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Vision of Islamic Banking
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Presen
Outline
Philosophy of Islamic banking.
Vision
Objectives
Inception of Islamic banking
Current Status of Islamic banking
Way Forward
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Presen
Philosophy
Islam is a complete religion providingcomprehensive code of life
Islam is not confined to some moral
teachings, some rituals or some modes ofworship
It rather contains guidance in every sphere oflife including socio-economic fields
If such guidance and rules are followed by, itis very useful for the welfare and well beingof all human being.
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Presen
Philosophy
Allah (SWT) has ordained in Holy Quran
Allah has permitted trade and prohibitedRiba
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Presen
Vision
Establish Islamic Banking as banking of first
choice to facilitate implementation of an
equitable economic system providing a strongfoundation for establishing a fair and just
society for mankind
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Presen
Objectives
1. Equitable Distribution of Wealth
Islam encourages fair and equitabledistribution of wealth. Hence, it does notpromote concentration of wealth in few hands
Riba, Maysir & Gharar cause unfair distributionof wealth
All permissible modes are beneficial for theeconomy, however some of them are morepreferred and encouraged by Islamic Shariasuch as Contracts ofEquities (Uqood ulMusharakat) which facilitate equitable
distribution
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PresenObjectives
Islamic banking, being a part of IslamicEconomic System, should play an active roleto achieve this objective
For this purpose, Islamic banking transactionsshould primarily be based onMusharaka/Mudaraba (Profit & Loss sharingbasis) so that the capital flows from wealthyclass to the poorer
The ratio of equity based transactions to tradebased transactions should increase to achievethe real benefits of Islamic banking
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PresenObjectives
2. Asset Backed Financing
Where Uqood ul Musharakat (Profit & losssharing contracts) are not possible orfeasible, Uqood Ul Mubadalat (Exchangecontracts) such as Murabaha, Ijarah,Diminishing Musharakah, Salam & Istisnaaetc. may be used
These asset backed transaction also cause todecrease the level of inflation from theeconomy, provided they are completelygenuine and Shariah compliant transactions.
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PresenObjectives
3. Fulfilling Customer Needs
Islamic Financial Institutions should evaluatethe extent to which basic requirements of thecommunity have been fulfilled through ShariaCompliant range of products
A wide range of products fulfilling basic needs
of the masses increase peoples confidence inIslamic banking and its true spirit
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PresenObjectives
4. Shariah Compliance
The long term sustenance and survival ofIslamic Financial Institutions demands highlevel of Sharia Compliance and adherence toSharia principles
Products which may technicallybe ShariaCompliant but defeats the true spirit of Islam
or gives way to Heelah must be discouraged
A high reliance on such products raisesskepticism against the commitment andintegrity of industry participants
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Islamic Banking
Inception & today
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1. Cooperative banks in the sub-continent:o Cooperatives in Hyderabad Dakan (1940s)
o Cooperative bank in Karachi (1950s)
2. Pilgrimage fund in Malaysia (1950s) full-fledged bank in1967
3. Saving bank in Mitghamr,
Egypt (
1963)
4. Nasr Social Bank, Egypt (l97l), was created as an interest-free commercial bank
5. Dubai Islamic Bank (1974)
6. Islamic Development Bank (1974)
7. In 80s different initiative were taken in Pakistan, Iran &Sudan. Islamic Mutual funds started to emerges
8. In 90s AAOIFI, Harvard Islamic Finance Forum, DowJones Islamic Index were established
9. In 2000-05, several Islamic Bonds (sukooks) were issued.Key infrastructure institutes established including IFSB,
IRA (Islamic Rating Agency), CIBAFI, ARCIFI.
