islamic financial system 2012

8/3/2019 Islamic Financial System 2012

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Allah will deprive Riba of all blessing, but will giveincrease for deeds of charity, for He loveth not

creatures ungrateful and wicked.

(2:276)



ISLAMIC

FINANCIAL

SYSTEM

Islamic Financial

System



Group Members

Nauraiz Abbas Mi10MBA030

Waseem Anwer Mi10MBA042

Yahya Mahmood Mi10MBA025

Nayyar A. Majeed Mi10MBA069

Kashif Naeem Mi10MBA043



Contents

y What is Financial System

y Introduction to Islamic Financial System (IFS)

y Philosophy behind IFS

y Regulation of IFS

y

Development of IFS in Pakistany Islamic Modes of Financing

y Graphical Representations of IFS Islamic Banking around the World

Islamic Banks in Pakistan

Financial Highlights IFS

yComparisonConventional System & Islamic System

y Can IFS play any role in economic development of the Country?

y Challenges

y Conclusion



What is a Financial system ?

y Financial system is the system that allowsthe transfer of money between

Investors &

Borrowers.

y It can operate on a global, regional or firm

specific level.



IntroductionIslamic Financial System (IFS)

y Islamic Financial System refers to a systemin which all transactions is consistent withthe principles of Islamic law (Shariah)

y Shariah prohibits

o Riba (Interest)

o Gharar (Speculation)



Philosophy behind IFS

y Islamic Shariah forbids µ interest¶ but it does not prohibit allgains on capital.

y It is only the increase stipulated over the principal of a loan

or debt that is prohibited.y Islamic principles simply require that performance of capital

should also be considered while rewarding the capital.

y Islamic financial system is based on

Risk-sharing,

Owning and handling of physical goods,

Involvement in the process of trading,

Leasing and

Constructing contracts using various Islamic modes of finance



R egulation of IFS

y In Pakistan, the banks are authorized to offer products based onIslamic modes under the Banking Companies Ordinance, 1962.

y The Shariah Board of State Bank of Pakistan has approvedEssentials of Islamic modes of finance and Model Agreements,

which previously issued as guideline to all Islamic bankinginstitutions (IBI)

y Each IBI is required to appoint a Shariah Advisor who isresponsible to give approval regarding Shariah compliance of allproducts of IBIs and issue Shariah rulings.

y The SBP Shariah Board advises State Bank in formulation of regulations on Islamic banking. In case of any difference of opinion between SBP Shariah Board and Shariah Advisor of anIslamic bank, the ruling of SBP Shariah Board is final.



Development of IFS in Pakistan

y The Council of Islamic Ideology (CII) was established in1962

y 1973 Federal Shariat Court and compressive legislationon Islamic principles was passed, known as the third

constitution of Pakistany 1980 Zakat and Usher Ordinance was passed. Shariah

enjoins all Muslims who are sahib-e-nisab to pay, and theState to arrange for the proper collection, disbursementand utilization of Zakat and Usher

y 1985 All commercial banking in Pak Rupees was madeinterest free. As a result total deposits rose from 9.2% atthe end of 1981 to 61.6% by end of 1985



Development of IFS in Pakistan (cont¶d)

y In 1991 procedure adopted by banks in 1985 was declaredunislamic by federal shariat court.

y 1999 The shariat appellate bench of supreme court of Pakistan ordered to cease all laws on interest banking. A high level commission was formed by government toestablish and endorse Islamic banking as parallel banking.

y 2001 State bank of Pakistan laid down the standards forestablishment of Islamic commercial banks and standalone branches by existing commercial banks.



Development of IFS in Pakistan (cont¶d)

y 2002 State bank of Pakistan issued first Islamic bankinglicense to Meezan bank.

y State bank of Pakistan designed a musharika based export

refinance scheme, in order to provide export finance on the basis of Islamic modes of financing.

y 2004 Islamic banking department (IBD) was establishedin state bank of Pakistan.

y 2005 A joint venture of ³Pak-Kuwait InvestmentCompany´ and Malaysian based company named ³TakafulNational´ launched first takaful business in Pakistan.



