Islamic Finance Special Focus NBFC

8/6/2019 Islamic Finance Special Focus NBFC

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Islamic Finance in India.

K M College of Teacher Education

March 29, 2011

Presentation by: Thanveer Mohiyudheen

Chief Operations Officer, AICL

[email protected]

AICL


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What is a financial system?

Instruments & Institutions to transfer

funds from saving surplus units to savingdeficit units.

It facilitates intermediation between

savers and investors. The investors are touse funds for productive purposes.


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Financial system efficiency

Promotion of efficiency is the primary goal ofevery Financial System.

It is measured in terms of efficiency achievedin mobilizing savings from saving surplus unitsin the economy and in allocating these fundsamong saving deficit units.

Increase in the range of financial assets andinstruments would improve efficiency inmobilization of funds.


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FOR IMPROVING ALLOCATIONAL

EFFICIENCY IT NEEDS

Less Transaction Cost

Simplified transaction system Availability and accuracy of

information

Information processing by participants An efficient system also be a stable

system


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FINANCIAL PRODUCTS AND

SERVICES

A financialsystemneedsinstrumentstomobilizefundsfromsavingsurplusunitstochannelthesameintosavingdeficitunits.

Thisproductsareprovidedbyfinancialinstitutions.

Financialinstitutionsarefacilitatorsorintermediaries.

Investorlikestheproductswithminimumrisksandhighexpectedrateofreturn.


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Financial institutions and instrumentswhich function on the basis of directionsand rules in sharia are known as islamicfinancial system.

In conventional finance there is a tug ofwar between ethics and efficiency.

But in islamic finance conformity norms ofislamic ethics dominate all the concerns

Ensures that contracts are just andequitable for all the parties involved.

Reward should be related to effort,

responsibility and risk-sharing.

Islamic financial system


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What is Shariah?

The Shariah is an abstract form of law capable ofadaptation, development and further interpretation.

Shariah is derived from two primary sources: theQuranand the Sunnah

Three dependent sources, namely qiyas (analogicaldeductions and reasoning), ijtehad (legal reasoning)and the ijmaa (a consensus of shariah scholars).


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Objectives of Shariah

Securing Benefits (manfaa)

Protectingfrom Harm (madarrah)

The Religion of Islam

Ibadaat

(Worship, Prayer)

Muamalaat

(Transactions, Worldly Affairs)


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Ibadaat & Muamalaat

Ibadaat

The principle is everything except what is

prescribed is PROHIBITED.

Muamalaat

The principle is everything except what is

prohibited is PERMITTED.


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Fundamentals of Shariah Finance

Prohibitions:

Riba

Gharar

Maysir

Prohibited sectors

Promotions:

Encouragement of profit and loss sharing

Public need or necessity


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Major Prohibitions: Riba

RIBA; in Islam is religiously, socially, andeconomically unjust practice.

Interest on consumption loans; takingadvantage of the borrowers inferioreconomic position.

Interest on business loans; inequitable formof transaction.


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Major Prohibitions: Gharar & Maysir

GHARAR; literal meaning: to deceive, cheat, delude, lure, entice.

Parties to a contract must have actual knowledge of the

"subject matter" of the contract, the price and the

implications of the contract. As a result, contracts where

the parties are not completely aware of the benefits and

risks inherent, are forbidden.

Nor can any obligation be conditional on the occurrence of

an uncertain or ill defined event outside the control of the

parties. Under Shariah principles, if gharar is present, the contract

will be void.

MAYSIR is gambling, bets and wager where whatever one profitsis at the cost of others.


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PRINCIPLES OF ISLAMIC FINANCE

1) freedom to contract

2) freedom from Riba

3) freedom from Algharar4) freedom from gambling and unearned income

5) freedom from price control and manipulation

6) mutual cooperation and solidarity

7) public interest (Maslaha)


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NEEDFOR ISLAMIC BANK

ISLAMIC BANKING has emerged as a viable and

possible alternative to conventional banking after the

financial Tsunami of 2008 in the west particularly thesub-prime housing mortgage crisis in USA

WHY ?


