2. Objective of this presentation
At the end of this session, you will be able to understand:
1. The concept of Islamic banking, its sources and fundamentals.
2. What & Why Islamic Banking?
3. History of Islamic Banking
4. The differences between Islamic banking and conventional banking
5. Main Islamic banking financial contracts, products & services
6. Future of Islamic Banking
7. Misconceptions of Islamic Banking
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3. The concept of Islamic banking, its
sources and fundamentals.
4. The Quran on “Riba”
• Allah SWT has warned those who take / pay Riba, that they would have
to go to war with HIM & the Messenger (PBUH)
• Riba - excess or increase , interest. Technically, it means an increase over
the principal in a loan transaction
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5. The Quran on “Riba”
Al Quran 2:275
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands
who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like
interest." But Allah has permitted trade and has forbidden interest. So whoever has received
an admonition from his Lord and desists may have what is past, and his affair rests with Allah .
But whoever returns to [dealing in interest or usury] - those are the companions of the Fire;
they will abide eternally therein
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6. What is Islamic Banking?
It is a system of banking or banking activities that are based on Shari’a rules and
principles that amongst others prohibit riba (interest), gharar (uncertainty) and maysir
(gambling) and guided by Islamic economics.
These Shari’a rules and principles are derived from the sources of Shari’a which are Al Quran
and the Sunnah, and other secondary sources of Islamic law such as opinions collectively
agreed among Shari’a scholars (ijma’), analogy (qiyas) and personal reasoning (ijtihad).
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7. What is Shari’a ?
Shari’a
Aqeedah Ibadah Muamalah
Legal
Affairs
Marriage
Affairs
Financial
Affairs
Takaful
Banking Waqf
Akhlaq
Shari’a is the divine law revealed in the Qur'an and the Sunnah. It is also a “comprehensive system” consisting
of Islamic rules and regulations.
Simply: The Law of Islam
Main function of Shari’a is “to guide man” to dutifully enjoy freedom and exercise the right to choose
between vice and virtue.
AQEEDAH - belief on the oneness of Allah, the angels, all Prophets, holy books, day of
judgment & destiny.
IBADAH – relationship of man with Allah e.g. prayers, zakaat, hajj (pilgrimage) etc.
MUAMALAH – relationship of a man with the society
AKHLAQ – Islamic ethics / morals
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8. Sources of Islamic law
Shari’a sources can be divided into two categories:
1. Primary sources (the divine laws); Examples are:
I. Al-Qur’an: Holy book of Islam
II. Al-Sunnah: traditions or known practices of the Prophet Muhammad (PBUH).
III. Ijmaa: the consensus of scholars within the community on a certain issue.
IV. Qiyas: means analogy or reasoning, judges may use Qiyas to decide on a new case law.
Examples:
Prohibition of drugs like marijuana
Prohibition of smoking
Islamic Banking is developed and operated based on the “Shari’a sources.”
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9. Sources of Islamic law
2. Secondary sources are used in situations when explicit and specific rulings are not
mentioned in the primary sources. These include but not limited to the following:
I. Masalih mursalah (Public interest)
II. Istihsan (Preference)
III. Istishab (Presumption of existence)
IV. Urf (Custom)
V. Ijma’ Ahl madinah (Consensus of people of Madinah).
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10. Why Islamic Banking?
The primary objectives of Islamic Economic
System are:-
Halal way of Banking
Equal Distribution of wealth
Social justice
Ethical way of investment
Peace of mind
Transparency
These objectives can never be achieved in
Interest/Riba based economic systems.
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15. History of Islamic Banking
No “BANK” existed in the early history of Islam.
But, principles of Islamic finance have been in practice since the birth of Islam such as: Mudaraba,
Musharakah, Ijarah, Murabahah, Istisna’, Salam
An example of Mudaraba practice is given in the example of Prophet Muhammed (PBUH)’s partnership
with his wife Khadija prior to their marriage.
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16. History of Islamic Banking
Over 562
Islamic Banks
in 56 countries
around the
world with
assets
estimated at
>1.4 Trillion
USD .
TODAY
HSBC Amanah
was
established
1998
Citibank
Islamic
window in
Bahrain.
