Why Islamic Banking by Ehsan Waquar Ahmad

8/14/2019 Why Islamic Banking by Ehsan Waquar Ahmad

1/31


2/31


3/31

What has

Religion

got to do with

Economics, Banking and

Finance?


4/31

Islam is a way to lead a life in society not like other

religions which segregates religion with other issues

of life.

:1138 - :-:-: - :

.:1286 - :-:- : - :

Islam is a religion which address all the basic areas of

human life; belief, ritual, communal, behavioral

(etiquettes) and contractual issues.


5/31

Analyze the time spent during a day

We conclude that majority of the time spent is

interaction with people around

Now analyze the time spent in performing rituals.

What is the reason Muslims segregate the areas ofpractical life?


6/31

Importance of Banking Banking is the most important sector of the modern

day economy.

It provides an opportunity to the household withsurplus capital to select the best mix of investments interms of return and tenors & security.

It provides an opportunity to businesses andGovernments to finance their activities throughobtaining surplus funds


7/31

What is economics?Utilization of limited resources in such a way that

needs and wants are satisfied optimally to ensurethe well being of all members of the human society.

The four basic economic problems:

Determination of Priorities

Allocation of Resources (Land, Labor, Capital,Entrepreneur)

Distribution of Income

Development

We will glance some defects of Capitalism, Socialismand compare it with Islamic Economic system.


8/31

Shortcoming of Capitalism Maximization of profits without limitations

Total reliance of market forces

No moral value limitationsAs a result

Formation of Monopolies & Cartels

Exploitation of common people

Imbalance distribution of income

Concentration of wealth takes place


9/31

Shortcoming of Socialism Impede natural freedom

Ignore Individuals and entrepreneurs

Exaggerated Government Interference No moral value limitations

As a result

Creates inefficiency

Exploitation of common people

Imbalance distribution of income

Inactive without forceful Dictatorship


10/31

Economic Philosophy of Islam

Discourages concentration of wealth in few hands

Creation of monopolies

Greed and selfishness leading to injustice andoppression


11/31

Islamic Economic SystemThe prohibitions & considerations

1. Divine Prohibitions:

Islam has prohibited some economic activities that arenot allowed at any time at any place.( Interest,Gambling, Hoarding etc.)

2. Govt. Restrictions:Islam allows Govt. to intervene where it feelsappropriate , but these restrictions are temporary as perthe need of the time.

3. Moral Considerations & Restrictions (ROIA)Life in this world is temporary and there is an eternallife after words. One has to make this worldly life a wayto get the maximum benefit in the life hereafter.


12/31

Al Baqarah 275

Those who devourRiba shall rise up before Allah like menwhom Satan has demented by his touch; for they claim thattrading is like usury. But Allah has permitted trading and

forbidden usury. He that receives an admonition from hisRabb and mends his ways may keep what he has alreadyearned; his faith is in the hand of Allah. But he that pays noheed shall be among the people of fire and shall remain init forever.


13/31

Al Baqarah 278 - 279

O you who believe, Fear Allah and give up whatremains of your demand for Interest, if you are indeeda believer. If you do not, then you are warned of the

declaration of war from Allah and His Messenger; But ifyou turn back you shall have your principal: Deal notunjustly and you shall not be dealt with unjustly.


14/31

Selected Ahadith

From Hazrat Jabir Ibn-e-Abdullah ( ):

The Prophet, peace be on him, cursed :

The receiver and the payer of interest The one who records it and

The witnesses to the transaction

And said: "They are all alike [in guilt]."

(Muslim, Tirmidhi and Musnad Ahmad)


15/31

From Hazrat Abu Hurayrah :( )

The Prophet, peace be on him, said: "Riba has seventy

segments, the least serious being equivalent to, a mancommitting adultery with his own mother.

(Ibn Majah)

Selected Ahadith


16/31

Prohibition of interest is not limited to Islam it isprohibited in Judaism and Christianity

Exodus 22:25, Leviticus 25:35-36, Deuteronomy23:20,Psalms 15:5, Proverbs 28:8, Nehemiah 5:7and Ezakhiel 18:8,13,17 & 22:12

"Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury." [Deuteronomy 23:19]

Does ONLY ISLAM prohibits Interest?


17/31

Islamic Financial System For centuries Muslims have conducted business in

ways consistent with Islamic law.

The classical system of Islamic finance has remainedintact

Now the entire system of Islamic finance andbusiness is undergoing a revival; the potential of this

sector is real and deserving of serious attention. But unfortunately, today for many interest is more than

a way of life, it is fact of life.