Islamic Financial Products

1. Musharakah (Partnership)

2. Mudarabah (Passive Partnership)

3. Ijarah (Leasing)4. Salam

5. Istisna (Contract of Manufacturing)

6. Wakalah

7. Takaful

8. Sukuk



1. Musharakah (Partnership)

y A joint enterprise in which all the partners sharethe profit or loss of the joint venture

Profit of the enterprise can be distributed in any proportion by mutual consent. However, it is notpermissible to fix a lump sum profit for anyone.

In case of loss, it has to be shared strictly in proportion tothe capital contributions.

The liability of all the partners is unlimited.



2. Mudarabah (Passive Partnership)

y This is a contract between two parties :

a capital owner (called rabb al-mal) and

an investment manager (called mudarib).

y Profit is distributed between the two parties in accordance with theratio that they agree upon at the time of the contract.

y Financial loss is borne by the capital owner; the loss to the manager being the opportunity cost of his own labor, which failed togenerate any income

While the provider of capital can impose certain mutually agreed

conditions on the manager, he has no right to interfere in the day-to-day work of the manager.

The liability of the rabb al-mal is limited to the extent of his contributionto the capital.

The mudarib is not allowed to commit the mudarabah business for any sum greater than the capital contributed by the rabb al-mal.



3. I jarah (Leasing)

y Ijarah is a contract where the lessee (customer) usesan asset which is owned by the lessor (Bank)

The ownership remains with the lessor and lessee pays

monthly or annual rent for the use of asset

Only the assets leased by the lessor can be leased out

The commodities like money or fuel which cannot be used without consuming them, cannot be leased out

The lessor will be responsible for the insurance of theleased asset



4. Salam (Sales Contract)

y Salam is a sales contract in which the price is paid in advance at the time of contracting,against delivery of the purchased goods/services

at a specified future date.

The price should be paid in full at the time of the contract.

Goods whose quality or quantity cannot be determined by specification cannot be sold through the contract of salam. An example is precious stones.

The exact date and place of delivery must also be specified.



5. Istisna(Contract of Manufacturing)

y Istisna is a contract in which a party ordersanother to manufacture and provide a

commodity , in the contract

the description

delivery date

price and

payment date are all set with required details



7. Wakalah

y Wakalah is a contract whereby principal hiressomeone else as his agent to act on his behalf for aspecific task.

The agent is entitled to receive a predetermined feeirrespective of whether he is able to accomplish the assignedtask to the satisfaction of the principal or not.

He would be liable to penalties only if it can be proved thathe violated the terms of the trust or acted dishonestly.



Takaful (Islamic Insurance)

y An alternative for the contemporary insurance contract.y A group of persons agree to share certain risk by collecting a

specified sum from each. In case of loss to anyone of the group,the loss is met from the collected funds.

y

A Takaful company has the following features:

The company is not the one who assumes risks nor the one taking any profit.Rather, it is the participants, the policy holders, who mutually cover eachother.

All contributions (premiums) are accumulated into a fund. This fund isinvested using Islamic modes of investment and the net profit resulting fromthese investments is credited back to the fund.

All claims are paid from this fund. The policy holders, as a group, are theowners of any net profit that remains after paying all the claims. They are alsocollectively responsible if the claims exceed the balance in the fund.



Sukuk (Islamic Bonds)

y These are basically, certificates of ownership whichare negotiable in secondary markets.

