seminar paper_concepts and application of islami banking

8/10/2019 Seminar Paper_Concepts and Application of Islami Banking

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$1 *i+erence "eteen -ro.t and interest /0i"aInterest is the pre-agreed additional amount of money which is paid against principal mainly

for time period without exchange of any commodity or service between the lender and the

borrower. oney here is treated as commodity which is completely against the ob8ective of

creation of money. The factors determining interest is amount of loan time period and rate of

interest. In case of transactions on interest, the principal is guaranteed to remain intact, thus

the lender doesn6t take risk of loss of capital. The interest is to be borne only by the

borrower. #ometimes interest is paid or earned both on principal and interest 3compounding

interest4. #ince rate of Interest and time for repayment of principal and interest is

predetermined, lender does not bear any risk.

:n the contrary, prot is the amount earned by deploying capital into a business. It may beearned by way of trading of goods and services or by partnering a business. The factors

determining prot is business condition, demand and supply situation, e1orts given on the

business etc. oth buyer and seller or parties involved in business bear the risk. The

principal is not guaranteed. 'oss, if any, is borne by the capital provider3s4. The prot is

distributed among the capital providers and the parties managing the business. In case of

buying and selling, prot cannot be increased only for time periods, once the price is xed.

7rot can be earned only once in case of single trade.

?owever, xed percentage does not necessarily constitute interest. In case of buying and

selling xing a percentage of prot is permissible. ut xing an assured return before getting

any result from investment is interest.

$$ Economic demerits o2 Interest

Interest deects money from its basic function.

Interest based system may result in exploitation.

Ination is co-related with Interest.

Interest exerts disastrous e1ects on the human behavior and the society.

7redetermined rate of return is not 8ustied.

Interest reinforces the tendency for wealth to accumulate in the hands of a few, and

thereby diminishes human beings to concern their fellow people.

$3 4ome Uni5ue Features o2 Is#amic Ban&in'

:perates in line with #hari6ah principles and for the welfare of the people.

;omplete avoidance of interest in all its activities

&oesn6t invest only for prot, but looks into need of the society.

@nsures fairness and 8ustice in all sorts of transactions.

@nsures optimum utili(ation of resources and help to fulll 8ustied needs of all.

?elps develop the standards of living of the poor.

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&irect participation with trade and commerce through involvement of real assets

@ncourage socially desirable enterprises and discourages socially undesirable one

@liminate disparity among the people and establish economic 8ustice

@nsures ow of recourses from rich to the poor.

@nsures maximum employment and balanced development

The relationship between banker and client is business partner not lender and the

loaned.

3! Is#amic Ban&in' in Modern a'e

The rst instance of Islamic banking in modern age came into the picture in @gypt in >AB

titled Cit %hamr 'ocal #avings ank6. The pioneering e1orts by $hmad @l Da88ar brought this

bank into existence, whose key principle was prot sharing. y the end of >AEB there were A

such banks in the country. These banks neither charged nor paid interest but their activities

were mostly limited to trade and industries where these banks invested directly or as

partners of depositors. ?ence, functionally these banks were working more as nancial

institutions rather commercial banks. Dasser #ocial ank 3>AE>4 is known to be the rst

commercial bank in @gypt, though its charter never made references to #hari6ah. The rst

bank explicitly based on #hari6ah principles was established by the :rgani(ation of Islamic

countries 3:I;4 in >AEF, called Islamic &evelopment ank 3I&4. This bank was primarily

engaged in intergovernmental activities for providing funds for development pro8ects

running into member countries. Its business model involved fees for nancial services and

prot sharing nancial assistance for pro8ects.

Gith time, during the >AE+s several Islamic banks came into existence, including the &ubaiIslamic ank 3rst Islamic private commercial bank, >AEH4, the aisal Islamic bank of #udan3>AEE4 and the ahrain Islamic bank 3>AEA4. :thers from the $sia 7acic region include the

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7hilippine $manah ank 37$4, formulated under presidential decree. 7akistan also had anestablished Islamic banking system at the time which unfortunately didn6t survive.

Githin a decade of the rst private bank coming into existence in &ubai, the global industryhad more than H+ such banks. ost banks were a result of private initiatives, whereas therst concrete government initiative was taken by the Iranian government, when in >AJH no

bank was permitted to give or take interest.

The true phase of development of Islamic nancial institutions actually occurred in the>AJ+s. $s part of development, Islami ank angladesh 'imited was incorporated in >AJ asthe rst #hari6ah based interest free bank in #outh and #outh-@ast $sia. @arlier initiativeswere more inclined towards interest free Islamic banking, but the emergence of nancialsystems has evolved in the J+s. In >AJH, the ?igh ;ouncil of :I; 3:rgani(ation of Islamic;onference4 declared takaful 3Islamic insurance4 as #hari6ah compliant. The new, widerspectrum of Islamic nance covers not only banking activities but also capital markets,capital formation and other nancial instruments and intermediaries.

