muhammad saarim ghazi
TRANSCRIPT
Islamic Banking & FinanceConcept, Present State & Prospects
Muhammad Saarim GhaziHead Shari’a Advisory & Structuring
Head University of London International Programmes
Al-Hidayah Centre for Islamic Finance
Lecture Roadmap
The concept behind development of Islamic finance – Why Islamic finance evolved?
Historical development of Islamic finance & its current position – How Islamic finance evolved ?
Strength of the industry in global financial crisis 2008 – Is Islamic finance a viable alternative ?
Questions & Answers Session
The Idea Generation
Western commercial banks date from about three - four centuries ago….
When the Muslim world came into contact with the west, Muslims had two choices: to accept the interest based banking or to establish their own interest free-banking
The idea of establishing an interest free bank goes back to 1940s
Prophet (peace be upon him)
The Messenger of Allah cursed the one who accepted riba, the one who paid it, the one who recorded it, and the two witnesses to it.” He said: “They are all alike.” (Sahih Muslim)
‘Aun ibn Hanifa reported from his father that the Prophet (peace be upon him) had condemned both the receiver of interest and its payer.(Sahih Bukhari)
Evolution & Development
First Experiments; Saving Association 1. Mit Ghamr Saving Association – Egypt (1963) 2. Tabung Haji – Malaysia (1963)
The Emergence of Islamic Banks
1. Nasser Social Bank - Cairo (1971)
2. Islamic Development Bank – Jeddah (1975)
3. Dubai Islamic Bank – Dubai (1975)
4. Faisal Islamic Bank - Egypt & Sudan (1977)
5. Kuwait Finance House - Kuwait (1977)
International Holding Companies
1. Dar-al-Maal-al-Islami (DMI) Trust -1981
2. Al Baraka Group – 1981
Evolution & DevelopmentRegulatory & Supervisory Organisations
Accounting & Auditing Organizations for Islamic Financial Institutions (AAOIFI) - Bahrain (1990)
Islamic Finance Services Board (IFSB) – Malaysia (2002)
International Islamic Financial Market (IIFM ) – Bahrain (2002)
Liquidity Management Center (LMC) - Bahrain (2002)
International Islamic Rating Agency (IIRA) – Bahrain (2005)
Evolution & DevelopmentIslamic Indices
Dow Jones Islamic Market Index (DJIM) - New York
USA
Kuala Lumpur Shari’ah Index (KLSI) - Kuala
Lumpur Malaysia
Jakarta Islamic Index (JII) – Jakarta, Indonesia
Global GCC Islamic Index – Kuwait
HBSC/ DIFX Index
FTSE Islamic Global Index
Evolution & Development
Financial Highlights
• Total Islamic Financial Institutions Over
3000
• Continents 6
• Countries 80
• Total Assets USD 1.13
trillion
• Expectation in 2015 USD 2.8
trillion
• Annual Growth 15-
20%
• Full Fledged Islamic Banks
5
• Conventional Banks with Islamic branches 13
• Takaful Companies 5
P a k i s t a n
Global Islamic Financial Services Industry
Potential Size of the Industry USD 4.4
trillion
Actual Size USD 1.13
trillion
The Size Gap USD 3.27 trillion
Global Growth Rate (2010) 10%
Catch up Parameter 9 Years (with 25% growth)
Current Account Qard-e-Hasan
Saving & Term DepositMudarabah
Deposit Mobilization by Islamic Banks –
Liability Side
Depositors
Demand/ Interest Free Deposit
Islamic Framework
Conventional Framework
Bank
Loan
Principal
Loan
Principal
Depositors Bank
Deposits Carrying a Return
Depositors Bank
Funds for Investments
Principal* + Share in Profits
Depositors Bank
Interest based Loan
Principal + Interest
Islamic Framework
Conventional Framework
*Principal is not guaranteed
Islamic Modes of Financing
1. Musharakah (Partnership Mode)2. Modarabah (Partnership Mode)3. Diminishing Musharakah (Partnership Mode)
4. Murabaha (Credit Sale)5. Musawamah (Credit Sale)6. Salam (Future Sale)7. Istis’na (Future Sale)8. Istijrar (Repeat Sale)
9. Ijarah (Leasing)
Riba
Any amount, big or small, over the principal, in a contract of loan or debt is
“Riba” prohibited by the Holy Qur’an, regardless of whether the loan is taken for the purpose of consumption or for some
production activity.