Instruments should represent share in equity, real assets,money or debt or a combination of some or all of these;

Instruments representing real physical assets are negotiableat market price

Instruments representing debts in their negotiability to the

rules of hawalah

Instruments representing money are subject to the rules of sarf in their negotiability



Islamic Banking around the World

Source: PressReleasepoint.com




Name of Banks No. of Branches

Full-fledged Islamic Scheduled Banks 2011 2010

1 Al-Baraka Bank (Pakistan) Ltd. 87 29

2 Bankislami Pakistan Ltd. 70 70

3 Dawood Islamic Bank Ltd. 42 42

4 Dubai Islamic Bank Ltd. 64 36

5 Emirates Global Islamic Bank Ltd.* 0 58

6 Meezan Bank Ltd. 226 168

Total 489 415

* Al-Baraka Islamic Bank has been merged with Emirates Global Islamic Bank Ltdand renamed as Al-Baraka Bank (Pakistan) Ltd.

Source: State Bank Annual Report 2011




Name Stand-alone Branches of

Scheduled Banks

No. of Branches

20111 Askari Bank Ltd. 29 29

2 Bank Alfalah Ltd. 80 60

3 Bank Al Habib Ltd. 10 6

4 Habib Bank Ltd. 22 4

5 Habib Metropolitan Bank Ltd. 4 4

6 MCB Bank Ltd. 14 11

7 National Bank of Pakistan 6 6

8 Soneri Bank Ltd 4 4

9 Standard Chartered Bank (Pakistan) 12 8

10 The Bank of Khyber 21 18

11 The Royal Bank of Scotland * 0 03

12 United Bank Ltd. 5 5

13 Faysal Bank Ltd. 30 10

Total 237 168

* The Royal Bank of Scotland has been merged with Faysal Bank Ltd



Deposits, Financing and Investments of Islamic Banks

Items Jun 11 Jun 10 YOY

Growth %

Deposits

No. of Accounts

1,252,020 1,103,437 13.47

Amount 433.8 314.9 37.76

Financing*

No. of Accounts

51,064 103,294 -50.56

Amount 197.7 168.2 17.54

Investment Book-value 204.5 62.5 227.20

*Includes advances & bills

Source: State Bank Annual Report 2011

Billion R s.



Comparison Between Conventional &Islamic Banking System

Conventional System Islamic System

Based on man made principle Based on Islamic Shariah

The investor is assured of apredetermined rate of interest

risk sharing between investorand borrower

It aims at maximizing profit without any restriction

aims at maximizing profit butsubject to Shariah restrictions

It does not deal with Zakat. Z akat based system

compounding interest is the

fundamental function of theconventional banks.

Participation in partnership

business is the fundamentalfunction of the Islamic banks.

The conventional banks givegreater emphasis on credit-worthiness of the clients.

The Islamic banks, on the otherhand, give greater emphasis onthe viability of the projects.



Can IFS play any role in economicdevelopment of a Country?

y Resource mobilization through Musharaka and Mudarabaincreases employment rate in a country

y Decrease in inflation due to better liquidity option based onMurabaha techniques

y M arket Stability due to Islamic modes of investment

y The objective of Islamic Financial System is to raise the livingstandard of a society as whole not as a individual

y

IFS emphasis on the development of Small and mediumenterprises (S ME s) sector which has a great potential for expandingproduction capacity and self-employment opportunities in thecountry



Challenges

y Inadequate legal framework for Islamic banks

y Ineffective code of conduct for professionals

y Absence of Shariah audit in Islamic financial institutions

y Lack of research and development in the field of Islamic

finance and economics

y Inadequate Regulatory and Accounting framework for

Islamic banking

y Social and cultural factors

y Political Instability

y Lack of public awareness about Islamic economic system



Solutions

y Islamic Laws based society

y Islamic code of conduct for professionals

y Conducting Shariah audit in financial institutions

y Efficient Shariah Supervisory Boards in banks

y Research and development in the field of Islamic financial System

y Political stability

y Public awareness through conducting Seminars & training programs

& workshops

y Comprehensive knowledge of Islam & Shariah required for the

development of IFS



Conclusion

islamic financial system 2012

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