Participation Islamic Banking and Finance System 1 BANK

Participation (Islamic) Banking and Finance System. 1

BANK is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links together customers that have capital deficits and customers with capital surpluses. Modern conventional banking system came into existence nearly 429 years ago-Banco Della Pizza in Venice 1587 2

Types of Banks Commercial banks Community development banks Land development banks Credit unions or Co-operative Banks Postal savings banks Private banks Offshore banks Savings bank Building societies and Landesbanks Spare Bank Exchange Banks Consumer’s Bank Ethical banks Direct or Internet-Only bank Investment banks "underwrite“ Merchant banks Universal banks Central banks Participation/Islamic banks Savings Banks Indigenous Banks Mortgage Banks 3

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings). CHRISTIANITY “Do not charge your brother interest, whether on money or food or anything else that may earn interest. ” (Deuteronomy 23: 19) “Do not take interest of any kind from him, but fear your God, so that your countryman may continue to live among you. ” (Leviticus 25: 36) “If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest” (Exodus 22: 25) 24. “When you lend money to any of My people, to the poor among you, you shall not be to him as a creditor, nor shall you impose upon him any interest. JUDAISM 25. If you take your neighbor’s [night]garment a s a pledge (collateral), you shall return it to him by nightfall. • ISLAM “Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury, " but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever). ” (Quran 2: 275) 4

The pulse of the international Participation banking industry are the nine core markets — Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Turkey, Kuwait and Pakistan (QISMUT plus three contributions). Together, they account for 93% of industry banking assets in the world, it exceeds US$920 billion in 2015. 5

Unlike traditional banks, Islamic banks’ funding comes from deposits (on which they pay no interest) and profit-sharing investment accounts with a return decided by the bank’s profit. 6

Rapid-growth markets: fast-tracking to global economic importance Ernst and Young has classified top 9 countries as rapid growth markets(RGMs) in Islamic finance based on following principles: -their economic growth to date and future outlook -the size of their economy and population -their strategic importance for global business 7

World Bank: The Islamic finance industry has expanded rapidly over the past decade, growing at 10 -12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion, covering bank and non-bank financial institutions, capital markets, money markets and insurance (“Takaful”). CIBAFI (The General Council for Islamic Banks and Financial Institutions) and the World Bank Sign Memorandum of Understanding to Foster Cooperation on Islamic Finance (July, 2015). 8

Islamic Banking Activities in accordance with Shariah: Different Accounts in IB Musharakah Mudarabah Murabahah Ijarah Qard Hassan Salam and Istisna Sukuk Zakat and so on… 9

What is Shariah? Quran Ijmah Sunnah Qiyas 10

SHARIAH QURAN – holy book of Islam and understood by Muslims literature word of God. SUNNAH- sayings, actions and approvals of prophet Muhammed (pbuh). IJMAH- this is consensus reached on particular issue by Islamic Scholars. QIYAS- analogy, simply to say decisions made by Islamic scholars on particular issue by comparing with similar situations may have happened before. 11

Main Prohibitions RIBA (interest) Impermissible Activities GHARAR (uncertainty) 12

Key Objectives of Islamic Banking and Financial Principles TRANSPARENCY SOCIALLY RESPONSIBLE CURBING SPECULATION FINANCING REAL ECONOMY 13

Musharakah is an Islamic mode of financing in the form of a partnership between the bank and its client whereby each party contributes to the capital of the partnership in equal or varying degrees either to establish a new project or share in an existing project. The accruing profit is divided between the partners pre-agreed formula, while losses are shared on pro rata basis. The word Musharakah is derived from the Arabic word Sharikah meaning partnership. Islamic jurists point out that the legality and permissibility of Musharakah is based on the injunctions of the Qur'an, Sunnah, and Ijma (consensus) of the scholars. 14

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Mudarabah is an Islamic mode of financing between the bank, providing a specified amount of capital, and the Mudarib, providing management for carrying out the venture, trade or service with a view to earning profit. It is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The former is called Rabb - ul - mal and the latter is called Mudharib. Thus, Mudarabah is a contract between those who have capital and those who have expertise, where the first party provides capital and the other party provides the expertise with the purpose of earning Halal (lawful) profit which will be shared in a mutually agreed upon proportion. This type of business venture serves the interest of the capital owner and the Mudarib (agent). 16

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Murabahah Murabaha is one of the Islamic Finance modes and it is very popular worldwide nowadays. Murabaha; sometimes referred to as “Murabahah” is also known as “corporate asset support”. The concept of murabaha can be summed up as; “Bank finances the needed purchase, buys it, and resells it with a mark – up”. murabaha financing means, “cost plus financing”. Murabaha is an Islamic finance instrument which of course does not include interest (usury – riba) in it. The philosophy laying in the roots of murabaha financing is to supply a needed service, good or commercial right. Bank; Islamic bank in this situation, buys that needed property or service in advance with cash money than resells it to the client with an added profit as deferred payment base. 18

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Ijarah is an operating lease contract whereby the bank avails assets to the customer against a periodic rental fee for a specified period of time. The asset continues to be owned by the bank, and will revert back to the bank at the end of the lease contract. Ijarah is commonly used for the finance of expensive equipment. 20

Ijarah 21

Sukuk A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia - Islamic religious law. Since the traditional Western interest-paying bond structure is not permissible, the issuer of a sukuk sells an investor group a certificate, and then uses the proceeds to purchase an asset, of which the investor group has partial ownership. The issuer must also make a contractual promise to buy back the bond at a future date at par value. 22

Takaful is a type of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. Takafulbranded insurance is based on Sharia, Islamic religious law, and explains how it is the responsibility of individuals to cooperate and protect each other. 23

Qard-ul-Hassan From the legal point of view, the main ingredient of a Qard-ul Hassan contract is a loan that is not contaminated in any way by Riba. There is a lender and a borrower, with no reference to a market, which might give one the impression that there should be a ‘price’ for it. The relationship between lender and borrower is one of creditor and debtor, and the principal of the money loaned out remains the responsibility of the borrower. The lender cannot demand his dues before the end of the contract period. 24

Thank You for Your Attention! 25

Murabahah vs Short Term Loan Murabahah: -Sale of Tangible Asset -Profit Margin (Cost Plus Mark Up) -No penalty acceptable for delay in payments. -Commodity has got intrinsic value and quality in condition. Short Term Loan: -Advance Money (money is treated as commodity) -Interest Rate on Balance outstanding -Penalty Acceptable for delay in payments. -Money does not have any intrinsic value and quality in its condition, it is only medium of exchange. 26