1996
Islamic
windows for
conventional
banks in
Malaysia.
1993
The first
commercial
Islamic Bank
was Dubai
Islamic Bank.
1975
Hajj Fund was
established in
Malaysia for
Malaysian
Muslims to
save and
invest their
savings for
hajj.
1969
The first
attempt to
have a
modern
Banking
system based
on Shari’a
principles
goes back to
“Mit Gamar“
in Egypt.
1963
NOTE:
Amana Bank of
Sri Lanka was
licensed by
CBSL in 2009
40
YEARS
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17. History of conventional banks
Founded in 1865, with over 6,600
offices in over 80 countries
Founded in 1812, with over 4,000
offices in over 36 countries
Founded in 1852, with over 2,500
offices in over 70 countries
150 Years
203 Years
163 Years
Italian bank founded in 1472, with
over 3,000 branches
543 Years
Founded in 1690, with it’s presence
in over 80 countries
325 Years
Founded in 1765, with it’s presence
in over 30 countries
250 Years
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20. Is Islamic Banking only for Muslims?
The primary objectives of Islamic Economic System are:-
Halal way of Banking
Equal Distribution of wealth
Social justice
Ethical way of investment
Peace of mind
Transparency
Applicable to Muslims
Applicable to all
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22. Islamic Banking Vs. Conventional Banking
Islamic finance distinguishes from Conventional finance in four basic principles:
And Allah permits to
trade and forbids Riba
Riba Free
Risk & Reward
Sharing
Asset & Service
Backing
Contractual Certainty which
are free from:
i- Gharar - uncertainty
ii- Jahalah – ambiguity
iii- Maysir - gambling
Al Quran 2:275
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23. 3 Fundamental Prohibitions in Islamic Finance
Riba
- Interest – any return of money on money, whether it is fixed
or floating, simple or compounded and at what ever rate.
Jahalah
- The lack of knowledge about the specifics of an object, event,
or action, in-spite of knowledge about its occurrence. For
example, The sale of tree with fruits before they ripen is a
typical example of Jahalah.
Gharar
- Uncertainty and ignorance of the contracting parties over the
substance or attributes of the subjects of the contracts.
Maysir (Gambling)
- Betting or charging something that will be forfeited if one fails
to obtain greater gain that one hopes for.
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24. Islamic Banking Vs. Conventional Banking
ISLAMIC BANKING CONVENTIONAL BANKING
1) Functions and operations are based on Shari’a principles Functions and operations are based on fully man made
principles
2) Promote risk-sharing between provider of capital (investor)
and user of funds (entrepreneurs)
Investor is assured of pre-determined rate of interest
3) Aims at maximising profit but subject to Shari’a restrictions Aim at maximising profit without any restrictions
4) Partners, investor and traders, buyer or seller relationship Creditor-Debtor relationship
5) Encourage asset-based financing and based on commodity
trading
Based on money trading. Money is a medium of exchange and
not a commodity, its sale and purchase is prohibited in Islam.
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25. Islamic Banking Vs. Conventional Banking
ISLAMIC BANKING CONVENTIONAL BANKING
6) No right of profit if there is no risk involved. The profit and
loss sharing depositor may lose money in case of loss.
It is almost risk free banking and depositor has no risk of losing
its money because interest is guaranteed.
7) The Islamic banks, give greater emphasis on the viability of
the projects.
The conventional banks give greater emphasis on credit-
worthiness of the clients.
8) There extra charges from the defaulters. Only operational
costs and these proceeds are given to charity. Rebates are give
for early settlement.
It can charge additional money (penalty and compounded
interest) in case of defaulters.
9) In the modern Islamic banking system, it has become one of
the service-oriented functions of the Islamic banks to be a
Zakat Collection Centre and they also pay out their Zakat.
It does not deal with Zakat.
