Alhuda CIBE - Presentation on Islamic Finance by Zubair Mughal

Outline of Presentation Introduction and Brief Perspective of Islamic Banking Islamic Banking Products World Wide Mechanism of Islamic Banking Mode of Financing in Islam ( Musharakah & Modarabah ) Bai ( Buying & Selling ) Takaful Product of Takaful

Presented by : Zubair Mughal

CEO – AlHuda : Centre of Islamic Banking & EconomicsRegional Head – Takaful Pakistan Limited.

Industry Progress in Pakistan

Currently there are 6 full fledged Islamic Banks, while

6 Full fledge Banks having 186 and 12 Conventional Banks have 103 SAIBBS

Total IB Branches = 289

Year 2001

•Meezan Bank•Al Baraka

•Meezan Bank•Al Baraka•MCB•Alfalah•SCB•Bank AlHabib•Habib AG Zur.•Metropolitan•Bank of Khyber•Soneri Bank

2002 2003

•Meezan Bank•Al Baraka•MCB

•Meezan Bank•Al Baraka•MCB•Alfalah

2 10

2006 - 07

•Meezan Bank (100) •Al Baraka (18) •MCB (8) •Alfalah(32) •SCB (8) •Bank AlHabib(4 ) •HMB(4) •Bank of Khyber(17) •Soneri Bank ( 4) •HBL(1) •Bank Islami(36) •DIB (17) •EGIBL (10) • Dawood(5) •NBP(3) •ABN AMRO (3) •Askari(14) •UBL (5)

2004 - 05

1843


City - Wise Breakup

City - Wise Breakup





Islamic products and services offered by 300+ Financial Institutions around the world

.United States: 20- Al Manzil Financial Services- American Finance House- Failaka Investments- HSBC - Ameen Housing Cooperative

Germany:4- Bank Sepah- Commerz Bank- Deutsche BankSwitzerland: 6

UK: 26- HSBC Amanah Finance - Al Baraka International Ltd- Takafol UK Ltd- The Halal Mutual Investment Company- J Aron & Co Ltd (Goldman Sachs)

Bahrain: 26 - Bahrain Islamic Bank- Al Baraka- ABC Islamic Bank - CitiIslamic Investment Bank

Malaysia: 492 - Pure Islamic Banks (Bank Islam, Bank Muamalat)Rest - conventional banks

Saudi Arabia: 17- Al Rajhi - SAMBA- Saudi Hollandi - Riyadh Bank

UAE: 13- Dubai Islamic Bank- Abu Dhabi Islamic Bank- HSBC Amanah

Qatar: 4- Qatar Islamic Bank- Qatar International Islamic

Kuwait: 9- Kuwait Finance House

Iran: 8

Egypt: 12- Alwatany Bank of Egypt- Egyptian Saudi Finance

Indonesia: 4

Sudan: 9

Pakistan: 21India: 3Bangladesh:9

Turkey: 7- Faisal Finance Institution- Ihlas Finance House

Yemen: 5

International Overview The size of Islamic Financial Industry has reached US$

300 Bln. and its growing annually @ 15% per anum. 51 countries have Islamic Banking Institutions 27 Muslim countries including Bahrain, UAE, Saudi

Arabia, Malaysia, Brunei and Pakistan 24 non-Muslim countries including USA, UK, Canada,

Switzerland, South Africa and Australia

International OverviewLeading foreign Banks have opened Islamic

Banking windows or subsidiaries such as:• Standard Chartered Bank • Citibank• HSBC• ABN AMRO• UBS

International Overview In Feb 1999, Dow Jones introduced the Dow

Jones Islamic Market Index (DJIM) of 600 companies world wide whose business complies with Islamic Shariah laws

At present there are more than 105 Islamic Funds operational through out the world with a total fund base of over USD 3.50 billion

International Overview Governments of Bahrain ,Malaysia and now

Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks in managing their liquidity.

Issuance of these bonds has also paved the way for Shariah compliant Government borrowings

International Overview Institutions like Accounting and Auditing Organization

for Islamic Financial Institutions (AAOIFI) and Islamic Finance Services Board (IFSB) have been formed.

These institutions are playing a key role in setting up and standardizing Shariah , Financial and Accounting standards for Islamic Financial Institutions.

Due to these collective efforts Islamic banking is now recognized by IMF, World Bank and Basel Committee.