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FINANCIAL ENGINEERING

FINANCIAL ENGINEERING instead ofREAL ECONOMY

Use of Derivatives in a complex fashion

Supply of fictious money to unbelievable extent 12times more than Collective GDP of entire world

Total Derivatives (2008) US $ 741 Trillions

Total GDP (entire world) US $ 60 Trillions

CDO / CDS


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ISLAMIC BANKNOT MUSLIM SPECIFIC

Islamic banking focuses on transparency, cooperative ventures,

shared risk and ethical investing attracts a wide range of both

Muslims and Non Muslims alike. Can you afford to ignore it?

(Boston Consulting group, BCG)

In Malaysia, more than 40% of the investors & 60% borrowers

are non-Muslims, mostly Chinese, in Islamic banks.

One in five applicants for some of the Islamic products are non-

Muslims in Islamic Bank of Britain.


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ALTERNATIVEGLOBAL FINANCIAL

ARCHITECTURE The country should call for analternative global financial architecture,

which is built on the real economy

and not on the paper economy.

To build a new architecture India should take the lead

- Mr. Vaidyanathan, Professor of finance, Indian Institute of Management Bangalore


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Global scenario

AICLAICL

Islamic alternative system has been tried successfullyin various forms in different parts of world.

London, Tokyo, Hong Kong, Singapore and Paris eye tobecome hub and house of Islamic finance and banking

Impressive growth over the last 30 years.

300+ institutions

Islamic Banks/ Islamic NBFCs / Islamic Bankingwindows / Islamic finance institutions

Islamic Finance growing at 15 to 20% annually


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(INSTRUMNETNS USED IN ISLAMIC FINANCE)


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MUDARABA

Mudaraba is a contract between two parties: an

investor (Rab-Al-Mal) and an investment manager(Mudarib). Profit, if earned, is distributed between the

two parties in accordance with the ratio that they agree

upon at the time of the contract. Financial loss, if

suffered, is borne by the investor; the loss to themanager being the opportunity cost of his own labor,

which failed to generate any income for him.


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MUSHARAKA

A Musharaka contract is similar to that of the

Mudaraba, with the difference that in the case of

Musharaka both partners participate in the

management and provision of capital and also

share in the profit and loss. Profits are distributed

between partners in accordance with agreed ratios,

but the loss must be distributed in proportion to the

share of each in the total capital.


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DIMINISHING MUSHARAKA(MUSHARAKA MUTANAQISA)

This is a contract between a financier (the bank) and

a beneficiary (the client) in which the two agree to

enter into a partnership to own an asset, as described,

above, but on the condition that the financier will

gradually sell his share to the beneficiary at an agreed

price and in accordance with an agreed schedule.


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MURABAHA

Under a Murabaha contract, the client orders an

Islamic bank to purchase certain goods at a specific

cash price, promising to purchase such goods from the

bank once it has been bought, but at a deferred price,

which includes an agreed upon, known and fixed

profit in favor of the bank. The deferred price may be

paid as a lump sum or in installments.


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ISTISNA

Istisna is a contract in which a party ordersanother to manufacture and provide an

asset/project, the description of which, delivery

date, price and payment date are all set in the

contract.


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5/26/2011 29

Istisna (Build / Manufacture)

Builds Delivers

Payment

Describe

d

Project

/ Asset


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IJARA

Ijara is a contract pursuant to which a

property/equipment/aircraft etc. is leased byone party to the other with a specified

permissible benefit in the form of a usufruct

obtained for a specified period in return for a

specified permissible consideration.


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It is benevolent loan/debt financing that does

not promise excess or profit to the lender. Theloan amount will be repaid through deferred

payment or lump sum as agreed. This is only for

poor/needy/low income individual/unemployedyouth etc

QARD HASSAN


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Current scenario and regulations


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Isl mi Fi Indi

S nari

AICLAICL

Islamic banking not approved, investment

option available : AICL, Idafa, Secura, Taurus,

Reliance Iman, Bajaj Allianz, Al Barakah,Bearys Amanah

Islamic micro finance institutions surge

Sahoulat, Al Khair Co-op Society.. Immense pressure on Govt. to sanction IF


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PRIME MINISTER ON ISLAMIC BANKING

AICLAICL

"There have been from time totime demands for experimenting(with) Islamic banking. I would

certainly recommend to RBI, whichis looking into the question, tolook at what is happening inMalaysia in this regard

-Prime Minister Mr. Manmohan Singh during hisvisit to Kuala lampur, 27 October 2010


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KER ALA IG RT ER M ITS

N FC ASE N S AR IAH

AICLAICL

The Kerala High court earlier thismonth approved Kerala Governmentsdecision to float Shariah based Non

anking Financial Co (N FC) Alarakah Financial Service Ltd which isa positive development .

