THE TWO BANKING SYSTEM I SLAMIC ( SOCIAL ) BANKING V S C ONVENTIONAL BANKING INTRODUCTION & APPLICATION PRACTICE- OPERATIONS- CONDITIONS YOUSUF IBNUL HASAN PROGRAM CONSULTANT ISLAMIC BANKING & APPLIED FINANCE IQRA UNIVERSITY PAKISTAN [email protected]8/27/2014 Yousuf Ibnul Hasan, [email protected]1
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Introduction to islamic banking and conventional banking
Conventional Banking institutions are limited to the monetary affairs and to the monetary markets with a purpose to gain monetary benefits in rightly or wrongly. Islamic Banks & Financial institution with Islamic norm and directive as define for the betterment of socioeconomic development as the benefit of the society, with commercial viability of the monetary affairs, ventures and transaction in gaining and disposal of basic need and resources.
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• Moves resources and lend these resources on fixed return to those who need funds for their business or personal utilization.
• Lending remains only to generate income, rightly or wrongly.
• The objective is to earn interest in buying and selling the money and keeping the cut in between to the sale and purchase of money in addition to the bank profitability.
• Act as Post Office, Middlemen or Commission Agent in buying and selling of funds.
• Financial activities that are classified as RIBA activities are avoided
• Products and services through money and commodity for useable and consumable are considered as forbidden which damage the mankind in and restricted by Islam and all other practicing religions.
• Acts & deed pertain to non transparency such as earning & distribution of profit between the bank & client are considered as unethical and immoral monetary affairs.
• The rule to measure the work and the production as a source of profit and increase of capital.
• Linking the individual customer with the Islamic directives towards the economic and commercial importance of money and efforts.
• Finding practical substitute to stop on the Rate of Interest charged on Principle and introduce Ratio on investment participation in the banking transaction either in deposit participation of in financing.
• Realizing chances of work and make the most of the potentials and capacities.
• Giving social support by contributing by Alms, Donations, Financial Aids considered as spreading the unification, affection, eliminating selfishness, greed, self-importance, discrimination, jealousy, injustice, cruelty and humiliation in the social and economical life of the community.
• Using funds of Alms, Donations, Financial Aids is the confirmation to the management for countless number of economic problems and fighting poverty alleviation from the community.
The forces behind Islamic Banks in achieving their objectives
There are two pillars which may be considered substantial to establish the way towards the Islamic Bank and to realize its goals in the promotion of socioeconomic
• The human element is the administrative body that manages the operation of the bank in the supervision and guidance of the GOVERNOR
• The governing authority is assisted by the board of directors and personnel who are professionals in their field of trade.
• Authority should preferably be a Muslim with complete faith and understanding to the Islamic values and injunctions guided by the Holy Quran and Shariah Rules of economic and commercial matters.
• Conversant with Rules, Policies, Functions & Ideas of Islamic banking services & operations.
• Capable to administer & make use ability as an honest, professional before being a man of implementation.
• Necessary to be specialized in the field of banking, investment, financing and commercial trading operations.
• Combines the characteristic with the governor as the expertise of the members of the board of directors and know how to make efforts in Human Resource Development, putting the right man on the right job and able to form a team of professional workforce of administrators, executives and worker.
• Guide and develop effective, premeditated policies in the subject of Finance, Investment, Administration, Human Resource, Local & International, Economic, Commercial, Trading, Social & legal affairs, Organization set-up and Regulatory affairs to guide the administrative body and to lead the team in the best ways of projecting the Aims, Objectives, Goals, Effects and importance of Islamic Banking in the community life.
Merits to follow the prohibition on dealing RIBA in Islamic Banks
• Directing efforts towards the development by means of investments that develop socioeconomic activities.
• Relationship between the economic development & socio economic development.
• Revival of the rule of Social Development along with commercial activities by using Alms, Donations, Zakat and Sadqat for its effective and positive economic and Islamic functions
• Giving Alms, Donation, Charity, Zakat through banking is considered spreading of the alliance, affection, cooperation, participation, support and sincerity by wiping out selfishness and jealousy from community life.
• Using funds of Alms, Donation, Charity, Zakat guarantees the cure for countless number of economic problems and combating poverty.
• Savings Accounts • Deposited Funds for Investments • Deposits • Current Accounts • Alms, Donation, Charity, Zakat and its
money should be spent in their rightful channels
• Participatory Profit through Riba free modes of financings by application of RATIO according to participation and not the application of RATE on principle
Islamic Banks target area of investment fund management
• Firstly: Direct investment: As establishing companies or organizations which perform a certain economic activity commercial, industrial or agricultural
• Secondly: Investment by participating with others in projects as follows:
1. Capital of the project, buying shares of other companies or sharing in the capital of certain projects.
• Thirdly: Lending without interest in certain cases.
• Fourthly: Using alms funds and specialize them in Islamic collaboration.
– The right function of alms fund is to enable the poor man to enrich himself so that there may be a fixed source of income to spare him the need to help.
– If the resources of alms and their collections increase, then may be used in establishing enterprises and factories.
• Authorized to be proxy in collecting debts and commercial bills in return for a wage or a commission is lawful.
• Allowed transferring commercial bills is lawful, that is transferring debts from one entity to another, i.e. from the entity of the transferor to the transferee in the bank accounts and registers only.
• The bank can restore actual expenses, as telephone, telegram, post etc. In addition to his wage or commission unless it is agreed that the wage or commission includes them.
• The bank can buy or sell foreign currencies on behalf of his clients and in return for a commission (of exchange) on condition that it should be handed by hand.
• The bank can act as fund manager and earn part of profitability as management fee.
• The bank can accept work “joint hiring” or Outsourcing as when it is required for the operation of pre-agreed and pre-defined fee or wages through contract..
• The bank can buy, sell & issue financial Certificate, Sukuk, Shares and collect their dividends in return for a fee or commission.
• The bank can issue Promissory Note on behalf of its participation Partner.
• The bank can issue Documentary Credit by using its name on behalf of its participator.
• The bank as fund manager for depositors bank cover wages for employees, utilities and using of equipment, etc. through charging Management Fee from the gross profit earn on fund management.
• The bank charges are informed to the client prior to establishment of the relationship.
• The Bank is eligible for Management Fee as well as part of the profit from the fund management as Modarib to the transaction.
• The bank can participate at a RATIO in capital through financing in syndicate financing or a kind of financial to make profit.
• The bank is not authorized to deduct any amount from the client account at its discretion and need written authority.
• All charges and fees that banks require should be notified to the client prior to the transaction.
• The bank in case of financing in form accrued and expected cost and expenses at actual that may arise during the transaction and these expenses and charges are taken as the cost of the transaction.