4. Islamic Banking is growing
rapidly in the world by
15-20% annually.
Estimated $270 billion
in assets is controlled
by Islamic banks of the
world
(Total asset base of all Islamic
banks estimated at $950billion)
5. Future projection suggests that Islamic banks will
hold 40% to 50% of the savings of the world’s
1.67 billion Muslims in 8 to 10 years, according
to the International Islamic Finance Forum.
United Kingdom
Netherlands France
United States Germany
Middle East India
Malaysia
Indonesia
6. More than 500 Islamic banks
and investment firms exist
globally according to the
Bahrain based General Council for
Islamic Banks
and Financial Institutions.
7. Islamic Finance and Banking
is now worth around US
Dollar 1 trillion and is
destined to grow more than
the rate of
conventional
investing, according
to analysts at
Deloitte & Touche.
8. Malaysian based Islamic Financial
Services and Saudi Arabian Islamic
Development Bank are projecting the
market to grow to
US Dollar 1.6 trillion by 2012.
10. Islamic finance
industry continues to escape the
full force of current
economic turmoil.
What is clear is that the rapid growth in
this area of finance and its ethical
foundations make Islamic finance
an increasingly serious alternative
to conventional finance.
11. The concepts of Islamic Finance
have been around since the
origination of Islam itself.
18. Earning Interest is prohibited!
Shariah prohibits usury or lending
Why? FOR THE PROHIBITION:
RATIONALE
money at an exorbitant rate of
interest (Riba).
The Qur’an contends that an element of injustice is
found intrinsically in interest. It says to give up
whatever remains of Riba such that ‘Neither you
wrong, nor be wronged.’ (Lit. Al Dhulm)
Some injustices of Riba:
-Indirectly encouraging systematic competition
amongst participants
-Concentrating wealth with the rich at the expense of
the poor
-Fueling an endless unsustainable disproportionate
economic growth In Islamic finance...
19. Earning Interest is prohibited!
Shariah prohibits usury or lending
Why? money at an exorbitant rate of
interest (Riba).
RATIONALE FOR THE PROHIBITION:
Money has no intrinsic value – it is only a measure
of value, and since money has no value itself,
there should be no charge for its use. Therefore,
Islamic Finance is said to be asset based as
opposed to currency based.
In Islamic finance...
20. Other prohibitions:
Masir, which is involvement in
speculative and gambling transactions
Gharar, which is uncertainty about the
terms of contract or the subject-matter,
e.g. prohibits selling something which one
does not own
Investment in businesses dealing in alcohol,
drugs, gambling, armaments, etc. which are
considered unlawful or undesirable
27. Risk in any transaction must be shared
between at least two parties so that
the provider of capital and the user
(entrepreneur) share the business risk
in return for a share in profit
In Islamic finance...
28. In summary...
Islamic Conventional
Functions and
Functions and
operations are based
operations are based
on fully man-made
on Shariah principles
principles
Promote risk-sharing Investor is assured of
between provider of pre-determined rate
capital (investor) and of interest
user of funds
(entrepreneurs)
29. In summary...
Islamic Conventional
Partners, investor and Lender-Borrower
traders, buyer or relationship
seller relationship
Based on money
Encourage asset- trading. Money is a
based financing and medium of exchange
based on commodity and not a commodity,
trading its sale and purchase
is prohibited in Islam
30. In summary...
Islamic Conventional
Aim at maximizing Aim at maximizing
profit but subject to profit without any
Shariah restrictions restrictions
No right of profit if
there is no risk It is almost risk free
involved. There is banking and lender
profit and loss has no risk of losing
sharing, provider may its money because
lose money in case of interest is guaranteed
loss
31. Product Tree
Islamic Modes of Finance
Partnership Trade Based Rental Based
Based Modes Modes Modes
Musharaka
(Equity
Participation)
Murabaha Ijarah
(Cost-plus sale) (Leasing)
Mudaraba
(Partnership
Financing)
32. Partnership Based Modes
Musharaka (Equity Participation)
The parties involved contribute in varying degrees
of assets, technical expertise, etc., and agree to
a percentage of the returns as well as the risk.
Mudaraba (Partnership Financing)
is very similar to Musharaka and is a trustee type
finance contract under which one party provides
the labour while the other provides the capital.
33. Trade Based Modes
Murabaha (Cost-plus sale)
is essentially undertaking a trade with a markup and is used
for short-term financing, similar in form to purchase
finance.
An example would be a bank purchasing a tangible asset of
some sort from a supplier with the resale based on the
cost plus an agreed markup. This is most often used to
finance property, since the bank would not be allowed to
charge interest on any loan. Once such a debt covenant
is in place between a bank and the customer,
repayments can begin until a completion point where
the asset is transferred to the customer. There is no
interest rate risk which is essentially covered within the
markup percentage, identified at the outset.
34. Rental Based Modes
Ijarah (Leasing)
is a leasing contract whereby one party leases an
asset for a specific amount of time and cost from
another party, usually a bank. The bank would
bear all the risk and a portion of the installment
payment goes towards the final purchase of the
asset at the time of transfer of asset. This can
also be set up as a lease-purchase contract for
the term of the asset’s specified lifetime.
This could represent total assets coming from Middle eastern countries and even countries outside Middle east such as India, Indonesia, Malaysia, United Kingdom, France, Germany, the Netherlands, and the United States..
The modern Islamic Finance really originated in the 1960s..
Shariah, which governs Islamic societies Shariah, the Law of Islam, originates from two principal sources, the Qur’an (the Holy Book of the Muslims and its Practices), and the Sunnah, the way of life prescribed as normative in Islam based on the teachings and practices of Prophet Muhammad (PBUH).
Let’s answer the big question on everyone’s mind...
Interest and Flat money is the method by which Banks function.
The main intention is to avoid injustice and unfair enrichment at the expense of another party.
Whereby an investment is structured on exchange or ownership of assets, and money is simply the payment mechanism to effect the transaction.The difference is that the rate of return is based on asset transaction and not based on interest on money loaned.
So, the answer is on the next principle...
Musharaka – All parties must invest a certain amount of capital. In the case of purchasing a property under this sort of arrangement, it is purchased by both the bank and the customer together, and the repayments made are partly rent and partly by buyback (It could also be under rental based mode)