The biggest change in terms of adaptability came in >AA> when the $ccounting and $uditing:rgani(ation for Islamic inancial Institutions 3$$:II4 was established to advise on Islamic

nance standards all over the world. 'ater, the development of uniform standards wassupported by other organi(ations such as Islamic inancial #ervices oard 3I#4 in alaysiain *++*.

! Is#amic Ban&in' around the 8#o"eIslamic anking has become an attractive banking system among the uslim and non-

uslim market participants around the globe. :bviously, this is not only driven by religious

implication but also by economic 8ustication or the benets it o1ers. The global market for

Islamic nance at the end of *+>> was worth around K>. trillion, according to the !" Islamic

inance #ecretariat. The total value of #hari6ah-compliant assets has grown by >H+ since

*++B. Islamic nancial institutions are growing at around *+ per annum, which exceeds

that of conventional nancial industry. $s can be seen over the years, Islamic banking has

gained momentum on a global scale. inancial Institutions all over the world have launched

their own Islamic banking units in trying to keep up with the pace of growing demand for

#hari6ah compliant products and services. There are more than ++ Islamic banks and

nancial institutions in more than E+ countries of $sia, $frica, @urope, and $merica including

countries like the !.", !.#.$, %ermany, $rgentina, &enmark, 'uxemburg, #wit(erland and

India. $lthough Islamic anking is not allowed as per the current regulatory system of India,

a good number of nancial institutions claim that they are working as per Islamic principles.

?! Is#amic Ban&in' in Ban'#adesh

The 8ourney of Islamic banking in angladesh was started with the incorporation of Islami

ank angladesh 'imited in >AJ which is also the rst bank in #outh-@ast $sian region.

'ater on six other banks were establishedLconverted to operate as Islami bank in the

country. In addition, a good number 3around >H4 of traditional banks including some foreign

ones have opened Islamic banking branches and windows to cater to the growing demand of

Islamic banking products and services. &uring the last decade, Islamic banks experienced

phenomenal growth in terms of deposit and investment base.

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Total deposit base of Islamic banks stood at around Tk.*F+ billion at M@ *+>> registering

around > market share. The cumulative average growth rate 3*++H-*+>>4 of deposit of

Islamic banks was more than + against industry growth rate 3excluding Islamic banks4 of

around *+.

:n the contrary, investment base stood at around Tk. *+A billion registering around >J

market share. The cumulative average growth rate 3*++H-*+>>4 of investment of Islamic

banks was also more than + against industry growth rate 3excluding Islamic banks4 of

around >F.

7! O-erationa# As-ects o2 Is#amic Ban&in'

71 4hariGah 4u-ervisor9 Committee

To decide on #hari6ah issues an Independent #hari6ah #upervisory ;ommittee is re)uired to

be established in Islamic anks consisting of prominent Islamic scholars and economic

experts. @ach and every product and their modus operandi are re)uired to be approved by

the ;ommittee. :n #hari6ah issues the decision of the committee is nal and the committee

is to en8oy full independence for proper functioning of Islamic banking. In an ideal situation

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the ;ommittee also supervise a group of #hari6ah $uditors who oversees the income

generating and other activities of the bank in line with the #hari6ah principle.

7$ Mo"i#iation o2 *e-ositH

Islamic anks focus more on welfare and nancial inclusion in deposit mobili(ation. Itencourages small depositors to save money instead of collecting big deposits from few

customers. $s such Islamic banks o1er some special deposit products like, ;ash G$N,

udaraba ?a88 #avings, udaraba ohor #avings, etc. The udaraba &epositors agree to

share prot and bear loss on the investment of their deposit. $s a result the ank en8oy

better liberty to invest in risky but more benecial ventures.

7$1 Cost Free *e-ositHIslamic anks operate this type of account under $l-Gadeah 7rinciple where the bank

commits to refund money deposited with these accounts on the demand of the customers.

:n the other hand, the banks takes permission from customers that the bank may utili(e

their money. In case of cost free deposit of conventional banks, permission from the

depositors is not taken to utili(e their money. Do prot is disbursed in these accounts and

the depositors do not bear any loss. This account is as good as Camanah6

Is#amic ModeH

Conventiona# ModeH

7$$ Cost Bearin' *e-ositHIs#amic ModeH !nderIslamic mode, the bank mobili(es deposit under mudaraba principle.

!nlike conventional banks, Islamic banks do not pay xed rate of interest rather distributes a

certain percentage 3say minimum BH4 of its investment-income earned through

deployment of mudaraba fund to the depositors.

