Growth of islamic banking by karimi

Al Huda Int’l Conference 2010

ISLAMIC BANKING:

The Common

Perception &

The Future Prospects

Abdul Jabbar KarimiHMB-Islamic Banking [email protected]

Alhuda Conf. 8-9 June’ 2010 2Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

TABLE OF CONTENTS

The common perception about Islamic Banking….

What is Islamic Banking ?How is Islamic Finance today at Global Scene?

What about its future?


Alhuda Conf. 8-9 June’ 2010 Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi4

Table of contents

THE COMMON PERCEPTION ABOUT ISLAMIC BANKING….

What is Islamic Banking ?How is Islamic Finance today at Global Scene?What about its future?

Is this about Islam? Or about Banking? What has Religion got to do with Banking? Has Islamic Banking ever been practiced? What is Islamic Banking? Why Islamic Banking??? Where is the misconception and what is the

acceptable answer? How Banking could be Islamic? How is it different from the Conventional

Banking? R U pricing your products on LIBOR/KIBOR

basis? Still it is Islamic…!!!!....


The Common FAQs about Islamic Banking..??

The Basic Knowledge of Shariah Principles Accounting & Shariah Standards by AAOIFI Psychological Marketing / With reference to

Quran + Sunnah The mean to achieve the end must be right

& Justified for a Muslim


How to make the customers perception in the desired direction?


What bothers Interest-based Financial Institutions to have Shariah Compliant Products?

Are the interest-based leading financial institutions suddenly converting to Islam?

Interest-based system has reached a level of stagnation & the Islamic system, which built momentum about three decades ago, is expanding at unflagging speeds (Malaysia, Bahrain and Pakistan who making steady progress).


Are IFI (Islamic Financial Institutions) Viable?

The commercial viability of Islamic finance is still a debatable issue

The system is a cross between the capitalist system and socialist order

The advantage of a fairer distribution Reduced default risk and viability in

micro-finance Some thing that is Shariah Compliant

would be more viable.


Islamic Banking: The Stakeholders

Consumers

Islamic Islamic Banking Banking

InstitutionInstitution

Government

Central Bank

Staff Sponsors

Management

External

Internal

Legal Framework

Demand for Products & Services

Vision & Leadership

Capital

Regulations/Policies guidelines

Shariah Adviser/Shariah Board

Madrasas/

Religious Scholars

Shariah supervision

Public opinion/Religious Rulings

Productivity


Shariah Risk: A Unique IB Characteristic

Basic Knowledge of Islamic Investment Firm Belief + Assurance (Haqq ul Yaqeen or

Ainul Yaqeen) Commitment at all levels

CONFIDENCE OF DEPOSITORS & SAVERS

“A bank licensed as an Islamic Bank may be running on a very sound financial footing. However, if the depositors came to know that the Bank has violated its Shari’ah mandate, the depositors will lose confidence and the finding will trigger deposit withdrawal and probably collapse of the bank. By contagion effect this can lead to financial instability threatening economic development.”


Table of contents


WHAT IS ISLAMIC BANKING ?

How is Islamic Finance today at Global Scene?What about its future?

What is Islamic Banking?

““Islamic Banking is interest free Asset Islamic Banking is interest free Asset Backed banking governed by the Backed banking governed by the principles of Islamic Shariah”principles of Islamic Shariah”

““The ends of the both banking systems are same but only the means to achieve these ends are different as one system is God given in contrast to its rival system which

is ma made.” .” ((KarimiKarimi, Abdul Jabbar- ‘Islamic Banking :A necessary system, published in , Abdul Jabbar- ‘Islamic Banking :A necessary system, published in

the Finance & Business Review, The News, the Finance & Business Review, The News, 18th Jun’ 200118th Jun’ 2001))



The Basic principles of Islamic Banking/Finance…(ICARE)

1.1. Interest Free TransactionsInterest Free Transactions

2.2. Contractual Certainty( Gharar free Contractual Certainty( Gharar free contracts)contracts)

3.3. Asset & Asset & ServiceService Backing Backing

4.4. Risk SharingRisk Sharing

5.5. Ethical BankingEthical Banking


Table of contents


What is Islamic Banking ?

