Islamic Banking and Investment

Introduction to Islamic Banking and Finance Presentation to Bosnian Parliament – May 8th 2006 Presented by : Nizam Yaquby Bahrain 1/25/2009 Nizam Yaquby - Bahrain 1 Introduction To Islamic Banking & Finance Nizam Yaquby Bahrain 1/25/2009 Nizam Yaquby - Bahrain 3 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. Nizam Yaquby - Bahrain 4 1/25/2009 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-ala’la Mawdudi,….etc) 1/25/2009 Nizam Yaquby - Bahrain 5 Prohibition of Interest Usury = Interest  Judaism  Christianity  Islam  1/25/2009 Nizam Yaquby - Bahrain 6 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 1/25/2009 Nizam Yaquby - Bahrain 7 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 Nizam Yaquby - Bahrain 8 1/25/2009 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  1/25/2009 Nizam Yaquby - Bahrain 9 Important Reasons for Global Interest in Islamic Banking  Good opportunity for investment Challenge to the conventional interestbased Capitalistic System  Demand of Muslim population in many countries outside the Muslim world.  1/25/2009 Nizam Yaquby - Bahrain 10 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 1/25/2009 Nizam Yaquby - Bahrain 11 Uniqueness of Islamic Banking Commingling between Finance & Religion and ethics  Sharia Supervisory Boards (SSB)  – – – – – – 1/25/2009 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 Nizam Yaquby - Bahrain 12 Basic Difference between Islamic and Conventional Modes of Finance Conventional money Bank money + money (interest) Client 1/25/2009 Nizam Yaquby - Bahrain 13 Basic Difference between Islamic and Conventional Modes of Finance Islamic Bank Goods & Services money Client 1/25/2009 Nizam Yaquby - Bahrain 14 Major Contracts Used in Islamic Banking Buying & Selling  Mudaraba: Investment management  Musharaka: Partnership  Ijarah: Leasing  Wakalah: Agency  Istisna’: Contract of works  1/25/2009 Nizam Yaquby - Bahrain 15 Main Objective Of Islamic Banking: Banking 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 1/25/2009 Nizam Yaquby - Bahrain 16 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 Qur’anic 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 1/25/2009 Nizam Yaquby - Bahrain 17  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 Shari’a or not 1/25/2009 Nizam Yaquby - Bahrain 18 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 1/25/2009 Nizam Yaquby - Bahrain 19 Most Important Islamic Teachings Related to Business 1. Honesty & Fair trade: (Thus, trade manipulations & malpractices like hoardings, black marketing, cheating, profiteering, shortweighting, hiding the defective quality of merchandise and adulteration are all prohibited activities). 2. 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 1/25/2009 Nizam Yaquby - Bahrain 20 3. Spending in good causes for the benefit and welfare of the people. Wastefulness and overindulgence in pleasurable activities are not allowed 4. Upholding justice in all dealings and transactions with both friends and enemies (Quran 4:29, 4:135). Thus, all customers must be treated equally (e.g. when imposing charges and fixing profit – sharing ratios). 1/25/2009 Nizam Yaquby - Bahrain 21 5. The prohibition of Gambling and other risk related purely speculative activities based on mere luck (most derivatives are prohibited) 1/25/2009 Nizam Yaquby - Bahrain 22 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-Mu’amalat) 1/25/2009 Nizam Yaquby - Bahrain 23 Educating Muslim scholars in modern banking  Encouraging Takaful (Islamic Insurance)  Gaining wide acceptance in the international financial community  1/25/2009 Nizam Yaquby - Bahrain 24 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 1/25/2009 Nizam Yaquby - Bahrain 25 Thank You