Islamic Model as an Alternative Banking System - By Elias Abu Alhaija - iCompetences IFC2012

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IFC 2012Islamic Finance: Myths, Realities, and Best Practices

Marrakech, Morocco 27 & 28 December 2012

elias.haija@ect.ac.ae

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Ø Every one thought that's every thing has arecession including # Islamic Finance but it

is not!

Ø Let’s see what happened in # IslamicFinance during 2011:

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1.Egypt announces its interest of establishing Islamic Banking andTakaful.

2.Gulf Borrowers show interest in tapping Malaysian Sukuk market

3.Yemen government shows interest in launching Islamic Sukuk.

4.Indonesian Government issues sukuk backed by infrastructure.

5.Qatar Central Bank issues rules for Conventional Bank to shutdown Islamic Units.

6.India: Kerala’s High Court allows 1st Islamic Bank to beestablished.

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7. Maldives 1st Islamic Bank launched.

8. Worlds First Halal Index Launched.

9. Oman opens door for Islamic Finance and announces potential regulations

to be launched.

10. Nigeria releases Islamic Banking Policies.

11. Bangladesh Central Bank Islamic money market in the offering.

12. Shari’a compliant profit benchmark launched by Reuters.

14. Sri Lanka’s first Shari’a Compliant Commercial Bank launched

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Continuous increase of the Islamic banks’ assets:826 US$ billions in 2010 - 1,130 US$ billions in2012 (Ernst & Young, 2011) with growth rate of 21% in 2011 (Oakley, 2011).

In many countries the banking system isbecoming dual with the simultaneouspresence of conventional and Islamic banks(IBs’ assets: 14% in the MENA region, 26% inGCC 17.3% in Malaysia.)

Increasing interest of researchers in comparing thebehavior and performance of the two types of banks ingeneral and during the recent financial crisis.

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Shamshad Akhtar Ex-Vice-president of the WorldBank for MENA in his speech during the “Symposiumon Islamic Finance in Roma: Developments in MENAregion”, Bank Italia, Rome, Italy, November, 11th,2009.

“…Although IBs have illustrated a degree of resilience and stability, they have been impacted bythe crisis because of their higher exposure to realestate and their limited reliance on risk sharing or

equity based transactions…”

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I.  Foundation of Islamic financing.

II.  Financial intermediation in Islamic banking.

III.  Islamic Transaction & Instruments.

IV.  Development characteristics of Islamic

financing.

V.  Islamic Banking as an Alternative Approach.

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The basic principles of Islamic financing are

derived from the axioms of justice  and

harmony with reality  on one hand and

human nature on the other.(Kahf,1992,2004)

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The principles of  justice  are essential in all

forms of Islamic financing.The Principles of justice and fairness requires

that the actual result or profit  of such

cooperation should be fairly distributed 

between the two parties and nothing else.

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Islamic banking provides means of payment  in the form of producers’

principal in projects on the basis of sharing the actual, real-life outcome of a production process.

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Both partiesshare in actual 

outcome or netprofit/ loss of 

productiveproject.

It is not throwing the risk burden  

on one party.

There is no guarantee return  

to the provider of money regardlessof whether the

project makes orloses money.

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Is incapable of growing or increasing  because it is purely conceptual : it is arelationship between a person andanother person.

How can a debt grow?

How it can increase?

Except by:

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losses should be carried in proportion to financing advanced.

If a financier wants to have a claim on a partof the return of the project,

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  Financial intermediation means taking fundsfrom people who have more than they need

and providing those funds to persons whoneed them for their economic transactionsand activities.

This is done in conventional banks on thebasis of loan contracts .

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  Islamic banks are also Financial

intermediaries

It makes their financial intermediation on several 

contracts  that do not include lending andborrowing because interest is prohibited in Islamic 

law .

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Loan Contract.

SharingContract

Leasing Contract

Salecontract.

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In the function of financial intermediation,

Islamic Banks contracts of investment and use of funds to theentrepreneurs and other users of fund.