HOW IS ISLAMIC FINANCE TODAY AT GLOBAL SCENE?

What about its future?

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

Note: Figure indicates number of Islamic FIs in the country. Only some of the key FIs are shown for each country

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

Germany: 3- Bank Sepah- Commerz Bank- Deutsche BankSwitzerland: 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)-Britain Islamic Bank

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: 5India: 3Bangladesh: 3

Turkey: 7- Faisal Finance Institution- Ihlas Finance House

Yemen: 5Planning to go for Islamic Banking


Establishment of Establishment of IFSB (IFSB (Islamic Financial Services Board), Islamic Financial Services Board),

IIFM IIFM (International Islamic Financial Market) & Accounting (International Islamic Financial Market) & Accounting

and and AAOIFIAAOIFI (Auditing Organization for Islamic Financial (Auditing Organization for Islamic Financial

Institutions) Institutions)

In Feb 1999, Dow Jones introduced the Dow Jones Islamic In Feb 1999, Dow Jones introduced the Dow Jones Islamic

Market Index (DJIM) of 600 companies worldwide whose Market Index (DJIM) of 600 companies worldwide whose

business complies with Islamic Shariah laws.business complies with Islamic Shariah laws.

At present there are more than 105 Islamic Funds At present there are more than 105 Islamic Funds

operational through out the world with a total fund base of operational through out the world with a total fund base of

over USD 3.50 billion.over USD 3.50 billion.

Global Scenario……


According to ‘The Banker’s 2009 survey, the volume of the Shariah Compliant Assets of the top 500 Islamic Financial Institutions grew by 28.6% rising to US$822bn from $639 in 2008 at a time when the top 1000 World Banks’ assets slumped to 6.8% from 21.6% from the previous year.

The Shariah Compliant Assets are projected to grow to US$1.60 trillion by 2012.

Sukuk (Islamic Bond) Issuance expected to hit US$200 Billion by 2010

The opportunities to tap the surplus funds of oil rich Muslim nations is strong as many non Muslim countries are trying to tap it including, Japan, UK, Singapore, France, Hong Kong US, Germany, Australia, Thailand, etc.

Global Scenario…….


The United Kingdom has emerged as a leading centre for offering Islamic Financial Services (IFS) as at present there are 22 banks in UK offering Islamic Financial Services, out of which 05 are fully Shariah Compliant (4 wholesale & 1 retail bank).

Lloyds TSB Bank PLC (LYG ), Britain's fourth-largest, recently

introduced Islamic mortgage products to cater to Britain's 2.5 million Muslims.

France by indicating the adjustments in its legal and fiscal framework aims to the development of Islamic Finance to cater the faith-based clientele in the country in addition to gain attention of Middle Eastern Investors holding abundant liquidity. (report by Standard & Poor, 2009)

German state became the first European government body to issue an Islamic bond last year -- a $121 million.



Governments of Bahrain ,Malaysia and now Governments of Bahrain ,Malaysia and now

Pakistan have issued Islamic Bonds (Sukuk) in Pakistan have issued Islamic Bonds (Sukuk) in

order to facilitate Islamic Banks in managing their order to facilitate Islamic Banks in managing their

liquidity. liquidity.

Issuance of these bonds has also paved the way Issuance of these bonds has also paved the way

for Shariah compliant Government borrowings.for Shariah compliant Government borrowings.

These institutions are playing a key role in setting These institutions are playing a key role in setting

up and standardizing Shariah , Financial and up and standardizing Shariah , Financial and

Accounting standards for Islamic Financial Accounting standards for Islamic Financial

Institutions.Institutions.



Major business schools such as Oxford, Harvard, Major business schools such as Oxford, Harvard,

Rice and Durham has started post graduate Rice and Durham has started post graduate

programs in Islamic Finance programs in Islamic Finance

Harvard University has developed a major database Harvard University has developed a major database

by the name of Harvard Islamic Financial Information by the name of Harvard Islamic Financial Information

Program (HIFIP) for Islamic Banking.Program (HIFIP) for Islamic Banking.