Misconception about the Nature of Money
“Money should be treated as a commodity. So, just as a merchant can sell his commodity for a higher price than his cost, he can also sell his money for a higher price than its face value: therefore he can lend his money and can claim interest thereupon”.
Difference between Money and Commodity
Money has no intrinsic utility. It can not be utilized in direct fulfillment of human needs it can only be used for acquiring some goods or services.
The commodities can be of different qualities while money has no quality except that it is a measure of value or a medium of exchange.
In commodities, the transactions of sale and purchase are effected on an identified particular commodity. Money, on contrary, cannot be pin-pointed in a transaction of exchange.
Riba is restricted to consumption loans and does not include
Productive/ Commercial loans. The Holy Qur'an had
prohibited claiming any increase over and above the principal
in the case of consumption loans only, where the borrowers
used to be poor person's borrowing money to meet their day
to day needs of food and clothes etc. While in case of
productive & commercial loans there is no Zulm because in
most cases the debtors are wealthy or at least economically
well-off and the loans taken by them are generally used for
generating profits. Therefore, any increase charged from
them by the creditors cannot he term as Zulm (injustice)
which was the basic cause of the prohibition of 'riba'.
Misconception
Answer
Firstly, The validity of a financial or commercial transaction does never depend on the financial position of the parties. It rather depends on the intrinsic nature of the transaction itself.
Secondly, 'poverty' is a relative term which has different degrees. Once it is accepted that interest cannot be charged from the poor, while it is quite lawful to be charged from the rich, who will have the authority to determine the exact degree of poverty required for exempting a person from the charge of interest?
Thirdly, Qur’an has prohibited riba in general terms, which include all the forms of riba.
Fourthly, Zulm is the hikmat and not the illat (basic cause) of prohibition.
The prohibition of riba is applicable only to those interest transactions where the rate of interest is exorbitant or excessive.
This argument is sought to be supported by the verse of Surah Al-i-'Imran:
ب'ا الر( ت'أ1ك.ل.وا ال' ن.وا آم' ال>ذ:ين' ا 'ي<ه' أ ا ي'ا ع'اف@ أ'ض1ة@ اع'ف' ون' م.ض' ل:ح. ت.ف1 ل'ع'ل>ك.م1 الل>ه' وا ات>ق. و'
"O ye who believe! devour not Usury, doubled and multiplied; but fear Allah; that ye may
(really) prosper."
[Al-i-'Imran 3:130]
Misconception
No verse can be interpreted in isolation from the other relevant material available in other parts of the Holy Qur'an.
OينR مWؤUمRن UمW Uت Wن ك UنR إ Oا ب الر_ OنRم OيRقO ب مOا وا WرOذOو Oهi الل iقWوا ات Wوا آمOن OينRذi ال qهOا يO أ Oا ي
"O those who believe fear Allah and give up whatever remains of riba, if you are believers." [AlBaqarah 2:278]
The point is further clarified in express terms by the following sentence:
UمW Rك مUوOالO أ WوسWء Wر UمW Oك فOل UمW Uت Wب ت UنR وOإ
Unlike the text of a statute book, the Holy Qur'an contains some words or expressions used either for emphasis or for explaining the evil results of a particular act.
OاتRي Rآي ب وا WرO ت UشO ت OالOل:يال@ و ق' ن@ا ث'م'"Do not sell my verses for a little price." [Al-Baqarah 2:41]
Performance of Top 10 Islamic Banks
VsTop 10 Conventional Banks
Financial Crisis 2008
VS
Citigroup
Bank of America
ICB of China
HSBC
JP Morgan Chase
Bank of China
China Construction Bank
UBS
Royal Bank of Scotland
Mitsubishi UFJ Fin.
