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You are Probably Thinking?
... huh?
Is there any thing Like that?
Is it about funding religious groups or communities?
How does it work?
Who it is different from conventional banks?
....
Developments in Islamic Banking
Year 8th-12th
centuries
Early Islamic
banking
• bills of
exchange
•Partnership
•limited
partnerships
•check
•transactional
accounts
• loaning
•ledgers
1963
Islamic Golden Age Egypt
Under cover
•savings
bank based
on profit-
sharing
1973
OIC
Founding IDB
•to fund
projects in OIC
countries
•not
commertial
Dubai
1975
Dubai Islamic
Bank
•First
Commertial
Bank
2010
>300
Institutions
+ 250 mutual
funds
over 51
Worldwide
Source: (2),(4)
Islamic financial services industry currently ~ 1% of global assetsGrowing by more than 20% annually since 2000
Emerging interest in Islamic Finance
Source: (2)
Countries out side ME are pursuing Islamic finance as a new asset class
Some of the key FIs in the world including 15 non-Muslim
United States: 20- Al Manzil Financial Services- American Finance House- Failaka Investments- HSBC - Ameen Housing Cooperative
Germany: 3- Bank Sepah- Commerz Bank- Deutsche Bank
Switzerland: 6
UK: 26 (primarily
branches of Gulf and
global banks)- 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: 10- Al Rajhi - SAMBA- Saudi Hollandi - Riyadh Bank
UAE: 9- Dubai Islamic Bank- Abu Dhabi Islamic Bank- HSBC Amanah
Qatar: 4- Qatar Islamic Bank- Qatar International Islamic
Kuwait: 5- Kuwait Finance House
Iran: 8
Egypt: 7- Alwatany Bank of Egypt- Egyptian Saudi Finance
Indonesia: 4
Sudan: 9
Pakistan: 5
India: 3
Bangladesh: 3
Turkey: 7- Faisal Finance Institution- Ihlas Finance House
Yemen: 5
Source:(3)
Islamic Financial Institutions around the world
Islamic Banking Performance
Muslim population, Islamic assets, revenues and profit pool breakdown by region, 2007
Middle East account 80% of Islamic finance market
Islamic Banking Performance
Islamic and Conventional Banks in the Gulf Region, 2008
Between December 2006 and May 2009
the combined market capitalization of top 10 conventionalbanks suffered a decline of 42.8% 8.5% decline in market capitalization by Islamic banks for the period
Basic Principles in Islamic Financial Model
What is Islamic Banking?“Islamic Banking is interest free Asset Backed banking
governed by the principles of Islamic Shariah”
Islamic Banking basic principles:
Interest Free (riba) Transactions
Risk Sharing
Shariah approved activities
Sanctity of contracts
“The interest which you give to increase the wealth of people, will have no increase with Allah: But that which you lay out for charity, seeking favor of Allah (He will increase): it is these who will get a recompense multiplied.”
Ar Rum 39 (First Revelation)
Riba (Interest) in Shariah
“O you who believe, Fear Allah and give up what remains of your demand for Interest, if you
are indeed a believer. If you do not, then you are warned of the declaration of war from Allah and His Messenger; But if you turn back you shall have your principal: Deal not unjustly and you shall not be dealt with unjustly.”
Al Baqarah 278 - 279 (Fourth Revelation)
Riba (Interest) in Shariah
taxonomy of Islamic contractsThe parallel with “conventional” finance
Salam Householders lending
Murabaha Mortgage with bank’s ownership (in the first step of contract)
Ijara Renting / Leasing
Istisna Sale of real estate under contruction
Musharaka Joint venture / investment deposits
Mudaraba Limited partnership / Investment accounts
Mudaraba Mutual funds / bank’s performance bonds
Qardh hasan Demand deposits 11(current accounts)
Takaful Insurance contract
Sukuk Asset Backed SecuritiesSource:(5)
Murabaha- ConceptsMortgage with bank’s ownership (in the first step of contract)
Vendor
Customer
Islamic Bank
Payment of marked
up price (P+X)
Payment of purchase price (p)
Transfer of titles to bank
Transfer of title to customer
75% of total contracts being Murabaha based
Murabaha refers to contracts in which a financial institutionpurchases goods upon the request of a client, who makesdeferred payments that cover costs and agreed-upon profitmargin for the financial institution.