In the above case, the principle is not guaranteedO losses if any are to be shared by the

contributors of fund Conventiona# ModeH

InvestmentH

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&epositors >. Interest free&epositL'oan

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&epositors

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*. 7rincipal P Interest

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73 Investment /Loans and Advances in Conventiona# :ermsH

The main ob8ective of investment under Islamic principles is not earning maximum prot,rather ensuring maximum welfare. or that reason, Islamic banks are to invest in thepro8ects which create more employment. Investment in import substitute and exportoriented industries help the country to improve the balance of payments. The banks takerisky ventures giving long term benet instead of short term trading. Islamic bankingactivities emphasi(e ow of resources from the rich to poor thus its prime focus is on microand #@ investments. Islamic anks cannot invest in the products which are harmful for thepeople and discourages luxurious items. @nsuring distributive 8ustice is the key focus ofIslamic banks and thus investment is mostly need based rather than grid based.

Islamic banks deploy their funds under di1erent modes of nancing as permitted by #hari6ahwhich include trade mechanism 3Cbaiin $rabic term4, partnership mechanism 3CShirkat6 in$rabic term4, and leasing mechanism 3Ijara6 in $rabic term4.

731 :rade MechanismHTrade mechanism takes place in three modes5 CBai-Murabaha3sale on agreed upon prot4, CBai-Muajjal3sale on deferred payment basis4 and CBai-Salam37urchase of goods on deferred delivery basis4 where the bank acts as an economic agent.!nder the mechanism, nancial ows are parallel to real ows and claims of the bank on theclients are not necessarily time variant. The following diagrams depict the di1erence oftrade mechanism and that of conventional interest based mechanism5

Is#amic ModeH

Conventiona# ModeH

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:he a"ove dia'rams indicate that there is chance o2 misuse o2 2und/diversion in conventiona# s9stem hich is not -ossi"#e under Is#amicmode since "an& direct#9 -rovides 'oods and services to its c#ients

73$ Leasin' MechanismH!nder leasing agreement, bank receives rent from the lesserfor use of assets owned by it. CHire Purchase under Shirkatal Melk 3popularly known as?7#4 is a derivative product of leasing which is a synthesis of three contracts5 #hirkat, I8araand #ale. !nder the mechanism, the bank and the client 8ointly provide capital 3on pre-agreed ratio4 to buy an asset and client gives installment payments 3includes rent andprincipal4 based on which ownership is gradually transferred to him. In this mechanismnancial ows are also tied to real ows. The following diagrams depict the di1erencebetween Islamic mode and conventional mode5

Is#amic ModeH

Conventiona#H

733 Partnershi- MechanismH 7artnership mechanism can also take place in twomodes-Cmudarabaand Cmusharaka. !nder mudarabamode of nancing, bank 3here calledCSahib-al-maal)6 provides fund while client 3here called mudarib4 provides expertise andmanagement support for the enterprise. $ny prot accrued is shared between two parties onpre-agreed upon ratios while capital loss 3without negligence on the part of theclientLmudarib4 is fully borne by the bank 3capital provider4. :n the other hand, undermusharaka mode of nancing, both the bank and the client invest capital in a venture andshare prot at a pre-agreed ratio and bear losses in proportion to capital. !nlike traditionalbanking system, the banks involve in real economic activity.

$31 Mudara"a Financin' in *ia'ram

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733$ Mushara&a Financin' in *ia'ram

Conventiona#H

:he a"ove dia'ram revea#s that under Is#amic mode the "an& direct#9 invo#ve

ith the "usiness enter-rise hich ensures sustaina"#e deve#o-ment hi#e

under conventiona# mode "an& does not direct#9 invo#ve ith economicactivit9

7 Is#amic Micro FinanceIslamic micronance 3I4 is becoming an increasingly popular mechanism for alleviating

poverty, especially in developing countries around the world. The concept of I adheres to

the principles of Islam and is a form of socially responsible investment. Investors who use

their wealth for I pro8ects under #hari6ah only involve themselves in halal pro8ects which

benet the community at large.

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The modas operendi in I is similar to that of conventional D%:s except for collateral free

investments are given to small entrepreneurs based on #hari6ah mechanism. !nlike other

D%:s, ma8or focus is not given on recovery rather improvement of living standard of poor

people. The pro8ects are closely monitored so that the members are really benetted. They

are imparted education on literacy, cleanliness and other basic issues of human life. $

portion of the return received from the members are spent for their welfare such as

providing scholarship to their children, giving sanitary latrines, tree plantation, donation for

marriage etc.

