International Conference on Islamic Banking & Finance in Afghanistan

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					2
    Introduction to Islamic
       Banking Products
                                     PRESENTED BY

                                        Ali Rehman
                                 Vice President
                    Askari Bank Ltd. Islamic Banking Services

Disclaimer: Views expressed here in a personal capacity.




                                                                3
ISLAMIC BANKING PRODUCTS
    & THEIR OPERATIONAL
        MECHANISIM


                           4
         Islamic Banking

• All transactions are asset-based
• It is socially-responsible
  banking because it operates
  under Shariah restrictions
• Does not permit financing of
  prohibited goods / Industries

                                     5
Main Financial Contracts/ Islamic
            Modes



                                    6
Islamic Mode   Description          Basis of Shariah
                                    Permissibility
Murabaha       Cost + Profit Sale   Quran, Sunnah &
                                    Ijma’Consensus
Istisnaá       Sale on Order        Sunnah & Ijma’Conses
Salam          Commodity Sale       Quran, Sunnah &
                                    Ijma’Consensus
Ijarah         Leasing              Quran, Sunnah &
                                    Ijma’Consensus
Musharakah     Joint Venture        Quran, Sunnah &
               Profit Sharing       Ijma’Consensus
Mudarabah      Trustee Profit       Quran, Sunnah &
               Sharing              Ijma’Consensus
                                                           7
                   MURABAHA
Islamic Mode Description          Basis of Shariah
                                  Permissibility
Murabaha     Cost + Profit Sale   Quran, Sunnah &
                                  Ijma’Consensus




                                                     8
             MURABAHA
► Murabaha   is a particular kind of sale
  where the seller discloses its cost and
  profit charged thereon.
► The price in this sale can be both on
  spot and deferred.




                                            9
             MURABAHA
► The product of Murabaha that is being
  used in Islamic banking as a mode of
  finance is something different from the
  Murabaha used in normal trade .
► This transaction is concluded with a
  prior promise to buy, submitted by a
  person interested in acquiring goods
  through the institution.

                                        10
             MURABAHA
► It is called Murabaha to the purchase
  orderer .
► It is a bunch of contracts completed in
  steps and ultimately suffices the
  financial needs of the client.
► The sequence of their execution is
  extremely important to make the
  transaction Shariah compliant.
                                        11
              MURABAHA
► As  it is a kind of sale, there must be a
  seller and buyer and some thing that is
  bought and sold . The institution is the
  seller and the client is buyer.
► It cannot be used as a substitute for
  running finance facility , which
  provides cash for fulfilling various
  needs of the client.

                                          12
    MURABAHA




Step by Step Murabaha



                        13
                  MURABAHA
1- Promise stage
► Stage     One (a) for Murabaha financing

1.   Client approach the bank for facility
      through Murabaha.

              Bank                       Client

                     Facility Approved
                                                  14
                     MURABAHA
►   Stage One (b) for Murabaha financing

Client and bank sign an agreement to enter into Murabaha.




             Bank                           Client

                        Murabaha Facility
                           Agreement
                              MOU

                                                            15
                 MURABAHA
                 Promise stage
► Stage   One (c) for Murabaha financing
•   Client submit the purchase requisition
    to the bank.

          Bank                            Client

                  Purchase requisition/
                   Promise to the bank.

                                                   16
                        MURABAHA
                               Agency stage
►   Client appointed as agent to purchase goods on bank’s behalf




                Bank                                    Client
                                Agreement to Murabaha




                                Agency Agreement

                                                                   17
                             MURABAHA
Agency stage Stage Two for Murabaha
 financing
   ► Bank   gives money to supplier through
     client‟s account for purchase of goods.



Client                       Bank                                      Supplier

     Agreement to Murabaha                     Agreement of Purchase




                             Disbursement to the Supplier                         18
              ISTISNA
Islamic    Description Basis of Shariah
Mode                   Permissibility
Istisnaá     Sale on       Sunnah &
              Order      Ijma’Conses
           (Manufacturing
              Goods)




                                      19
                      ISTISNA
► Istisnais the second exception where a sale is
  allowed of goods before they come into existence
► It   relates to goods that require manufacturing
► Ifthe manufacturer undertakes to manufacture
  goods with material available with the
  manufacturer
► Itis necessary for the Istisna transaction that
  price is fixed
► And necessary specifications of the product are
  defined
                                                     20
               ISTISNA
►The  Istisna contract creates a moral
 obligation on the manufacturer But
 both parties may unilaterally cancel the
 contract before work starts After work
 starts, cancellation requires mutual
 consent.


                                        21
              SALAM
Islamic   Description Basis of Shariah
Mode                  Permissibility
Salam      Commodity Quran, Sunnah &
              Sale    Ijma’Consensus
           (Agricultural
            Products in
             Advance)



                                     22
                   SALAM
► Salam was allowed by the Prophet (SAW)
  subject to certain conditions

The basic purpose was to meet the needs of
 small farmers

Who needed money to grow their crops And
 to feed their families till the time of harvest.
                                                23
                     SALAM
► Since,   after the prohibition of Riba

They could not borrow money on interest
Hence they were allowed to sell their
 agricultural products in advance.