Source:(3)
Mudaraba- ConceptsLimited partnership
Contract between investors and a financial institution that, acting as a silent
If the enterprise makes a loss, A (as the investor) has to bearall the losses unless
Source:(3)
Investment
/trading activity
Islamic Bank
Entrepreneur (mudarib)
Periodic profits and return of capital customer
Payment of mudarabah capital
customer
Musharaka- ConceptsJoint venture
The bank buys out the investor’s share over a period of time
share of the profits and losses according to the agreedproportions
Source:(3)
Islamic Bank
Partner (customer)
Musharaka
60% ownership
40% ownership
Diminishing Musharaka/ Joint venture
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Customer Bank
----------Time------->
Rs
Monthly Rentals
----------Time------->Source:(3)
Ijara- ConceptsLeasing
The Bank purchases capital equipment or property and leases it to an enterprise
The financial institution may either rent the equipment or receive a share of the profits earned through its use
Source:(3)
Islamic Bank
Vendor
Customer (lessee)
Transfer of title to the bank
Assets leased to the customer- title does (not)
pass at the end of the lease term
Payment of purchase price
Ijarah installments
Still remember Pheonix Ltd.
Source:(3)
[$] 1st year 2nd year 3rd year 4th year
Depreciation 1,250,650.4 1,250,650.4 1,250,650.4 1,250,650.4
Other costs 1,016,176.2 4,134,481.15 4,141,826.1 4,141,826.1
Total Cost 2,266,826.6 5,385,131.55 5,392,476.5 5,234,801.45
Loss carried forward -866,826.6 -3,451,958.15 -6,044,434.65
Turnover 1,400,000 2,800,000 2,800,000 7,000,000
Profit before tax -866,826.6 -3,451,958.15 -6,044,434.65 -4,279,236.1
Taxes (15%) 0 0 0 0
Profit after tax -866,826.6 -3,451,958.15 -6,044,434.65 -4,279,236.1
Cash flow 383,823.8 -2,201307.75 -4,793,784.25 -3,028,585,7
Repayment credit 1,576,750.5 1,576,750.5 1,576,750.5 1,576,750.5
Dividend -1,192,926.7 -3,778,058.25 -6,370,534.75 -4,605,336.2
Still remember Pheonix Ltd.
Source:(3)
Costs [$] 1st year 2nd year 3rd year 4th year
Depreciation 1,250,650.4 1,250,650.4 1,250,650.4 1,250,650.4
Financing 630,700.2 473,025.15 315,350.1 157,675.05
Labor 305,856 305,856 305,856 305,856
Running 20,620 20,620 20,620 20,620
Implementation 59,000 3,334,980 3,500,000 3,500,000
Total Costs 2,266,826.6 5,385,131.55 5,392,476.5 5,234,801.45
References
(1) World Database for Islamic Banking and Finance (www.wdibf.com/)
(2) The IFSB-IRTI-IDB publishes report on Islamic Finance: Global Financial Stability April 2010 (http://www.ifsb.org/docs/IFSB-IRTI-IDB2010.pdf )
(3) Islamic Banking Current Scenario & Way ahead Nov. 2005 by Muhammad Imran:Head of Islamic Banking Standard Chartered Bank
(4) Organization of the Islamic Conference (OIC) (www.oic-oci.org/ )
(5) Risk profile of Islamic banks Nov. 2009 by Claudio Porzio & M. Grazia Starita: University of Naples “Parthenope”