In a nut shell, Islamic icro inance represents the merging of two growing sectors5

micronance and the Islamic nance industry. Islami ank angladesh 'td. contributes more

than H+ of the global market share of Islamic icro nance under the umbrella of /ural

&evelopment #cheme 3/ and !rban 7oor &evelopment #cheme 3!7. $lthough it

contributes only * of the total business, around *+ manpower is deployed to provide the

service.

7? Is#amic Instruments in Mone9 Mar&et7?1 Ban'#adesh 8ovt Is#amic Investment Bond /B8IIBH Islamic banks cannotparticipate in interest based treasury billsLbonds. In order to meet the #'/ re)uirement,

angladesh %ovt. Islamic Investment ond 3%II4 has been introduced in *++F by the

inistry of inance, %:. The Islamic banks buy the bonds where angladesh ank acts as a

custodian of the fund. angladesh ank invests the fund to di1erent Islamic banks and

Islamic nancial institutions. The prot received from the invested fund is distributed among

the contributory banks after deducting H-*+ of prot to meet expenditure and

reinvestment. The return on %II is not so lucrative since it gives lower return compared to

other instrument.

7?$ Is#amic InterBan& Fund Mar&et /IIFMH !nlike traditional banks, Islamic banks

cannot participate in call money market for overnight lending or borrowing. To remove the

problem, a new type of #hari6ah based money market instrument called Islamic Inter-bank

und arket 3II4 has been established with the initiative of angladesh ank to meet

overnight li)uidity re)uirement. The II is operated under mudaraba principle where the

fund taken by the bank is considered as mudarabah deposits.The Islamic ond und of the central bank will act as the custodian of the II and does not

charge any fees for the fund. If any bank has excess fund, it may invest it in the II for

overnight. $nother Islamic bank re)uiring fund may borrow the money from the II for

overnight and returns the principal with prot at the rate of three months2 term deposit

which is nally ad8usted upon nali(ation of inancial #tatements.

3 Inter"an& *e-ositH Interbank deposit among the Islamic bank and nancial

institutions is another mechanism of Islamic money market. These inter-bank deposits varyfrom one month to twelve months period. These deposits are takenLgiven on mudarabah

principle.

#teps needs to be taken to introduce some lucrative money market instruments for Islamic

banks to make it more vibrant.

=!Accountin' As-ects o2 Is#amic Ban&in'

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=1 Income 0eco'nitionIncome from investments is accounted for on accrual basis except investments under

usharaka, udaraba, ai-#alam and ai-as-#arf modes of Investment. Income from

investment under udaraba, usharaka, ai-#alam and ai-as-#arf modes is accounted for

on reali(ation basis. ecause the amount of incomeLprot from the investment under those

modes can6t be ascertained until the amount of income generated from the ultimate

deployment of invested fund at the client6s end is determined. esides, fees and commission

income are recogni(ed when earned.

Islamic banks cannot compute the Sinterest on interestS popularly known as Scompounding

interestS. or Islamic banks, unpaid prot shall remain as Sprot earned but not yet

paidS and that amount cannot become part of principal amount of the following period.

Ghile creating each dealLinvestment, in case of ai mode of investment, prot is added to

the investment cost and the full price is recovered from the clients in installments. /ebate

may be allowed to the clients if the price is paid earlier than pre-xed time.

Instead of charging interest for overdue periods, Islamic anks charge compensation at the

same rate at which prot was agreed. @ven though this income is


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?owever, udarabah und gets priority in the matters of investment over ank2s @)uity and

other ;ost-free unds. ank2s @)uity and ;ost-free unds are deployed only after full

investment of udaraba &eposits.

The gross income derived from investments during the $ccounting year, at rst, is allocated

to udaraba und and ;ost-free unds 3including ank2s @)uity4 according to their

proportion in the total investment. Then the gross income from investments applicable forudaraba und is distributed to udaraba &epositors and ank according to the pre-

determined sharing ratio say BH5H 3depositors5 bank4. The depositors2 share 3i.e. the

aforementioned BH4 is then allocated to di1erent mode of depositors according to the

eligibility of the depositors. Islamic banks strictly ensures paying at least up to the pre-

determined sharing ratio at any case but very often pays more than that to keep the return

of depositors6 competitiveness.

=3 %hat is -rovisiona# rate in Is#amic Ban&s(

Islami banks calculate a provisional rate based on past experiences, industry trends, macro-

micro economic policy of the government, growth prospects, and general economic

condition etc. with a clear proposition that the nal prot will be declared later and ad8usted

accordingly after the end of the year. onthly prot is accrued and paid to depositors but

sub8ect to ad8ustment of nal rate of prot after the year end. inal rate of prot attributable

to the udarabah &epositors can be clearly determined sub8ect to certication of

investment income by statutory auditors as well as #hari6ah $uditors. $fter nali(ation of

nal rate of prot, if nal prot rate is more than provisional rate of prot paid, then the

additional prot is paid to the udarabah &epositors. ?owever, if nal prot rate is less than

provisional rate of prot then Islamic anks usually decide not to take the additional amount

back from the depositors. #ince the provisional rate is determined after considering the

above factors, normally the nal rate falls around the provisional rate.

