Transcript DIP – 10. Islamic Banking - seikeelim | Just another

Lim Sei Kee @ cK
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Islamic banks adhere to the concepts of
Islamic law.
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Islamic banking refers to a system of
banking or banking activity that is
consistent with Islamic law (shariah)
principles and guided by Islamic
economics
 Prohibition
of riba (interest)
 Profit sharing (mudharabah)
 Safekeeping (wadiah)
 Joint venture (musharakah)
 Cost plus (murabahab)
 Leasing (ijarah)
Conventional banking
Islamic banking
It does not deal with zakat
In modern Islamic banking, it has
become one of the service oriented
function of the Islamic banks to be a
zakat collection centre and they also
pay out their zakat
It can charge additional money in case of
defaulters
Islamic banks have no provision to
charge any extra money from the
defaulters
Very often it results in the banks own
interest becoming prominent. it makes no
effort to ensure growth with equity
It gives due importance to the public
interest, its ultimate aim is to ensure
growth with equity
Conventional bank has to guarantee all its
deposits
Islamic bank can only guarantee
deposits for deposit account, thus
depositors are guaranteed repayment
of their funds
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Concept  principles  no deception and no riba
(interest)
It is not new  7th Century
Money is a medium of exchange
Interest can lead to injustice/exploitation in society 
Zulm
No real 'lending' as all 'lenders' obtain interests
To earn money for banks, they must obtain an equity /
ownership
Requires banks to participate, share risk  profit varies
Profit share is distributed instead of interest earned
Leads to more ethical society (Unlike West  you must pay
interest)
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This concept encourages better resource management
Islamic Banking is known by several names:
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Interest free banking (Iran)
PLS Banking (Pakistan)
Islamic Banking (Gulf)
Special Finance Houses (Turkey)
All expressions are used interchangeably.
Some people prefer Islamic Finance House
instead of Islamic bank. (Beit ul tamweel)
 Rental-based
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Ijarah  Lease
 Partnership-based
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Musharakah  Partnership  time,$  share profit
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Risk is shared between 2 person  loss or profit is shared
Mudharabah  Partnership one $, other effort
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If profit, it is shared with the customer; bank takes its fee
If loss, customer loses; bank does not take its fee
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Musharakah is from the word Sharikah.
More than one partners: Partnership in capital proportion
and project supervision.
A partner may waive his right of supervision or delegate it
to another partner.
Arrangements: Sharing of Profit and loss in accordance
with capital proportion agreed proportion.
Variant: Share of profit in agreed proportion, share of loss
in capital proportion.
Applications of Musharakah:
i. in Import trade
Ii. In Agriculture
The structure of a Musharakah Contract
ISLAMIC
BANK
PARTNER
(Customer)
60% Ownership
40% Ownership
MUSHARAKAH
Mudharabah existing from pre-Islamic times.
 Profit and loss sharing is a wrong translation.
 Arrangement: Profit is shared on an agreed basis,
loss is borne by the Rabbal Mal. (Bank)
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Ujrah Concept  Payment in exchange for services,
benefits and privileges offered to the cardholders
 Mudharabah  Partnership  bank $, customer
benefit
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Minimum age  21, With parents  18
 Payable Facility Charges  varies monthly; 0 if full
payment paid on or < due date
 Ta'widh (compensation)  1% of outstanding balance
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CLIENT
(Mudarib)
Investor of
Capital
ISLAMIC BANK
Payment of
Mudarabah
Capital
INVESTMENT / TRADING
ACTIVITIES
Earning of Profits
ISLAMIC BANK
Periodic proportionate
Profits / Return of Capital
CLIENT
(Mudarib)
Distributor of
Profits Earned
The bank provides to the customer (mudarib) all
the capital to fund a specified enterprise
 The customer contributes only entrepreneurship.
 The customer is responsible for the day to day
management of the enterprise and is entitled to
deduct its management fee (mudarib fee) from the
enterprise’s profits.
 The mudarib fee could be a fixed fee (to cover
management expenses) and a percentage of the
profits or a combination of the two.
 The balance of the profit of the enterprise is
payable to the bank
 If the enterprise makes a loss, the bank (as the
fund provider or Rabbul Mal) has to bear all the
losses unless the loss has resulted from negligence
on the part of the mudarib.
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Ijarah is emerging as a popular technique of
financing amongst the Islamic banks
 Elements of a lease contact: Lessor, Lessee,
instrument and period of lease,
 The asset remains in the ownership of the lessor.
Maintenance is the responsibility of the owner.
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 Find
a house to purchase and agree a sale price
 Bank will then purchase the property outright
 You then enter into 2 agreements with the bank
Pay back the purchase price  fixed monthly
instalments  over 25 years
 Pay agreed $ as rent each month  bank’s profit
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 Rent
is set annually, ↓ yearly in % of payment
 When fully paid  ownership is transferred to
you
 Borrow  up to 90% of the purchase price
 Legitimate under Sharia law
The structure of an Ijarah Wa Iqtina Contract
Assets leased
to customer –
title does (not)
pass at end of
lease term
Transfer of
title
to bank
ISLAMIC
BANK
VENDOR
Payment of
purchase
price
CUSTOMER
(Lessee)
Ijarah
Installment
 The
bank buys the asset from the vendor
 The bank then leases the asset to the
customer
 Periodic rentals are collected by the bank
 The title of the asset remains with the
bank under as operating ijarah
 Title passes to the customer under a
Lease ending with transfer of ownership,
either gradually over the period of the
contract, at the end.
 ISLAMIC
BANKING IS RELIGION BASED
 ISLAMIC
BANKING IS FOR A SPECIFIC
COMMUNITY
 ISLAMIC
BANKING REPLACES INTEREST RATE
WITH PROFIT AND THAT IS ALL.
 1.
Discuss the importance of the Islamic
system in managing a business.
 2. Discuss how to make effective decisions to
comply with Islam.
 3. Describe Islamic banking
• Musharakah
• Mudharabah
• Ijarah
• Takaful
 25th
Feb: Tutorial 10
 Presentation
Dates:
 28th
Feb
 4th Mar
 7th Mar
 11th Mar***
NOTE: MAXIMUM 5 STUDENTS /EACH DATE.