Islamic Banking in Pakistan: An Overview


Islamic Banking In Pakistan: An OverviewThe Islamic banking market in Pakistan continued to expand during the last year as well and the assets growth has registered 59% p.a. growth since 2005 as stated by Deputy Governor SBP. Assets = about PKR 370 bn + (Industry Share constitute 5.60%)Deposits = about PKR 280bn + (Industry Share constitute 5.90%) Financing and Investment = about PKR 230 bn +(Industry Share constitute 4.30%) Projected growth for the next 5 years of Islamic Banking is 15% to 20% per annum.The Islamic Banking Market share would reach 12% by 2012 as per strategy plan of SBPIn 2008 the assets of Islamic Banking increased by 34% as compared to the assets of overall industry by 8.8%. (SBP Bulletin)


Islamic Banking In Pakistan: An OverviewThere are 06 full fledged Islamic Banks and 13 Commercial Banks having Stand alone dedicated Islamic Banking Branches At present there are more than 600 Islamic Banking Branches in Pakistan.

The six full – fledged Islamic Banks are...

1.Meezan Bank2.Dubai Islamic Bank3.Al-Barakah Islamic Bank4.BankIslami5.Emirates Global Islamic Bank6.Dawood Islamic Bank



Table of contents


What is Islamic Banking ?How is Islamic Finance today at Global Scene?

WHAT ABOUT ITS FUTURE?

1. A FEW SAYINGS BY KEY PLAYERS FOR ISLAMIC BANKING………

"There is a segment within the current market that would switch to Islamic if the quality and benefits offered were as good as conventional financial products," says Ray Ferguson, CEO of Standard Chartered Bank UAE in Dubai.

“A conservative approach to risk and a close link between the financial sector and real assets has helped shield the sector from the worst of the credit crisis,” said. Brian Caplen, An editor of a London-based magazine

"Islamic banking isn't just for conservative or radical Muslims. It's mainstream business now, "That's why every bank wants a bigger piece of it." says Ross Mohamad Din, director of HSBC Amanah Malaysia


2. What Motivates an individual?


Universal Motivating Factors:

1.Fear

2.Reward (in Cash or Kind))


““O you who believe, Fear Allah and give up what remains of 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 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 not, then you are warned of the declaration of war from Allah and His Messenger; But if you turn back you shall have your and His Messenger; But if you turn back you shall have your principal: Deal not unjustly and you shall not be dealt with principal: Deal not unjustly and you shall not be dealt with unjustly.”unjustly.”

Al Baqarah 278 - 279 (Fourth Revelation)Al Baqarah 278 - 279 (Fourth Revelation)

Motivating Factor- Fear


From Hazrat Abu Hurayrah (RA):From Hazrat Abu Hurayrah (RA):

The Prophet, peace be on him, said:The Prophet, peace be on him, said:

"Riba has seventy segments, the least "Riba has seventy segments, the least serious being equivalent to a man serious being equivalent to a man committing adultery with his own committing adultery with his own mother." mother."

(Ibn (Ibn Majah)Majah)

Motivating Factor- Fear

What Hadith says about Riba?


From Hazrat Jabir Ibn-e-Abdullah (RA): The Prophet may peace be on him, cursed the receiver and the payer of interest, the one who records it and the witnesses to the transaction and said; “They are all alike (in guilt).”

Ref: (Muslim, Tirmidhi and Musnad Ahmed)

What Hadith says about Riba?


3. Changing the perceptions of the clients by offering the required

basket of goods @ market rate addressing the Qs…..


Q: Is It True Islamic Banking? (Profit Calculation Method)

Questions about IB Products:Q: Cover business requirements?Q: Cost effective? (Pricing formula…)Q: Any complications? (LIBOR/KIBOR…)Q: Why stage wise documentation?

Confusion about Islamic Banking Biased advice of consulting conventional bankers should be dealt with

carefully.. Different Opinions from Religious Scholars


The Common Perceptions: The Key Questions

Why Islamic Banking? Market Approach 20% of the world population is Muslims

15 million Muslims residing in non-Islamic countries in Europe, mostly in France, Germany and in UK. And members of this community were not getting benefit from the conventional banking

Sizable proportion who will only avail financial services if assurance of Shariah Approval is given

The Oil Rich Middle East, which has a huge potential for investing in a Shariah approved financial system


Why Islamic Banking? Islamic Approach:Interest has to be eliminated from the financial system on account of the followings;

Islamic Shariah/Law enjoins it (Qura’n + Sunnah)

Consensus of Ummah (Fiqh Academy of IDB (OIC)) issued fatwa (religious ruling that the Banking interest is harram in its all shapes….