J.+ 4ome uni5ue issues 2or Is#amic Ban&sH

@1 :reatment o2 J;aramJ ItemsHIslamic anks all the way try their best to comply fully with #hari6ah principles but there is

some non-#hari6ah compliant items in which the Islami anks are compelled to enter in.

?owever Islami anks treat those items as follows5

Interest received from the balances held with oreign anks abroad and from oreign

;urrency ;learing $ccount with angladesh ank are not credited to income, since it is not

permissible as per #hari6ah. These are utili(ed for charitable purposes after payment of

Income Tax thereon.

oreover, Income which is irregular 3doubtful4 as per #hari6ah is not included in thedistributable income of the ank. ank charges compensation on overdue ai-urabaha and

ai-ua((al investments. #uch compensation is not permissible as per #hari6ah to take into

regular income of the ank. /eali(ed amount of &oubtful Income and ;ompensation are

utili(ed for charitable purposes. $pplicable Income Tax on these items is duly paid to the

%ovt. $ccount.

J.*Da&atH

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9akat is paid by the Islami anks at the rate of *.HJ 3instead of *.H+ as the anks

maintain its inancial #tatements following %regorian Mear4 on the closing balances of #hare

7remium, #tatutory /eserve, %eneral /eserve and &ividend @)ualisation $ccounts as per

guidelines of #hari6ah.

9akat is charged in the 7rot Q 'oss $ccount of the anks as per H dated +A.>>.*++A. 9akaton 7aid up ;apital and &eposits is not paid by the ank, since it is the responsibility of the

#hareholders and &epositors respectively.

Though 9akat is not usually allowed as expenditure by the Tax $uthority, it should be made

tax-free to encourage payment of 9akat by the Institutions which would help reduction of

poverty at a rapid rate. Islamic anks6 9akat should be treated as business expenditure

since they are bound to pay 9akat as per statute to follow #hari6ah.

A.+ Accountin' and other standards re#evant to Is#amic Ban&sH

Islamic anks in angladesh follow I/# 3International inancial /eporting #tandards4 as

adopted by Institute of ;hartered $ccountants of angladesh 3I;$4. #ome other standardsrelevant for Islamic anks are mentioned below5

61 AAOIFI 4tandardsHThe $ccounting and $uditing :rgani(ation for Islamic inancial Institutions 3$$:II4 is an

Islamic international autonomous non-for-prot corporate body that prepares accounting,

auditing, governance, ethics and #hari6ah standards for Islamic nancial institutions and the

industry. It was established on *E arch >AA> in the #tate of ahrain and till date $$:II has

issued *B $ccounting #tandards, H $uditing #tandards, E %overnance #tandards, * @thics

#tandards and FH #hari6ah #tandards 3#ee AnnexureA4. 7rofessional )ualication programs

3notably ;I7$, the #hari6ah $dviser and $uditor S;#$$S, and the corporate compliance

program4 are presented now by $$:II in its e1orts to enhance the industry6s humanresources base and governance structures.

$s an independent international organi(ation, $$:II is supported by institutional members

3*++ members from FH countries, so far4 including central banks, Islamic nancial

institutions, and other participants from the international Islamic banking and nance

industry, worldwide.

$$:II has gained assuring support for the implementation of its standards, which are now

adopted in the "ingdom of ahrain, &ubai International inancial ;entre, ordan, 'ebanon,

Natar, #udan and #yria. The relevant authorities in $ustralia, Indonesia, alaysia, 7akistan,

"ingdom of #audi $rabia, and #outh $frica have issued guidelines that are based on $$:II6s

standards and pronouncements.S

6$ IF4BThe Islamic inancial #ervices oard 3I#4 is an international standard-setting organi(ation,

formed by the central banks of Islamic countries, promotes and enhances the soundness and

stability of the Islamic nancial services industry by issuing global prudential standards and

guiding principles for the industry, broadly dened to include banking, capital markets and

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insurance sectors. The I# also conducts research and coordinates initiatives on industry

related issues, as well as organi(es roundtables, seminars and conferences for regulators

and industry stakeholders.

