Islamic Banking and Investment

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Introduction to Islamic Banking and
Finance Presentation to Bosnian Parliament May
8th 2006Presented by Nizam Yaquby Bahrain
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Introduction To Islamic Banking Finance

• Nizam Yaquby
• Bahrain

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(No Transcript)
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Importance of Purifying the Source of Income in
Islam

• The body which is nourished by non-pure sources
  is bound to hellfire.
• On the day of Judgment, a person will not be
  moved from the place which he stands until he is
  asked about the sources of his income, and the
  ways he spent it.
• Purifying the source of ones nourishment is one
  of the important reasons for the acceptance of
  supplications by Allah.

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Historical Background

• Pre-colonial Era
• (Partnership Profit in Medieval Islam) by Prof.
  Udovitch
• Colonial Era
• Post Colonial Era
• (Dr. Najatuallah Siddiqi, Dr. Issa Abduh,
  Abu-alala Mawdudi,.etc)

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Prohibition of Interest

• Usury Interest
• Judaism
• Christianity
• Islam

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Latest Research And Literature On The Subject

• Teachings On Usury In Judaism, Christianity And
  Islam
• By Susan L. Buckley
• PhD Dissertation, University Of Aberdeen
• The Edwin Mellen Press, Lampeter, UK, 2000

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Inception of Islamic Banking

• Dubai Islamic Bank - 1975
• - modest beginnings
• - Initiated by businessmen who did not want to
  deal with interest based system
• - Hostile environment
• - Challenged by conventional banking system
• - Lack of public awareness

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Success Story

• 300 Islamic financial institutions
• 500 - 800 bn in funds
• Post graduate degrees offered in Islamic banking
  by major academic institutions
• Important database system (HIFIP)
• Standards for the Industry (AAOIFI)
• Recognition by IMF, World Bank and Basel
  Committee

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Important Reasons for Global Interest in Islamic
Banking

• Good opportunity for investment
• Challenge to the conventional interest-based
  Capitalistic System
• Demand of Muslim population in many countries
  outside the Muslim world.

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Important U.K and Singapore legislative efforts

• U.K waving double stamp duty laws and recognition
  of ijara , musharaka and murabaha for house
  finance.
• Singapore

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Uniqueness of Islamic Banking

• Commingling between Finance Religion and ethics
• Sharia Supervisory Boards (SSB)
• Studies Articles of associations and bylaws
• Approval of all contracts
• Contribute in designing new products
• Audit the actual implementations
• Issuance of Fatwas (Responsas)
• Conferences - Research - Training

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Basic Difference between Islamic and Conventional
Modes of Finance

• Conventional

money
Bank
Client
money money (interest)
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Basic Difference between Islamic and Conventional
Modes of Finance

• Islamic

Bank
Client
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Major Contracts Used in Islamic Banking

• Buying Selling
• Mudaraba Investment management
• Musharaka Partnership
• Ijarah Leasing
• Wakalah Agency
• Istisna Contract of works

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Main Objective Of Islamic BankingBanking
Without Riba

• The main objective of an Islamic Bank is to
  prohibit Muslims from dealing with interest or
  usury (Riba) which has been strictly prohibited
  by Allah, and to protect them from one of the
  biggest sins.
• Dubai Islamic Bank Statement

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Theoretical Conceptual Considerations Social
Economic Justice

• The Islamic economic order is based upon a set
  of principles found in the Quran. No matter what
  aspect of the Islamic economic order is
  itroduced, for practical operations it has to
  base itself on the Quranic concept of social
  justice. The Islamic financial system, therefore,
  cannot be introduced merely by eliminating riba,
  but only by adopting the Islamic principles of
  social justice and introducing laws, practices,
  procedures and instruments which help in the
  maintenance and dispensation of justice, equity
  and fairness.
• Muazzam Ali (1988)
• A Framework of Islamic Banking Directory Of
  Islamic Institutions, John R Presley (ed.),
  London, Croom Helm

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• The Objectives and philosophies of Islamic banks
  must thus be in line with the teachings of Quran
  and Sunnah of the Prophet (PBUH)
• Islamic banks must be guided by the entire
  comprehensive principles and rules of Islamic law
  derived from these two basic sources
• Holding tight to these principles indicates
  whether a particular Islamic bank is acting
  according to Sharia or not

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Principles of Islamic Business

• Eliminating riba is an important task, but
  Islamic banks, by default, must conform to all
  other Islamic business principles
• All teachings imposed on Muslim individuals are
  also applicable to Islamic banks

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Most Important Islamic Teachings Related to
Business

• Honesty Fair trade (Thus, trade manipulations
  malpractices like hoardings, black marketing,
  cheating, profiteering, short-weighting, hiding
  the defective quality of merchandise and
  adulteration are all prohibited activities).
• The Prophet (PBUH) said the truthful honest
  merchant is with the Prophets, the truthful and
  martyrs in the day of judgment. Narrated by
  Al-Tirmidhi

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• Spending in good causes for the benefit and
  welfare of the people. Wastefulness and
  overindulgence in pleasurable activities are not
  allowed
• Upholding justice in all dealings and
  transactions with both friends and enemies (Quran
  429, 4135). Thus, all customers must be treated
  equally (e.g. when imposing charges and fixing
  profit sharing ratios).

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• The prohibition of Gambling and other risk
  related purely speculative activities based on
  mere luck (most derivatives are prohibited)

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Important Achievements

• Attracting depositors in under-banked societies
• Encouraging saving and investment activities
• Channeling depositors funds into productive and
  commercially beneficial activities
• Relieving Muslims from trading in prohibited
  sectors or activities (e.g. opening an LC for
  alcoholic beverages
• Encouraging Zakat and charity
• Disseminating knowledge in the field of Islamic
  transaction law (Fiqh al-Muamalat)

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• Educating Muslim scholars in modern banking
• Encouraging Takaful (Islamic Insurance)
• Gaining wide acceptance in the international
  financial community

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The Way Ahead

• Islamic banks must develop the concept of
  Musharakah (participating in profit loss) and
  Mudaraba, and use it more aggressively
• Adopt new financing policies to encourage
  development and support for the small scale
  traders
• Develop the Islamic liquidity management and
  Islamic money market
• Must improve its services to be competitive with
  the best in the market

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Thank You