In the udget for 2011-12, Kerala'sFinance Minister Mr. Thomas Isaacunveiled road development project ofRs 40000 crores through the IslamicN FC.


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WHAT WE HAVE TO DO?

AICLAICL

Simple regulatory changes could

transform India into a regional

hub for shariah-complaiantfinance and clear the way for a

much-needed wave of

investment into its

infrastructure.-Ben Frumin -India BusinessLaw Journal, June 2008


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Finance regulators in India

AICLAICL

Reserve Bank of India Banks

NBFCs

Chit funds

Securities Exchange Board of India Mutual Funds

VC / PE Funds

Stock Market

PMS

REITs Insurance Regulatory and Development Authority

Insurance companies

Reinsurance companies


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Permissi leIF structures in

India

AICLAICL

Non Banking Finance Company - NBFC

Mutual Fund

Venture Capital Fund / Private Equity Fund

Portfolio Management Service

Stock broking

Micro credit societies

Real Estate Infrastructure Trusts - REITS


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IF institutions in India

AICLAICL

Non Banking Finance Company NBFC AICL

Al Barakah

Mutual Fund Taurus Ethical Fund

Tata Select Equity Fund

Venture Capital Fund / Private Equity Fund

Secura Investment ManagementPortfolio Management Service

Reliance capital


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IFInstitutions in India

AICLAICL

Stock broking

Idafa Investments

Profishare

Multigain

Wealth City

Micro credit societies

300 + SHGs in Kerala INFECC Al Kair Co-operative society

Many small ventures in different parts of India


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AICL the na e to reckon..

AICLAICL

Premier Islamic finance company in India

Registered with the Reserve Bank of India

Commenced operation as NBFC in 2002Works on Islamic Finance principles of equity

and justice

Is on its growth trajectory to transform into anIslamic Bank when the Government of India

sanctions Islamic banking


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AICL Mission

AICLAICL

Is a venue to invest savings for an interest-freereturns

Is a source of finance for entrepreneurs on a

profit/loss sharing (PLS) basis. Runs own businesses as subsidiaries or joint

ventures enhancing productivity of the economy

Striving to create an atmosphere for

establishment of Islamic Banks in India Educating the society on equitable, joint and

prudential practices of investment and business


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AICL How?

AICLAICL


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AICL - Products

AICLAICL

Finances businesses on profit and loss sharingbasis (diminishing Musharaka)

Offers vehicle finance on rental (Ijara) basis

Nurtures budding entrepreneurs with microfinance products

Offers business consultancy services via AICLConsultancy Division

Provides interest free loan and non refundablefinancial aid to the underprivileged through AICLCharitable Trust


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AICL Builders & Developers

AICLAICL

AICL B&D a subsidiary of AICL

Engages in infrastructure development and

building of houses, flats, villas, commercialcomplexes

Aimed at increasing profitability through real

estate development

Acquired properties for two projects at Aluva


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AICL Road ahead

AICLAICL

Grow in size with higher capital base 100 cr

immediately and 300 Cr in three years Increase nationwide presence

Widen product portfolio

Offering variant IF services including Islamicbanking when Govt. sanctions the same


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Invest ent opportunity

AICLAICL

Present value of share Rs. 11/- Minimum investment Rs. 27500/-

Maximum investment Rs. 1100000/-


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Thank you.

AICLAICL

ALTERNATIVE INVESTMENTS AND CREDITS LIMITED

Regd. Off: 34/2444, SUNNYESTATES

MAMANGALAMCOCHIN

Regional Off: 3RD FLOORCD TOWER,

NEAR BABY MEMORIAL, KOZHIKODE

www.aicl-india.com [email protected]

04953043599

Islamic Finance Special Focus NBFC

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