The of getting goods that arepurchased for sale or lease and of establishing projects is left to the user of funds, and the Islamic Bank acts upon ordersfrom the users of funds.

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 Islamic banks use three major categories of 

financing instruments or modes:

( None of them has any interest component)

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Under the principle of sharing, IBs providefinancing to projects on the expectation of a share in the return.

If a project loses, all capital providers andfinancing contributors lose together andproportionately.

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are only possible for

productive enterprises that involve real-life businesses that increase quantity orimprove quality or enhance usability of real goods and services.

By doing this, such businesses generate

a return that can distributed betweenentrepreneur and the financier.

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are those that involveactual, physical exchange of commodities or

provision of services from one to anotherwhere by financing is measured only by thereal sale of commodities and can only beprovided to the extent of the real value of goods exchanged. 

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Islamic Banks buy goods and supplythem to users: producers and/or

consumers against future repayment.

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1)  The simplest is where the bank sells realgoods, equipment and machinery to theirusers at an agreed-upon marked-up price.

2) Construction/manufacturing contract.

3)  Deferred delivery contract.

Sale-based modes can end up in one lump sum

deferred payment or in installments spread overa certain period of time.

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  Leasing modes can have a variety of forms:(As practiced in leasing companies and in many conventional banks) 

Ø  Fixed or Variable rents.

Ø  Declining or Fixed ownership.Ø  Operational or Financial.

With different conditions regarding thestatus of leased assets at the end of thelease period.

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Islamicmodes byvirtue of their very

nature, are

and

for:

Debtrescheduling& Debt swap.

Financing of speculative

cash balances.

Inter-bank

liquidity.

Speculative

transfers.

And for otherpurely

monetary /financial

activities that

make up asubstantialpart of current

activities of conventional

banks.

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Islamic financing is purely a real life,real-goods/services financing. 

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Islamic banking is the integration of ethical and moral values with Islamicfinance so that banking complementseconomic development. 

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By adopting Islamic moral/ethical criteria inIslamic Banking financing through not extendtheir help to activities that are Harmful tosociety….

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Many Islamic banks especially designedfor relieving the economic hardship of the poor and needy.

For instance , many Islamic banks have established a practice of providing goodly (interest –free) loans to their clientele in casesof dire need, overdrafts or unexpected circumstances.

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The third developmental characteristic of Islamicbanks is found in the nature of their relationship

with depositors.

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  One might wonder whether Islamic bankingand finance is an alternative approach to

conventional banking or may be the mostmodern generation of banking ?

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The answer is:

Banking business is more than a possiblemeans to satisfy the needs of societyaccording to the prevailing conditions andcircumstances.

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Islamic banking is a system that mobilizes savings on the basis of profit/loss sharing  that consideredto be fairer and more conducive to investment anddevelopment.

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The most popular 20 big Islamic banks around theworld have a growth of 16% within the previousthree years & S.A is the biggest market for IslamicAssets.

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( Thomson Reuters Survey Nov.2012)

Global Demand for Sukuk isexpected to reach $421 billion

by 2016 from $240 billion in2012.

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1 Iran 315 315 100.0

2 Saudi A 138 225 61.3

3 Malaysia 103 358 28.8

4 UAE 86 201 42.7

8 Turkey 22 520 4.3

12 Egypt 7 144 4.9

20 Algeria 1 90 1.1

23 Tunisia 0.8 36 2.2

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Faisal IB of Egypt

43 5,087 National Bank of Egypt 46,380

Al Baraka Bank,Egypt

81 2,135 Banque Misr 28,899

Al Baraka Bank,Algeria

116 1,015 Crédit Populaire d’Algérie

6,856

Banque Al WavaMauritania

118 992 Banque Mauritaniennepourle Commerce

International

12,922

Al Baraka Bank,Tunisia

163 418 Banque InternationalArabede Tunisie

4,719

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First: Limited development of retail

banking generally.

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NEXT 

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Dr. Elias Abu AL-Haija