank in a more responsible manner while remaining within the bounds of Shariah.manner while remaining within the bounds of Shariah.

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Islamic Banking VS Interest Free BankingIslamic Banking VS Interest Free Banking

Interest free banking is a narrow concept Interest free banking is a narrow concept denoting a number of banking instruments or denoting a number of banking instruments or operations, which avoid interest. Islamic operations, which avoid interest. Islamic Banking, the more general term is expected not Banking, the more general term is expected not only to avoid interest-based transactions, only to avoid interest-based transactions, prohibited in the Shariah, but also to avoid prohibited in the Shariah, but also to avoid unethical practice and participate actively in unethical practice and participate actively in achieving the goals and objectives of an Islamic achieving the goals and objectives of an Islamic Economy.Economy.

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Islamic Vs. Conventional Islamic Vs. Conventional BanksBanks

CONVENTIONALCONVENTIONAL•Borrows funds from the depositors and pay interest to them.Borrows funds from the depositors and pay interest to them.•Lends the funds to the borrowers and charge interest from them.Lends the funds to the borrowers and charge interest from them.

ISLAMICISLAMIC•Deposits accepted on the basis of profit and loss sharing Deposits accepted on the basis of profit and loss sharing arrangement between the bank and the depositors arrangement between the bank and the depositors (Musharakah or Mudarabah).(Musharakah or Mudarabah).

• Funds invested on the basis of Islamic financing Funds invested on the basis of Islamic financing instruments such as instruments such as Musharakah ,Mudarabah ,Ijarah ,Murabaha ,Istisna ,Salam Musharakah ,Mudarabah ,Ijarah ,Murabaha ,Istisna ,Salam etc.etc.

• The income earned is shared in pre agreed profit sharing ratio.The income earned is shared in pre agreed profit sharing ratio.

•The loss is shared in the ratio of deposits and equity investment The loss is shared in the ratio of deposits and equity investment (not the agreed profit sharing ratio. (not the agreed profit sharing ratio.

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Weightages OR Profit Sharing RatioWeightages OR Profit Sharing Ratio Profit sharing ratio is expressed in weightages. Profit sharing ratio is expressed in weightages. Weightages is one scientific mechanism to lay down the Weightages is one scientific mechanism to lay down the

ratio / share of a customer in the profit of a period. This ratio / share of a customer in the profit of a period. This mechanism allows the flexibility of distributing profit mechanism allows the flexibility of distributing profit among customers on pre-agreed ratio coupled with changes among customers on pre-agreed ratio coupled with changes in Deposit position of each Customer during that period.in Deposit position of each Customer during that period.

The Weightages decides relation of profit of one category / The Weightages decides relation of profit of one category / Class of Depositors viz-a-viz other classes of deposits.Class of Depositors viz-a-viz other classes of deposits.

In nut shell, it is a ratio of profit agreed between the Bank In nut shell, it is a ratio of profit agreed between the Bank and different classes of Customers to share profit.and different classes of Customers to share profit.

It may be noted that loss is shared in the ratio of funds It may be noted that loss is shared in the ratio of funds provided and for that purpose, Weightages shall be ignored.provided and for that purpose, Weightages shall be ignored.

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Kinds of Accounts Offered Kinds of Accounts Offered ByBy

Islamic BanksIslamic Banks

Current AccountCurrent Account Interest Free PLS Saving AccountInterest Free PLS Saving Account Riba Free CertificatesRiba Free Certificates

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Monthly Monthly Profit Sharing Profit Sharing

SystemSystem

An IllustrationAn Illustration

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PROFIT RATES (January-June 2006)PROFIT RATES (January-June 2006)

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Key MisconceptionsKey Misconceptions““Islamic Banking looks the same as conventional Islamic Banking looks the same as conventional Banking”Banking”

A halal meat and haram meat may look exactly the A halal meat and haram meat may look exactly the same but one is permissible while the other is not. same but one is permissible while the other is not.

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Key MisconceptionsKey Misconceptions

““A fixed rate of return is not permitted under A fixed rate of return is not permitted under Islamic Shariah”Islamic Shariah”

Fixed rate of return does not make a Fixed rate of return does not make a transaction halal or haram.transaction halal or haram.

For example:For example: Ijarah of Machinery.Ijarah of Machinery. Rent on property.Rent on property.

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““Increasing the Price based on Credit”Increasing the Price based on Credit”

Jurists allow the difference between cash and Jurists allow the difference between cash and credit prices of a commodity considering it a credit prices of a commodity considering it a genuine market practice.genuine market practice.

What is prohibited is any addition to the price What is prohibited is any addition to the price

once mutually agreed because of any delay in its once mutually agreed because of any delay in its payment. payment.

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Why there is no Loss in Islamic Banking ?Why there is no Loss in Islamic Banking ?

Taking risk does not imply that loss must occur in a Taking risk does not imply that loss must occur in a transaction or business.transaction or business.

We go for a project and business having minimum We go for a project and business having minimum risk.risk.

Different portfolio choices with Islamic Bank.Different portfolio choices with Islamic Bank.


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Thank youThank you