Islamic Banking

Important Elements of Islamic Economics

Bai ( Sale & Purchase ) Ijarah ( Islamic Leasing ) Basic Mode of Financing ( Musharkah &

Modarabah) Takaful ( Islamic Insurance ) Sukuk ( Islamic Bonds ) Qard Zakat & Ushar

PRODUCT TREE

Islamic Modes

Trade Based Modes

Partnership Based Modes

Rental Based Modes

MusharakaMudaraba

MurabahaMusawamaSalamIstisna

IjarahDiminishing Musharaka

Musharakah Characteristics

All parties share in the capital All parties share profits as well as losses Profits are distributed as per agreed

ratio Loss is borne by the parties as per

capital ratio Every partner is agent of other

MUSHARAKAH

PARTNER A PARTNER BVENTURERs.1000 Rs.1000

PROFIT Rs. 100

LOSSRs.100

Rs. 60 Rs. 40

Rs. 50 Rs. 50

May be in any agreed ratio

Must be according tocapital ratio

Mudarabah One partner (Rab al Mal) contributes

capital and the other (Mudarib) contributes his skills or services to the venture

Venture may for a fixed period or purpose

Both share profit in pre-agreed ratio Loss is borne by Rab al Mal only, Mudarib

loses his services

MUDARABAH

RABBUL MAL MUDARIBVENTURESERVICESCAPITAL

PROFIT

LOSS

40 %60 %

ALL MONETORY LOSS LOSS OF SERVICES

Bai (Buying & Selling)

BaiBuying & Selling

Basic Rules of Bai Existence of Product/Commodity

Ownership of Product/Commodity

Possession of Product/Commodity Unconditional basis

Product have value/Price.

Basic Rules of Bai Bai on Such product which is permissible in

Islam.

Product Must be Identify, clear with all demanding Qualities.

Not based on any incident, struggle etc

Price must be clearly identified.

Kinds of Bai Bai Musawamah Bai Murabaha Bai Surf Bai Salam Bai Istisna’ Bai Urboon

Basic Kinds of Bai Bai Eenna Bai Touliya Bai Wadhia Bai Tawaruq

Type of Bai according to Quality

Bai Salah Bai Fasid Bai Batil Bai Maqoof Bai Majool Bai Muqayaddah Bai Mu’ajal

Introduction “Takaful” is the Sharia Compliant brand

name for the Islamic alternative to conventional insurance. Its based on the principle of Ta’awan or mutual assistance. It provides mutual protection and joint risk sharing in the event of a loss by one of its member

Origins of Takaful

In the event of death caused by someone from another tribe, the member of the offender’s tribe would share the “ blood money” (Khoon Baha) to provide for the family of the victim.

Why Insurance ?Is Some thing wrong with Concept ?

Risk Aversion Assuring others Risk sharing

From the Holly Quran The need for insurance is shown in

the following verse of The Quran.“ Those of you who die and leave

widows should bequeath for their widows a year’s maintenance and residence” (2.240)

From the Hadiths By Anas-bin-Malik, One day Prophet

Muhammad(PBUH) notced a bedouin leaving his Camel without tying it. He asked the bedouin, “Why don’t you tie down your camel”? The Bedouin answered, “ I put my trust in Allah (SWT)”. The Prophet (PBUH) then said,” Tie your camel first, then put your trust in Allah(SWT)” <Tirmidhi>

What wrong with practice ?The contract between the insurer &

the insured is technically wrong from the sharia perspective because of

Gharar (Uncertainty)) Gambling (Qamar & Maisir) Interest (Riba)

Riba in Insurance Direct Riba

Excess on one side in case of exchange between the amount of premium.

Indirect RibaThe interest earned on interest based

investments

Gharar Lexically it means uncertainty and

technically it means the uncertainty of the counteract or the subject matter.

Different Models of Takaful Pure Mudarabah Model : The participants

and operator enter into modarabah Contract. Wakalah Model : An Agency Agreement is

made between participants and Operators on the basis of Wakalah ( Agency agreements)

Wakalah Based on Waqf Model : The participant's donate the fund and operator charge an agency fee.

InvestmentIncome

Operational Cost of Takaful

/ ReTakaful

Claims &Reserves Surplus

(Balance)

P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.)

Mudarib’s Share of PTF’s

Investment Income

Wakalah Fee

InvestmentIncome

Management Expense of

the Company

Profit/Loss

S H A R E H O L D E R S’ F U N D (S.H.F.)