The Islamic inancial #ervices oard 3I#4,which is based in "uala 'umpur, was o0cially

inaugurated on rd Dovember *++* and started operations on >+th arch *++. It serves as

an international standard-setting body of regulatory and supervisory agencies that have

vested interest in ensuring the soundness and stability of the Islamic nancial services

industry. In advancing this mission, the I# promotes the development of a prudent and

transparent Islamic nancial services industry through introducing new, or adapting existing

international standards consistent with #hari6ah principles, and recommend them for

adoption.

To this end, the work of the I# complements that of the asel ;ommittee on anking

#upervision, International :rgani(ation of #ecurities ;ommissions and the International

$ssociation of Insurance #upervisors.

$s at &ecember *+>*, the >JF members of the I# comprise HH regulatory and supervisory

authorities, eight international inter-governmental organi(ations and >*> market players,

professional rms and industry associations operating in F> 8urisdictions.

alaysia, the host country of the I#, has enacted a law known as the Islamic inancial

#ervices oard $ct *++*, which gives the I# the immunities and privileges that are usually

granted to international organi(ations and diplomatic missions.

#ince its inception, the I# has issued >A #tandards, %uiding 7rinciples and Technical

Dote for the Islamic nancial services industry 3#ee Annexure K B4.

>+.+ 4ome other re#evant or'aniationsHrief introduction of some other relevant organi(ations is as follows-

1!1 8CIBAFIThe %eneral ;ouncil for Islamic anks and inancial Institutions 3%;II4 is an internationalnon-prot organi(ation formed 8ointly by the Islamic &evelopment ank and many otherIslamic nancial institutions. :peration license was obtained in The "ingdom of ahrain onay *++>.

ain ob8ectives of %;II are to5

;reate a public awareness of Islamic #hari6ah concepts, rules and provisions related

to them &evelop the Islamic nancial industry

@nhance co-operation among its members

7rovide information related to Islamic nancial institutions

;ater for the interests of its members and confront the common di0culties and

challenges.

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1!$ IIFMInternational Islamic inancial arket 3II4 is the international Islamic nancial market6sorgani(ation focused on the Islamic ;apital Q oney arket 3I;4 segment of the Islamicinancial #ervices Industry 3I#I4. Its primary focus lies in the standardi(ation of Islamicnancial products, documentation and related processes at the global level. II is based in

anama, ahrain.

II was founded with the collective e1orts of the Islamic &evelopment ank, $utoritionetari runei &arussalam, ank Indonesia, ;entral ank of ahrain, ;entral ank of#udan and the 'abuan inancial #ervices $uthority 3alaysia4 as a neutral and non-protorgani(ation.

esides the founding members, II is supported by its permanent member #tate ank of7akistan as well as by a number of regional and international nancial institutions and othermarket participants as its members.

IIFM "ene.ts to the Is#amic Financia# 4ervices Industr9H

$ddressing the product and documentation standardi(ation needs of the industry

7roviding universal platform by bringing regulatory bodies, nancial institutions, law

rms, stock exchanges, industry associations, infrastructure service providers andother market participants on a common platform through the creation of pro8ectspecic global working groups and committees

acilitate unication, #hari6ah harmoni(ation and legal reforms in Islamic nancial

markets

#hari6ah $dvisory 7anel consisting of renowned scholars, hence, ensuring wider

#hari6ah acceptance

1!3 IIC0AThe International Islamic ;entre for /econciliation and $rbitration 3II;/$4 is an international,

independent, non-protable organi(ation, and one ma8or infrastructure institutions of the

Islamic nance industry.

The center settles in all nancial or commercial disputes and conicts that arise between

nancial or business institutions that choose to apply the provisions of Islamic law O#hari6ah

principles, in resolving their disputes. :ther than, between these institutions and their

clients or between them and third parties through reconciliation or arbitration.

IIC0A has "een esta"#ishedH

- To respond to the )uantitative and )ualitative development of the Islamic nancialIndustry in the last years.

- To fulll the Islamic nancial industry needs in order to be able to settle the disputes

in accordance with the Islamic #hari6ah laws.

- To respond to the peculiarities of the Islamic nancial services concerned with the

products and contracts.

>H) 7 a g e


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- To ll the vacuum of the experts in the Islamic inancial Industry eld.

$t the regional and international level it can be seen many circumstances that strengthen

the position of the ;entre and the factors of the success lie on the approval of the ma8ority

member countries of the :rgani(ation for Islamic ;onference on the regional and

international accords concerned with the approval of the rulings of the arbitrators, and in

the absence of a speciali(ed international commercial arbitration ;entre in the $rab andIslamic region to settle the Islamic nancial transactions.

1! I0:IThe Islamic /esearch and Training Institute 3I/TI4 is an a0liate of the Islamic &evelopmentank %roup responsible for leading the development and sustenance of a dynamic andcomprehensive Islamic inancial #ervices Industry that supports socio-economicdevelopment in ember countries. It was established in >AJ> in #audi $rabia. The institutehas vast history of doing research in the area of Islamic banking and nance.

