Waheed Qaiser

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Islamic Banking Finance

• Waheed Qaiser
• Managing Director

6th March 2008
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Islamic Banking
Islamic banking can be defined as providing and
using financial services and products that
conform to Islamic religious practices - the
Shari'a law. Islamic banking is not a new
phenomenon but revival of the Shariaa taking
into account the modern economics and the current
market situation in each of the countries. It is
important to note that in a non-Muslim country
one can not expect the Shariaa and the local
legal system to be running in the same direction
and hence some compromises on
dzaroora/necessity basis without compromising
the main principles of Shariaa Islamic
financial services prohibit payment and receipt
of interest at a fixed or predetermined rate.
Instead, purchase and resale of goods and
services or profit and loss sharing (PLS)
arrangements form the basis of financial
contracts.
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Islamic Economic Activity

• Basis of economic activity
• Wealth / Resources belong to Allah
• We are trustee of the wealth
• Accountable to Allah
• What is Shariaa and where is it derived from?

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Shariaa

• Lexical meaning Plain Way (Siratul
  Mustaqeem)
• Technical meaning The Divine Law

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Component of Sharia'a
Sharia'a concepts
Objective of Islamic banking is to be Sharia'a
compliant
Holy Quran Holy book for the mankind
Sunnah Practices and sayings of Prophet
Sharia'a derived from
Ijtehad Reasoning applied by Scholars
Qiyas Analytical comparison
Ijmaa Consensus of Ummah
Sharia'a concepts
Fiqh al-Muamlaat Dealing with civic Matters
Fiqh Al-Ibadat Dealing with religious matters
such as prayer, Zakat, Haj etc
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Revelation about Riba

• That which you give as interest to increase the
  peoples' wealth increases not with God but that
  which you give in charity, seeking the goodwill
  of God, multiplies manifold. (Surah Rome, Verse
  39)

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Revelation

• Believers! Do not swallow riba, doubled and
  redoubled, and be mindful of Allah so that you
  may attain true success ( Al Imran, Ayat 130)

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The prohibition of Interest is not
limited to Islam Some of the old testaments
have rendered riba as haram (See Exodus 2225,
Leviticus 2535-36, Deutronomy 2320, Psalms
155, Proverbs 288, Nehemiah 57 and Ezakhiel
188,13,17 2212).
UK usury laws on excessive interest abolished in
1854
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Basic difference
Brief Description of Both
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Islamic vs. Conventional

• .

CONVENTIONAL
money

• CONVENTIONAL BANKING
• Is based on interest.
• Deals in money or papers
• Is based on fixed return on both Sides of the
  balance sheet.
• Does not involve itself in trade and business
  directly

Bank
Client
money money (interest)
ISLAMIC
Bank
Client
Islamic BANKING . Is based on profit or
rent . Deals in assets. . Is based on profit
sharing on . deposits side, and on profit on
assets side. . Actively participates in trade,
production and valid services through valid
contracts.
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Importance of Purifying the Source of Income in
Islam

• The body which is nourished by non-pure sources
  is bound to hellfire.
• On the day of Judgment, a person will not be
  moved from the place which he stands until he is
  asked about the sources of his income, and the
  ways he spent it.
• Purifying the source of ones nourishment is one
  of the important reasons for the acceptance of
  supplications by Allah.

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Major contracts used in Islamic banking

• Buying Selling (Murabaha, Musawama, Tawarruq)
• Mudaraba/Qiradh Investment management
• Musharaka Partnership
• Ijarah Leasing
• Wakalatul Istismar Agency
• Istisna/ Muqawala Contract of works mostly for
  constructions
• Salam Forward sale contract used usually for
  crops

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Objective of Islamic banking
The main objective of Islamic Banking is to
avoid dealing with interest or usury (Riba) and
undertake economic activities in accordance with
Islamic Law as stated in Quran and hadith
Muslim community is estimated at 1.4 billion
and majority of them along with religious groups
from other communities wish to move to Islamic
Banking and hence this strong revival process
taking place Select retail services
include Investment Banking products / asset
management products Takaful covering all
disciplines Corporate Banking - Select business
banking services include
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Key similarities and differences
Product
Similarities
Differences
Conventional Savings Account