Religious Boards of all Islamic Banks (IBs) have repeated the same fatwa of OIC Fiqh Academy.



Is our vision to create a Market Segment?

The tale of Telecom.


Telecom Revolution…Year 2000

, 0%

306,493 , 9%

3,056,460 , 91%

“In the Year 2000, after 8 yearsmobile phone operator’s share was only 9%”

No of connections and market share

Source:

Pakistan Telecommunication Authority



4,884,607 , 8%

1,757,198 , 3%

55,617,101 , 89%

“Now mobile phone operators share of the industry is 89%!!!

No of connections and market share

Source:




“The market segment has become larger than the basic industry itself”

Mobile Phone Industry

55 Mn Connections Fixed LineIndustry

5 Mn Lines

Source:



What is the inspiration…

“ Vision is to create an industry itself and not a segment”

Basic functionality with out the wire

Financial solutions with out Riba


Accessing New Market segments through Islamic

products


At the time of branch opening…

- 15 branches of 13 banks on the same road

- IBB branch would in fact not be 14th branch rather 1st in that area offering Islamic products

Accessing New Market segments through Islamic products


What does this Market Want ?

Accessing New Market Segments through Islamic products


What does this Market Want?

80%

10%10%

“The winning formula”

All things equal I Will prefer an

Islamic Product

I will Not bank with an Islamic

Bank

I will only bank with an Islamic

Bank

Research:

Source:

Oasis International research 2006


What does this Market Want?An Example…

“All things equal I will prefer an Islamic product”

Launched in an area already having

Conv.banking branches

Highest incremental growth in the entire

banking industry

IBB


The road ahead…

Accessing New Market Segments through Islamic products

“Nothing is more powerful than an idea whose time has come”


Alhuda Conf. 8-9 June’ 2010 Islamic Banking: The Common Perception & the Future Prospects by : A. J. Karimi

47

To address the challenges facing the IB industry including…

Diversification & Innovation in financial structures while adhering the Shariah credentials+

Standardization of products in the country and then across the globe+

Enhance understanding and capacities of IB Risk management +

An acceptable solution of liquidity placements..+

HR Training by having education of Islamic Finance at all levels…

Ref: For More Info. Read my article, ”CHALLENGES FACING ISLAMIC BANKS’ Published in DAWN on 04th December ’2006 (http://www.dawn.com/2006/12/04/ebr12.htm), on http://www.nzibo.com/governance.html), (www.gcu.edu.pk/library/NI_Dec06.htm - 219k) and www.bankseta.org.za/downloads/IEDP_UK_2007_%20Islamic_Finance_Research_Report.pdf

For having desired Future prospects…

The Main Motivating Factor and Driver of The Main Motivating Factor and Driver of Islamic Banking …..Islamic Banking …..

In anticipation of ROIA and in an effort to abide by the prohibition of Riba, In anticipation of ROIA and in an effort to abide by the prohibition of Riba,

a surprisingly increasing number of Muslim deposit holders all across the a surprisingly increasing number of Muslim deposit holders all across the

world, have non-interest bearing accounts and they refrain from Interest world, have non-interest bearing accounts and they refrain from Interest

Based Banking. Based Banking.

This will also go true forThis will also go true for Afghanistan as well……..as well……..

The rewards in this life and especially in the life hereafter are the main The rewards in this life and especially in the life hereafter are the main

motivating factors for them.motivating factors for them.


“ROIA”

Concluding Point

Thank youThank you


FOR FURTHER INFORMATION:

Abdul Jabbar Karimi

Cell: +92 300 8245995Ph: +9221 32639665

Email: [email protected]

CENTER OF ISLAMIC BANKING & ECNOMICSHead Office:

192- Ahmad Block, New Garden Town , Lahore, Pakistan Ph: +92-42-35913096-8, 35858990, 38407850

Fax: +92 -42-35913056E-mail : [email protected]: www.alhudacibe.com

Economy & Finance

Growth of islamic banking by karimi