11! Conc#usion

The superiority of Islamic baking derives from its involvement of real economic activity.&uring nineteen fties Islamic banking concept was mere a text book word and was limited

to theoretical extravagan(a. The sixties was actually the period of experimentation and

Islamic banking started gaining momentum in seventies. The eighties and nineties

constitute the period of consolidation. $nd now it is coming up as the only 8ust and welfare-

oriented banking system of the modern world. Islamic banking system has been proved to

be superior and more resilient during the global nancial crisis due to their non-involvement

of the toxic assets in the banking system and adherence to real assets in lending which is

directly linked with economic development and prosperity of the country. y their inherent

nature and ob8ectives, Islamic banks focus on moral aspects of nancing. /apid growth of

Islamic banking in an environment of overwhelmingly dominated conventional nance

reveals the system e0ciency and superiority of Islamic anking.

>B) 7 a g e


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0e2erences

1. Islami Bank Babosta b! "ohammad Abdul "annan# "anaging

Director# Islami Bank Bangladesh $td.

%. Islamic "icro&nance: An Instrument of 'overt! Alleviation b!

"ohammad Abdul "annan# "anaging Director# Islami Bank Bangladesh$td.

(. Islamic )inancial S!stem: 'rinciples and *perations b! International

Shariah +esearch Academ! for Islamic )inance ,ISB- /02/(31%/

04

3. Institute of Islamic Bankinge"site htt-His#amic"an&in'com

5. Islami Bank: (6 7ears of 'rogress -u"#ished "9 Pu"#ic 0e#ation

*e-artment, Is#ami Ban& Ban'#adesh Ltd

2. 8Islamic Banking: 9he $essons and Challenges in "ala!sia Be!ond;B9*A:OG 40I DU0I 4AMA: Mana'in' *irector, Ban& Is#am Ma#a9sia Berhad

President, Association o2 Is#amic Ban&in' Institutions Ma#a9sia

/. An Alternative )inancial S!stem for Inclusive E) 7 a g e
http://www.islamic-banking.com/http://en.wikipedia.org/wiki/Islamic_bankinghttp://www.ifsb.org/http://www.aaoifi.com/http://www.irti.org/http://www.afkaronline.com/english/clients/cases/case3.htmlhttp://www.cibafi.org/http://www.iifm.net/http://www.iicra.com/http://www.islamic-banking.com/http://en.wikipedia.org/wiki/Islamic_bankinghttp://www.ifsb.org/http://www.aaoifi.com/http://www.irti.org/http://www.afkaronline.com/english/clients/cases/case3.htmlhttp://www.cibafi.org/http://www.iifm.net/http://www.iicra.com/


18/21

Annexure K A

4tandards that have "een deve#o-ed "9 AAOIFI /Accountin' and Auditin'Or'aniation 2or Is#amic Financia# Institutions

Accountin' standardsH

>. :b8ective of nancial accounting forIslamic banks and nancial institution3IIs4.

*. ;oncept of nancial accounting for IIs.

. %eneral presentation and disclosure inthe nancial statements of IIs.

F. urabaha and urabaha to thepurchase orderer.

H. udaraba nancing.B. usharaka nancing.

E. &isclosure of bases for prot allocationbetween owners6 e)uity and investmentaccount holders.

J. @)uity of investment account holdersand their e)uivalent.

A. #alam and 7arallel #alam.

>+. I8arah and I8arah untahia ittamleek.

>>. 9akah.

>*. Istisna6a and 7arallel Istisna6a.

>. 7rovisions and /eserves.

>F. %eneral 7resentation and &isclosure inthe inancial #tatements of IslamicInsurance ;ompanies.

>H. &isclosure of ases for &eterminingand $llocating #urplus or &ecit in IslamicInsurance ;ompanies.

>B. Investment unds.

>E. 7rovisions and /eserves in Islamic

Insurance ;ompanies.>J. oreign ;urrency Transactions andoreign :peration.

>A. Investments.

*+. Islamic inancial #ervices :1ered by;onventional inancial Institutions.

*>. ;ontributions in Islamic Insurance;ompanies.

**. &eferred 7ayment #ale .

*. &isclosure on Transfer of $ssets.

*F. #egment /eporting.

*H. ;onsolidation.

*B. Investment in $ssociates.

Auditin' standardsH

>. :b8ective and principles of auditing.

*. The $uditor6s /eport.

. Terms of $udit @ngagement.

F. Testing for ;ompliance with #hari6a/ules and 7rinciples by an @xternal$uditor.

H. The $uditor6s /esponsibility to ;onsiderraud and @rror in an $udit of inancial#tatements.

8overnance standardsH

>. #hari6a #upervisory oard5$ppointment, ;omposition and /eport.