• Similar account features
• competitive fees and
• charges
• Customer earns return on
• savings
• Limited number of free
• transactions

• Customer rate of return
• not based on fixed
• interest rate
• Less returns to clients
• when Bank is less
• Profitable
• Higher returns to clients
• when Bank is more
• profitable
• Profit paid monthly as
• against quarterly
• Stabilization reserve
• created to smoothen the
• profit paid
• Customer to accept the loss if the investment
  makes a loss

Islamic Banks Savings Account
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Uniqueness of Islamic Banking

• Co-mingling between Finance Religion and ethics
• Shariaa Supervisory Boards (SSB)
• Studies Articles of associations and bylaws
• Approval of all contracts
• Contribute in designing new products
• Audit the actual implementations
• Issuance of Fatwas (Decrees)
• Conferences - Research - Training

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Principles of Islamic Business

• 1. The Objectives and philosophies of Islamic
  banks must thus be in line with the teachings of
  Quran and Sunnah of the Prophet (PBUH)
• 2. Eliminating riba is an important task, but
  Islamic banks, by default, must conform to all
  other Islamic business principles
• 3. All teachings imposed on Muslim individuals
  are also applicable to Islamic banks

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Main Islamic Banking Principles

• Permission of trade and prohibition of Riba
• money can not be made on money itself
• money can only be made on productive assets /
  trading activity

• Prohibition of Gharar / ambiguity
• Partnership based on profit and loss sharing

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Routes to conversion

• Selling Islamic products through dedicated
  Islamic windows and gradually expanding as the
  business prospects grow half hearted conversion
• Gradual conversion approach
• Independent Islamic Banking Unit
  Is it bringing any conf.
• Dedicated Islamic branches
• Separate funding and budgeting
• Full conversion ( Internal or External )
• Merely selling Islamic products through existing
  set-up without creating any dedicated Islamic
  windows not a very clear cut commitment
• Whichever is selected would reflect ones
  motives of conversion

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External Challenges

• Right composition of Shariaa Board
• Lack of proper Institutional framework
• Shortage of experienced Executive management
  team to build confidence they must know the
  values, this is not just another job?
• Narrow range of Islamic products vs conventional
  
• Lack of efficient financial markets and slow
  development
• Fear of lack of transparency
• Standardisation of Shariaa ruling,
  documentation etc
• Liquidity management / placement of short term
  funds etc
• Education key issue

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Internal challenges

• Occasional misunderstanding by management
  business divisions
• Lack of experienced, well trained and qualified
  human resources
• Insufficient products the time it takes to
  develop
• RD testing the output ensuring consistency
• Ineffective and slow response from the System
  operation group
• Lack of measures to build confidence among the
  core customers
• Massive difference of opinions without any
  concrete forward plan

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Key Issues

• Awareness and education in the market
• Legal system (conv.) Legal cost
• Regulatory issues practice differs from place
  to place
• Financiers / Investor commitment
• Research Dev. and Skill Base
• Flexibility

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The Way Ahead

• Islamic banks must develop the concept of
  Musharakah (participating in profit loss) and
  Mudaraba, and use it more aggressively
• Adopt new financing policies to encourage
  development and support for the small scale
  traders
• Develop the Islamic liquidity management and
  Islamic money market
• Must improve its services to be competitive with
  the best in the market
• Must arrange the Train The Trainers programs for
  scholars, bankers, businessmen and professionals

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Risk Management

• Medicine for the ailing economy John W. Snow
• In the next lecture we shall talk about market,
  operational and credit risk within Islamic
  Banking and also go through how a conventional
  evaluator would weigh the risk as against the
  Islamic evaluator. This is where crucial factor
  of understanding the Islamic Banking steps-in
• Legal and Shariaa risk
• Risk mitigation measures
• How does the Islamic Banking Risk differ from the
  conventional banking and why?

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Thank You
wqaiser_at_qcc.com.qa
wqaiser786_at_yahoo.com Tel. [phone] office
974 5101513 Mobile
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