Participant

WAQF

Takaful Operator

Share Holder

Wakala-Waqf Model

Investment by the Company

Shariah Compliance Shariah compliance is an essential

element in Takaful . It is ensured through a Shariah

Supervisory/ Advisory Board at the level of each Takaful company.

The role of the Shariah Board is vital in meeting the specific demand of a public who would not insure otherwise.

General Takaful Types General Takaful – offers all

kinds of non-life risk coverage. It is normally divided into following classes:

Property Takaful Marine Takaful Motor Takaful Miscellaneous Takaful

Types of Family Takaful Term Life Takaful Whole Life Takaful Endowment Takaful Universal Takaful Marriage Plan Education Plan

BANCATAKAFUL Background Range of Products

Savings → Personal Accident, Homeowners’ Comprehensive, Credit Cards, etc.

Financing, Individuals → Car Ijarah, Housing Musharika, Mortgage Takaful.

Financing, SMEs → Trade Credit Takaful, Business, Office, Equipment, Assets.

E-Commerce

BANCATAKAFUL (…Cont’d.)

Advantages of BancaTakaful: Facilitation Desk / Equipment. Fast Turnaround Time. One-Stop shop for Clients. Concept of Islamic Financial Supermarket. Value Added Services. Law of Large Numbers.

Lower Contribution Rates. Attraction for Depositors.

ReTakaful Currently few ReTakaful companies

worldwide offering a relatively small capacity:

Sudan (1979) National Reinsurance. Sudan (1983) Sheikhan Takaful Company. Bahamas (1983) Saudi Islamic Takaful and

ReTakaful Company. Bahrain/Saudi Arabia (1985) Islamic Insurance

and Reinsurance Company. Tunisia (1985) B.E.S.T. Re Malaysia (1997) ASEAN ReTakaful

International. Dubai (2005) TakafulRe by ARIG. Lloyds of London to have a ReTakaful

Syndicate in 2007.

Takaful Pioneers Takaful started some 27 years ago

in the Middle East with the launching of two companies: The Islamic Arab Insurance Co. (IAIC)

in the UAE and The Islamic Insurance Co. of Sudan

But it took some time for the movement to take shape.

Takaful Pioneers Later in 1984, Malaysia played a

pioneering role in setting the first Legal framework specific to Takaful (Takaful Act).

This was instrumental in the successful launching of the Takaful movement in Malaysia and in other countries of South East Asia.

Takaful Operators The number of Takaful operators worldwide is

now estimated at: 108 Takaful companies 6 Retakaful companies In 35 Countries. Average growth rate higher than

conventional insurance companies (around 25%).

Non–Muslims increasingly opting for Takaful products for commercial benefits.

Takaful Premium Takaful is one of the fastest

growing segments in insurance (at around 20% pa. on average)

World Takaful contributions are conservatively estimated at around US$ 3billions, of which: 60% General Takaful 40% Family Takaful

Takaful Geographical Spread South& East Asia : 56% Middle East : 36% Africa: 7% Europe, USA & Others: 1%

People who do not insure due to religious reasons.

People who insure and are insensitive to religious reasons.

People who currently do not insure at all.

TAKAFUL - TARGET MARKET

Main Markets Malaysia Indonesia Iran GCC countries Other Arab countries Other Asia Pacific Pakistan ( Emerging Market )

Challenges

Business Model Dilemma Could create an uneven / unfair

business environment to operate Need to reach a consensus

internationally on a common and standard Takaful business model

Poor Insurance penetration in the Muslim countries (<1% of GDP).

Takaful Best Practices Regional Takaful institutions and

organisations need to come together internationally in order to promote and standardise best practices within the industry: Islamic Financial Services Board (IFSB) ASEAN Takaful Group (ATG) International Takaful Association (ITA) Accounting and Auditing Organization of

Islamic Financial institutions (AAOIFI)

Growth Outlook World Muslim population is estimated

at 1.5 billions, of which around 97% are based in Asia and Africa.

A two-digit growth in the range of 15% to 20% can be reasonably sustained for at least the next 10 years in the existing markets (Far and Middle East).

Takaful Prospects in Pakistan 97% Muslim population.

Demand for insurance increasing with increase in per capita income.

Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other conventional classes.

Islamic banking on sound footing with support of the Govt.

.

Takaful Products

Trade Based Modes

Partnership Based Modes

Rental Based Modes

MusharakaMudaraba

MurabahaMusawamaSalamIstisna

IjarahDiminishing Musharaka

Thank You.