Inception ofIslamic Banking
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500 + Islamic financial institutions
$ 500 - 600 bn in funds
250+ Shariah compliance mutual funds with $ 300bn funds
207+ International Islamic sukuks issued till 2007 with a73%
Growth in comparison with 2006
133 + Takaful companies operating world wide
Post graduate degrees offered in Islamic banking by majoracademic institutions
Important database system (HIFIP)
Shariah &Accounting Standards for the Industry (AAOIFI)
Recognition by IMF, World Bank and Basel Committee
Sources
CIBAFI, Insurance Daily, www.AMEINFO.com
Islamic Banking - a Success Story
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More then 60 countries have ISLAMIC BANKINGInstitutions
Approx37 Muslim countries including Kuwait, Dubai,
Saudi Arabia, Iran Malaysia Brunei and Pakistan
Approx 23 non-Muslim countries including USA, UK,
Canada, Switzerland, Srilanka, South Africa and
Australia
Islamic Banking - a Success Story
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Different types of IFI have emerged globally
Islamic Commercial Banks
Islamic Investment Banks
Islamic Units of conventional banks
Islamic Funds
Islamic House Financing Schemes
International Financial Market
International Institutions of Islamic Banking
Islamic Banking - a Success Story
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Main Groups
DMI
Al Baraka
Al Rajihi Kuwait Finance House
In Pakistan
Meezan Bank Al Baraka
Many foreign banks nowhave Islamic windows.
Citibank
ANZ
ABN AMRO Goldman Sachs
Kleinwort
Benson(German)
Hong Kong Shanghai
bank
Saudi American bank
Saudi British Bank
UBS AG
Islamic Banking - Institutional Evolution
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PresenCurrent Status & Growth
Legal framework in place, licenses availablefor
Islamic commercial bank
Islamic Subsidiary of a conventional bank
Stand alone Islamic branches of aconventional bank
Legal framework hybrid of Bahrain and
Malaysian model
Islamic Banking in Pakistan
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PresenCurrent Status & Growth
Islamic Banking in Pakistan
Shariah Board established at SBP
Islamic products available to cover 85% ofthe services offered by conventional banks
Liquidity management products beingdeveloped
Shariah audit developed by SBP
Rupee denominated Sukooks has beenissued
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PresenCurrent Status & Growth
Full Fledged Islamic Banks - 6
Meezan Bank
Al Barakah Islamic Bank
Dubai Islamic Bank
Bank Islami Pakistan
Emirates Global Islamic bank
First Dawood Islamic Bank
Many conventional banks operating Islamic BankingBranches: Bank of Khyber,MCB, Bank Alfalah, Habib Metro
Bank, Bank Al Habib, Standard Chartered Bank, Soneri,
HBL, UBL, Askari, NBP, RBS etc. (12)
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PresenCurrent Status & Growth
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PresenCurrent Status & Growth
Branch network of IB participants by Dec,08 Rs. 525 +
Asset base of IB Rs.235 bln+
Deposit base of IB Rs.169 bln+
Growth rate in 2006 around 65%
Share of IB in the overall Banking system stands at 4.3%
As of June, 2008
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Key Management Challenges
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Skepticism & Lack of awareness
Lack of trained Human Resource
Solutions for Liquidity Management
Islamic Inter-bank Market
Ensuring Shariah Compliance
New Product Development & Research
Key Management Challenges
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Availability of Takaful
Weak Regulatory/Legal Frame work
Risk Management Frame work
Key Management Challenges
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Way Forward
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PresenWay Forward
In order to meet above mentioned objectives,following steps will be helpful in movingtowards the right direction:
Strict compliance to SSB / SA Guidelines &AA
OIFI Sharia Standards
Use of true modes such as Mudaraba /Musharaka (Profit & Loss Sharing) whichincludes Joint Ventures, Venture Capital,Private Equity etc.
Paying higher return to depositors andcharging lower financing charges ascompared to conventional banks in order toboost public confidence
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PresenWay Forward
Legal / Taxation laws should be modified tofacilitate asset backed transactions and trueimplementation of Sharia guidelines
Banks must carry out regular and organizedaudit activity to ensure proper utilization ofdepositors funds and to avoid faketransactions at customer end.
Depositors money should not be allocated tohigh risk low profit asset classes in order toraise profitability of shareholders
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PresenWay Forward
Fit & Proper criteria for the eligibility tobecome a Sharia Advisor/SSB member mustbe laid down in all jurisdictions
Adequate resources must be allocated tofacilitate Research & Development andeducation of masses
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