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28. Modes of Financing
a) Partnership based modes of financing (Savings / Fixed deposits)
Musharaka Finance, Mudaraba Finance,
b) Trade based modes of financing (Personal Loans / Auto Loans / Cards)
Murabaha Finance, Salam finance, Tawarruq finance
c) Rental based modes of financing (Housing Loans)
Ijarah Finance, Diminishing Musharaka Finance
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29. Mudarabah (Deposits)
• A contract or partnership where
one provides the capital and the
other the entrepreneurship with
the profit being shared among
them with a predetermined
condition
• Partnership in profit whereby
one party (rabb al-mal) provides
capital and the other party
(mudharib) provides labour
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30. BANK
Murabaha (Auto Finance)
Bank sell it to the Client on
Deferred Payment Basis
CLIE
NT
Bank purchase
the Automobile
on spot basis
DEALERS
Client owned
the Automobile
and pay the
sale price by
installments
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31. Ijara Finance (Home finance)
This is a lease contract wherein the Bank (lessor) leases the
property to the customer (lessee) in return for a rental
payment for a specified financing period. The Bank promises
to transfer the title of the property to the customer at the
end of the financing period, if all payments have been made.
Ijarah is an effective and practical financing tool allowing
businesses to acquire their equipment and machinery
through leasing, instead of outright purchase, thus reducing
the heavy burden of capital expenditure. The leasing period
normally ranges from 3-7 years, with the lessee having the
right to purchase the leased asset at the end of the Ijarah
period.
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32. Tawarruq / Qard (Credit Cards)
BANK
CLIE
NT
Sell it to Free
Market to get
Cash
Bank sell it on
behalf of client to
Broker B to get
Cash
Bank purchase
commodities
BROKER ABROKER B
OPTION - 1
OPTION - 2
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33. Product approval process
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Product Proposal
Review by Shari’a
Department
Fatwa & Shari’a
Supervisory Board
Shari’a Approval
ImplementationShari’a Audit
Rectification /
Purification
35. Islamic Bank
Highlights
• Sentiment of over 2.2 million customers’ social media posts on their banking
experiences with Islamic banks in Saudi Arabia, Bahrain, Kuwait, UAE, Malaysia,
Indonesia, Turkey, Qatar and Oman. The results showed that customer satisfaction
is mediocre for many Islamic banks.
• International Islamic banking assets with commercial banks exceed US$778b in
2014 in the core markets.
• The global profit pool of Islamic banks is set to triple by 2019. (US$ 10b in 2013 to
US$ 37b in 2019)
• Islamic banking assets in six core markets Qatar, Indonesia, Saudi Arabia, Malaysia,
UAE, Turkey on course to touch US$1.8t by 2019. (expected CAGR is @ 19%)
• Global Islamic banking assets witnessed a compounded annual growth rate (CAGR)
of around 17% from 2009 to 2013. [Global recession]
• Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9%,
44.6% and 27.7% market share respectively.
• Positive progress has been made in Indonesia, Turkey and Pakistan, with 43.5%,
18.7% and 22.0% Compound Annual Growth Rate (CAGR) respectively from 2009-
2013.
Leading countries on Islamic Banking
Source: World Islamic Banking Competitiveness Report 2014-2015
US$ Billion
2014 2015 2016 2017 2018 2019
926 1,102 1,311 1,560 1,857 2,209
36. Leading countries on Islamic Banking
Source: World Islamic Banking Competitiveness Report 2014-2015
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37. Landscape of UAE
Source: EY World Islamic Banking Competitiveness Report
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UAE is en route to achieve US$263b of Sharia-compliant assets by 2019 (in 2014 it was at US$127b)
UAE is expected to be one of the main markets that drive the future internationalization of the Islamic banking
industry
Islamic banking penetration in the UAE currently stands at 21.4%
UAE represents a 14.6% share of the global market
The industry in the UAE is growing at more than twice the rate of conventional banking
Customer feelings were mixed with respect to branch experience, products, online banking and phone banking
The reputations of Islamic banks today will depend on the way banks engage with their customers
38. Landscape of Dubai
Clearly, Dubai has set an exciting
and challenging mandate for its
self. Success for Dubai will raise
the performance bar across the
Islamic finance markets
internationally.
Primarily Risk is the quality of
execution.