*. #hari6a /eview.

. Internal #hari6a /eview.

F. $udit and %overnance ;ommittee forIIs.

H. Independence of #hari6a #upervisoryoard.

B. #tatement on %overnance 7rinciples forIIs.

E. ;orporate #ocial /esponsibility.

Ethics standardsH

>. ;ode of ethics for accountants andauditors of IIs.

*. ;ode of ethics for employees of IIs.

>J) 7 a g e


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4hariGah standardsH

>. Trading in currencies.

*. &ebit ;ard, ;harge ;ard and ;redit;ard

. &efault in 7ayment by a &ebtor.

F. #ettlement of &ebt by #et-:1.

H. %uarantees.

B. ;onversion of a ;onventional ank toan Islamic ank.

E. ?awala.

J. urabaha to the 7urchase :rderer.

A. I8arah and I8arah untahia ittamleek.

>+. #alam and 7arallel #alam.

>>. Istisna6a and 7arallel Istisna6a.

>*. #harika 3usharaka4 and odern;orporations.

>. udaraba.

>F. &ocumentary ;redit.

>H. ua6la.

>B. ;ommercial 7apers.

>E. Investment #ukuk.

>J. 7ossession 3Nabd4.

>A. 'oan 3Nard4.

*+. ;ommodities in :rganised arkets.

*>. inancial 7apers 3#hares and onds4.

**. ;oncession ;ontracts.

*. $gency.

*F. #yndicated inancing.

*H. ;ombination of ;ontracts.

*B. Islamic Insurance.

*E. Indices.*J. anking #ervices.

*A. @thics and stipulations for atwa.

+. oneti(ation 3Tawarru)4

>. %harar #tipulations in inancialTransactions

*. $rbitration

. Ga)f

F. I8arah on 'abour 3Individuals4

H. 9akahB. Impact of ;ontingent Incidents on;ommitments.

E. ;redit $greement

J. :nline inancial &ealings

A. ortgage and its ;ontemporary$pplications.

F+. &istribution of 7rot in udarabah-based Investments $ccounts.

F>. Islamic /einsurance

F*. inancial /ights and Its &isposalanagement

F. 'i)uidity and Its Instruments

FF. ankruptcy

FH. ;apital and Investment 7rotection

>A) 7 a g e


20/21

AnnexureB

4tandards that have "een deve#o-ed "9 IF4B /Is#amic Financia# 4ervicesBoard

Pu"#ished 4tandards

1. December %665: I)SB1:

8uidin' Princi-#es o2

0is& Mana'ement 2or

Institutions /other than

Insurance Institutions o+erin'

on#9 Is#amic Financia# 4ervices

/IIF4

2. December %665: I)SB%:

Ca-ita# Ade5uac9

4tandard 2or Institutions /other

than Insurance Institutions

o+erin' on#9 Is#amic Financia#

4ervices /IIF4

3. December %662: I)SB(:

8uidin' Princi-#es on

Cor-orate 8overnance 2or

Institutions o+erin' on#9

Is#amic Financia# 4ervices/Exc#udin' Is#amic Insurance

/9ak@ful Institutions and

Is#amic Mutua# Funds

. December %66/: I)SB3:

*isc#osures to Promote

:rans-arenc9 and Mar&et

*isci-#ine 2or Institutions

o+erin' Is#amic Financia#

4ervices /exc#udin' Is#amic

Insurance /9ak@ful Institutionsand Is#amic Mutua# Funds

!. December %66/: I)SB5:

8uidance on e9

E#ements in the 4u-ervisor9

0evie Process o2 Institutions


4ervices /exc#udin' Is#amic

Insurance /9ak@ful Institutions

and Is#amic Mutua# Funds

". December %660: I)SB2:


8overnance 2or Is#amic

Co##ective Investment 4chemes

#. anuar! %66: I)SB/:

Ca-ita# Ade5uac9

0e5uirements 2or Sukk,

4ecuritisations and 0ea# Estate

investment

$. December %66: I)SB0:


8overnance 2or 9ak@ful/Is#amic

Insurance Underta&in's

%. December %66: I)SB:

8uidin' Princi-#es onConduct o2 Business 2or

Institutions o+erin' Is#amic

Financia# 4ervices

1&. December %66: I)SB16:

8uidin' Princi-#es

on Sharah8overnance

49stems 2or Institutions


4ervices

11. December %616: I)SB11:

4tandard on 4o#venc9

0e5uirements

2or 9ak@ful/Is#amic Insurance

Underta&in's

*+) 7 a g e


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seminar paper_concepts and application of islami banking

Documents