Al Rajhi Bank
Kuwait Finance House
Dubai Islamic Bank
Bank Al Bilad
Qatar Islamic Bank
Investment Dar
Abu Dhabi Islamic Bank
Kuwait International Bank
Gulf Finance House
Qatar Int’l Bank
Top 10 Conventional Top 10 Islamic
Top 10 conventional
banks
Top 10 Islamic banks
Combined Market Capitalisation
42.8% 8.5%
Aggregate Net Profits
USD116 billion in 2006to
Net loss of USD42 billion-2008
USD4.2 billion to USD4.6 billion
(9 % Profit)
Growth in Assets
36% 55%
Growth in Equity
24% 36%
% Conventional Vs Islamic
Change in Market Capitalisation
Change in net profit/loss
Change in total assets
Change in equity
-150
-100
-50
0
50
100
Top 10 Conventional banks
Top 10 Islamic banks
Financial Assistance
Five of the top 10 conventional banks received government financial assistance of USD163 billion in aggregate i.e.
26% of the affected banks’ combined equity.
Vs.
As at end 2009, none of the Islamic banks needed any government rescue scheme.
The Great Destruction
Sept 15, 2008Lehman Brothers; 4th Largest Investment Bank becomes BankruptMerrill Lynch; 3rd Largest Investment Bank sold to Bank of America
Sept 17, 2008AIG; US Treasury seized control of the Company
Sept 22, 2008Goldman Sachs & Morgan Stanley; Last two major investment
banks converted into traditional banks holding companies
Sept 25, 2008Washington Mutual; Forced sale to JP Morgan Chases by Regulators
November 1, 2009 CIT Group filed for bankruptcy protection
General Principles of Contracts & Transactions in Islamic Law
Why Islamic Finance
Remained More Resilient ?
Guiding Principles of Islamic Commercial Law
Principle Prohibition of Gharar (Uncertainty, Deceit & Hazard)
Gharar takes place where the
consequences (of a
transaction) are concealed.
(Imam Sarkhsi; Al Mabsut, Vol 13 p 194)
Uncertainty and Excessive
Risk
ليس ما تبع ال
عندكIslamic commercial law
requires absolute certainty
about the terms and
conditions of contractual
obligations.Financial innovation with
unnecessary complications resulted in new risks that are less
understood, assessed & controlled.
PrincipleProhibition of Speculative Behaviour
Every form of money acquisition of which depends upon luck or chance (zero-sum-game)
You gain what you have not earned - Gambling
• Examples– Mobilizing resources on the basis
of lottery & draws.– Futures & Options contracts that
are settled through price differences only.
According to the International Swaps and Derivatives Association (ISDA), the total notional value of CDSs in mid 2008 is approximately $55 trillion, doubling its size from mid 2006.
AIG alone is reported to have sold over $440 billion of CDSs protection on a notional basis.
Volume of global international trade in 2008 = USD32 trillion
Average of USD88 billion on a daily basis
Daily turnover in global foreign exchange markets was USD3.98 trillion i.e. 45 times more than the
vol. of international trade.
Only 2% of trade in currencies is based on the genuine cross-border trade, while 98% of
currencies transactions account
for nothing but speculation in money prices.
Total derivatives was
USD741.1 trillion in 2008
(Year end)
Total GDP of the entire world
was only 60.6 trillion
The worth of derivatives was 12 times more than the gross
products of all the countries of the globe.
PrincipleProhibition of Khilabah & Ghishsh (Fraud & Deception)
Khilabah: “concealing the defects of and in merchandise”
Tatfeef: Giving short weight and measure
Najash/ Tanajush: False bidding to raise prices
Hiding defects of commodity in Sale.
Ghabn-e-Kaseer / Ghabn-e-Fahish
False Swearing
Talaqqi al-Rukban: purchasing merchandise before they reach the market place.
Low level of transparency & disclosure damaged market confidence & contributed to
market panic
ConclusionThis was not the first time when Islamic financial institutions were tested
with a systematic crisis.
Resilience in the PastThe experience of KFH in surviving the Kuwait Souq al-Manakh crisis in 1982.
The performance of Bank Islam in navigating through the Asian financial crisis 1997-98.
The resilience of Turkish participation banks in coming out of the economic crisis in 2000-01.
“Today we have reached a tipping point, which leaves us only one choice: change or face
continued decline and misery.”Chairman World Economic Forum