18/31

Features of Islamic Economics and

Banking Transactions are asset-based

It is socially-responsible banking

Ethical Banking

It pulls evil out of the society

Healthier Society as ethics and moral values play amajor role in investment decisions


19/31


20/31

Islamic Banking Pakistan 7 yearsScenario

In 2001, the industry comprised of just two players

Currently there are 6 full fledged Islamic Banks,while

13 Banks have set up Islamic Banking Divisions

(IBDs)There around 183 IBBs


21/31

Islamic products and services offered by 250+Financial Institutions around the world

Note: Figure indicates number of Islamic FIs in the country. Only some of the key FIs are shown for each country

United States: 20- Al Manzil Financial Services

- American Finance House

- Failaka Investments

- HSBC

- Ameen Housing Cooperative

Germany: 3- Bank Sepah

- Commerz Bank- Deutsche Bank

Switzerland: 6UK: 26 (primarily

branches of Gulf and global

banks)

- HSBC Amanah Finance

- Al Baraka International Ltd

- Takafol UK Ltd- The Halal Mutual

Investment Company

- J Aron & Co Ltd (Goldman

Sachs)

Bahrain: 26- Bahrain Islamic Bank

- Al Baraka

- ABC Islamic Bank

- CitiIslamic Investment Bank

Malaysia: 492 - Pure Islamic Banks (Ba

Islam, Bank Muamalat)

Rest - conventional banks

Saudi Arabia: 10- Al Rajhi

- SAMBA

- Saudi Hollandi

- Riyadh Bank

UAE: 9- Dubai Islamic Bank

- Abu Dhabi Islamic Bank- HSBC Amanah

Qatar: 4- Qatar Islamic Bank

- Qatar International Isla

Kuwait: 5- Kuwait Finance House

Iran: 8

Egypt: 7- Alwatany Bank of Egypt

- Egyptian Saudi Finance

Indonesia: 4

Sudan: 9

Pakistan: 19

India: 3Bangladesh: 3Turkey: 7

- Faisal Finance

Institution

- Ihlas Finance House

Yemen: 5


22/31

The size of Islamic Financial Industry is growing

aggressively @ 15% annually

60 countries have Islamic Banking Institutions

27 Muslim countries including Bahrain, UAE, Saudi

Arabia, Malaysia, Brunei and Pakistan

Many non-Muslim countries including USA, UK,

Canada, Switzerland, Belgium, Kenya, South Africa

and Australia

International Overview


23/31

Leading foreign Banks have opened Islamic Banking

windows or subsidiaries such as:

Standard Chartered Bank Citibank

HSBC

ABN AMRO

UBS

International Overview


24/31


25/31

Some people claim that there is No concept of

banking in Islam

The use of the word banking does not make anyinstitution halal or haram, rather it is the underlying scope& nature of activities that are being conducted whichmakes it halal or haram.

Concept of banking based on pooling of excess funds ofdepositors and channeling them towards those whorequire it for investing activities is not only approved butencouraged by Islam.

But the concept to lending and borrowing on the basisof interest in not allowed in Islam.


26/31


27/31

A fixed rate of return is not permitted under

Islamic Shariah

Fixed return does not make a transaction halal or

haram

For example:

Profit on trading

Rent on property


28/31

Can Interest rate be used as a Bench Mark?

Using Interest Rate benchmark for determining theprofit in halal transactions does not render the

transaction as invalid or haram.

Selling a soft drink over a soft drink barcounter andserving it in terms of goblets/pack will not make itharam

The nature of transactions determines the validity ofthe transaction.


29/31

Mode Application1 Murabaha Sale of Raw material or commodities on cost plus

2 Ijarah Leasing of Cars & Fixed Assets (medium to long term financing)

3 Musharakah Participatory certificates and depos its, Joint ventures, Export Refinance

House Financing (Build, Buy, Renovate & Replace)

Plant & Machinery, Commercial Premises5 Mudarabah Usage of Mudarabah on asset and liablities sides

6 Salam Foreign Currency Salam - Alternative for Sight Bill Discounting

7 Istisna Order to Manufacture - Islam ic Export Refinance Scheme (IERS)

8 Wakaltul-Istismar Investment Agency contract for fund management

9 Musawamah Sale without mentioning the cost, finance against usance LC

Diminishing

Musharakah

4

Products based on Islamic Modes


30/31

Islamic banking is a viable alternative however it is still

in the development stage and has to go a long way

It needs to be supported in its mission to eliminate thecurse of riba from our societies.

Positive criticism is always welcome but we also need togain knowledge about the concept before commenting

Should be viewed with an open mind and we need to becautious in passing judgments without sufficientknowledge

We also need to understand the fact that disagreementbetween about any operational item or any difference ofview in two schools of thought does not make the wholeprocess of IB invalid or in any way similar to Riba.

The Way Forward


31/31

Why Islamic Banking by Ehsan Waquar Ahmad

Documents