SHARIA BANKING

IBS GURGAON

WHAT DOES ‘ SHARIA’ MEANS ? Sharia is an Islamic religious law which is

not only related to religious relations but also related to day – to – day life of Islam

WHAT IS ISLAMIC BANKING ?

This kind of banking is based on Sharia law and mainly two principles:

(a)sharing of profit and loss

(b)prohibition of the collection and payment of interest by lenders and investors

HISTORY Islamic Banking is based on Islamic Commercial

Law, which was founded over 1400 years ago

Modern Islamic Banking grew due to the desire of Muslims to fashion all aspects of their life in accordance with principles of their faith

In 1975, history was created when Dubai Islamic Bank (DIB) became the first modern commercial Islamic bank in the world. Before this, customers had no choice but to use conventional banks for all their financial requirements

PRINCIPLES OF

ISLAMIC BANKING? Islamic financial model works on the basis of

risk sharing 1. Freedom to contract 2. Freedom from price control 3. Entitlement to equal, adequate and

accurate information. 4. Freedom from Riba( interest) 5. Freedom from Gharar ( Risk) 6. Avoid hoarding 7. Avoid selling forbidden (Haraam) items

TERMINOLOGIES OF BANKING

Ijara is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period

Ijara-wa-Iqtina is a similar arrangement, except that the customer is able to buy the item at the end of the contract

Mudaraba offers specialist investment by a financial expert in which the bank and the customer shares any profits

Musharaka is a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested

CHALLENGES IN ISLAMIC BANKING

Islamic bank has grown in large no. of countries the world.

PLS modes shift the direct risk of Islamic banks to their investment depositors.

Provide funds through their PLS facilities especially in Mudarabah contract.

Lack of risk-hedging instruments. Hold large proportion of assets in reserve

accounts.

ISLAMIC V/S CONVENTIONAL BANKING

Only one buyer and seller in the transaction process

Practices are concerned with bear the risk , when any transaction takes place

They bear all the liability involved in transaction from the consumer

Many buyers and sellers are involved

Practices are concerned with elimination of risk, any transaction takes place

They do not take the liability only get the benefit by the interest from the consumers

ISLAMIC BANKING CONVENTIONAL BANKING

HOW DO BANKS MAKE MONEY WHEN THERE IS NO INTEREST INVOLVED ? Profit and loss sharing contracts : The

Islamic bank pools investors' money and assumes a share of the profits and losses

Partnership and joint stock ownership : (a) Declining-Balance Shared Equity: (b) Lease-to-Own(c) Installment (Cost-Plus) Sale

ADVANTAGES It assists in financial inclusion Reducing the impact of harmful products and

practices It promotes the principle of financial justice Encouraging stability in investments Accelerating economic development

DISADVANTAGES While competing with conventional banks,

the basis of Islamic banking makes the proposal unattractive to deposit holders under Modarabah

Banks have to recruit highly competent persons in evaluating each proposal or project before entering into any partnership

Gestation period of three to five years in generating profits from the business will discourage deposit holders in blocking funds in Modarabah accounts

Financial fraudulent will help in manipulating profit figures

EXAMPLE : DUBAI ISLAMIC BANKING DIB is a public joint stock company, and its

shares are listed on the Dubai Financial Market

 The bank currently operates 62 branches in the UAE

LIST OF SUCH BANKS Amana Bank Sri Lanka Bank of Whittier USA Jaiz Islamic Bank Nigeria Dubai Islamic bank Pakistan LTD Yemen Islamic bank Qatar Islamic bank Bahrain Islamic bank Syria Islamic bank

CHALLENGES FACED BY BANKING Building the capacity to manage the

increasing uncertainties generated by financial innovation

The effective implementation of financial safety nets and effective coordination

Increase and highly complex financial and economic integration associated with globalization

CONCLUSION Businesses have to open their books so

Islamic banks can verify performance

Investors are sharing the risk with the companies

Islamic finance is a centuries-old practice that is gaining recognition throughout the world

Thank you !