Dubai as an Islamic
Financial hub
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World Islamic Banking
Competitiveness Report
2014-2015
39. The future of Islamic Banking
The future aspirations:
a) Digital banking is the future with customers of Participation
banks showing tremendous interest. Banking is set to evolve
towards technology-based, service-driven value propositions.
b) Customers are increasingly active online and vocal about their
experiences.
c) Migration from physical to digital channels requires more
attention. Half of the banks surveyed did not have a Twitter
account and only 1 in 18 banks offered full customer
engagement on social media.
d) Banks should invest in analytics, to build rich insights into
customers’ delights and pain points and personalize user
experience.
e) 4 out of every 10 Participation banks are not “listening.”
f) Fresh retail banking experience could attract a sizeable majority
to switch banks.
g) Customers do not just want their bank to have a digital
presence. They want it be tailored to their lifestyle relationships
and connections.
h) Have a common Shari’a supervisory board across the region
41. Islamic Banking !!
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• THEY ARE BOTH THE SAME, ONE CALL IT “INTEREST” AND THE OTHER “PROFIT”
• ISLAMIC BANKING IS MORE EXPENSIVE
• ISLAMIC BANKING DOES NOT “HELP” THE MUSLIMS
• ISLAMIC BANKING HAS A VERY LONG PROCESS
42.
43. Challenges faced by Islamic Banks
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a) There is no separate legal framework for Islamic banking across the world
b) The lack of a common Shari’a board creates disconnect between product offerings
c) Islamic banking is trying to compete with the traditional conventional banking products with
no uniqueness
d) Islamic banks do not have the basic products to offer their customers in some markets
(Eg: Amana bank in SL did not have NRFC accounts until recently, does not have a Credit Card proposition, No online
banking facilities / In case of international travel there is no global Shari’s complaint travel Takaful solutions)
e) Due to the economies of scale the costs are often higher than the conventional banks
f) Islamic banking products lack innovation and technological solutions due to its complexities
g) Conventional banks do capture this segment by providing similar solutions through a
subsidiary Islamic arm
44.
45. Islamic Banking is About Trust
They say:
“Why risking yourself to rob a bank and get jailed”
“Just form a bank, then you can steal from your customer.”
We only have to say:
“We are not, this is Islamic Bank”.
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49. Landslide of UAE
Source: EY World Islamic Banking Competitiveness Report
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The UAE is en route to achieve US$263b of Sharia-compliant assets by 2019 according to EY’s World Islamic Banking Competitiveness (WIBC) report. The industry was estimated
to be worth US$127b in 2014, thus making it the third largest Islamic banking market by value, after the Saudi Arabian and Malaysian markets.
Ashar Nazim, Global Islamic Finance Leader at EY, says:
“Islamic banks in the UAE, also known as participation banks, are eyeing revenue growth through experience-led transformation of their domestic business. Stronger capital
position is also driving their international expansion. Initiatives in mobile payments are likely to cause positive disruption to banks’ traditional operating models. Looking at the
positive performance of Islamic banks in the UAE, the country is expected to be one of the main markets that drive the future internationalization of the Islamic banking industry.”
Sharia-compliant assets in the UAE crossed the US$100b milestone for the first time. Islamic banking penetration in the UAE currently stands at 21.4% and represents a 14.6%
share of the global market. The industry in the UAE is growing at more than twice the rate of conventional banking. Due to high demand, there is increased pressure on efficiency
as more Islamic banks attempt to go mainstream.
Islamic banking customers in the UAE happy with customer service
Banking clients were most satisfied with customer service, where positive comments on social media outnumbered negative comments by more than 5%. Half of all the positive
sentiments monitored were around customer service levels and complaint handling.
Customer feelings were mixed with respect to branch experience, online banking and phone banking. Out of the sentiments monitored on social media for all the three
experiences, there was almost an equal number of positive and negative comments.
The study of social media comments has revealed an improvement opportunity for Sharia-compliant banks with respect to products and services, which were ranked the lowest
in terms of customer satisfaction. Half of the overall negative sentiments monitored were about disappointing experiences with regard to product and service offerings.
“The call to action for Islamic banks in the UAE is to build rich insights into customers’ delight and pain points, and break operational silos. The time is right for analytics; banks
need to challenge their channel capabilities and push for more customized products and services. Regulatory intervention on product design can help to both attract and protect
consumers. The reputations of Islamic banks today will depend on the way banks engage with their customers,” concludes Ashar.