                                           24
                    SALAM
► Salamis where the seller undertakes to
 supply some specific goods to the buyer

   At a future date
   Against an advance price, fully paid at spot


Hence, the price / Payment is in Advance
But the supply is deferred
                                                   25
             IJARAH
Islamic   Description Basis of Shariah
Mode                  Permissibility
Ijarah    Leasing     Quran, Sunnah &
                      Ijma’Consensus




                                     26
                          IJARAH
►    Ijarah is a term of Islamic Fiqh Literally, it means “To
     give something on rent”

The term “Ijarah” is used in two situations

1. It means „To employ the services of a person on
   wages‟ e.g “A” employs “B” to work at his office,
   and pays him salary for his work
“A” hires a porter at the airport to carry his luggage


                                                                27
                  IJARAH
2. Another type of Ijarah relates to paying
  rent for use of an asset or property

The 2nd type of Ijarah is relevant to our
 discussion
This Ijarah is analogous to the English term
 “Leasing”

                                               28
                      IJARAH
► Rules governing Ijarah are similar to the rules
  governing sale
► Because in both cases something is transferred
  from one person to another

The only difference is:
► In case of sale, title of property is transferred to
  Buyer

► In case of Ijarah, title remain with the Lessor
► Only the use of the property is transferred to Lessee


                                                         29
              MUSHARAKAH


Islamic    Description Basis of Shariah
Mode                   Permissibility

Musharakah Joint Venture Quran, Sunnah &
           Profit Sharing Ijma’Consensus




                                           30
                    MUSHARAKAH

► Derives    from “Shirkah”

► Literal   Meaning – Sharing

► In the context of business, it means partnership in
  a venture Such that the participants share the
  profit & loss

► In modern banking, Musharakah can provide a
  viable alternative to interest-based transactions

                                                      31
                    MUSHARAKAH


► Interest  determines a fixed rate of return
► Return in Musharakah is based on actual
  profit & loss

   Interest-bearing transaction–Financier cannot
    suffer loss

   Musharakah transaction -Financier can suffer loss


                                                        32
                   MUSHARAKAH

► Basic   rules of Musharakah
               Distribution of profit:

► The  ratio of profit distribution should be agreed at
  the time of execution of contract
► Otherwise contract is void

► The  Profit Sharing will be according to agreed
  ratio.
► Loss must be shared strictly according to Capital.

                                                       33
            MUDARABAH
Islamic     Description Basis of Shariah
Mode                    Permissibility
Mudarabah     Trustee   Quran, Sunnah
               Profit          &
              Sharing   Ijma’Consensus



                                       34
                 MUDARABAH
• This is a kind of partnership where one partner
  gives money to another for investing in a
  commercial enterprise.

• The investment comes from the first partner who is
  called “Rab-ul-Mal” (Investor)

• The management and work is an exclusive
  responsibility of the other, who is called “Mudarib”
  (Working Partner)

• Profit is shared as per agreed ratio
• In case of Mudarabah all losses are borne by Rab-
  ul- Mal
                                                         35
           MUDARABAH
         Types of Mudarabah
1. Al Mudarabah Al Muqayyadah
            (Restricted Mudarabah)

2. Al Mudarabah Al Mutlaqah
        (Unrestricted Mudarabah)


                                     36
             MUDARABAH
        Authority of Rab-ul Maal
Rab-ul-Mal has authority to:

a) Oversee the Mudarib’s activities and
b) Work with Mudarib if the Mudarib consents.




                                            37
                 MUDARABAH
     Different Capacities of the Mudarib
1.   Ameen (Trustee): The money given by Rabb-
     ul-maal (investor) and the assets required
     therewith are held by him as a trust.
2.   Wakeel (Agent): In purchasing goods for trade,
     he is an agent of Rabb-ul-maal.
3.   Shareek (Partner): In case the enterprise earns
     a profit, he is a partner of Rabb-ul-maal who
     shares the profit in agreed ratio.
                                                   38
                 MUDARABAH
4. Zamin (Liable): If the enterprise suffers a loss due
   to his negligence or misconduct, he is liable to
   compensate the loss.
5. Ajeer (Employee):If the Mudarabah becomes
   Void due to any reason, the Mudarib is entitled to
   get a fee for his services.



                                                      39
              MUDARABAH
           Termination of Mudarabah
► Mudarabah can be terminated any time by
  either of the two parties by giving notice.
► If Mudarabah was for a particular term, it
  will terminate at the end of the term.
► Termination of Mudarabah means that the
  Mudarib cannot purchase new goods for the
  Mudarabah. However, he may sell the
  existing goods that were purchased before
  termination.

                                                40
          Islamic banking turns to
                Afghanistan


      the success of Islamic banking in
► After
 Pakistan, local banks want to steer
 towards Afghanistan which is a rapidly
 emerging market for the financial
 industry.



                                      41
       Islamic banking turns to
             Afghanistan
► Experts  related to the industry ,they said
  Islamic banking and insurance have shown
  significant progress in recent years in
  Pakistan, compared to conventional banks.
► Now, it is time for Pakistan’s banks to enter
  the fast emerging market of Afghanistan
  and lead the banking sector in Islamic
  banking.

                                                  42
       Islamic banking turns to
             Afghanistan
► Afghanistan   and Pakistan have a strong
  potential for Islamic banking
► Afghanistan is interested in Islamic banking
  but it lacks human resources and technical
  expertise.
► We can utilize our potential in Afghanistan




                                                 43
What distinguishes Islamic banking
  from conventional banking?



                                     44
                         Documents
►   “Conventional Banks deal in Documents”

       ► Transaction   Documents (“Loan Creation”)

       ► Security   Documents

►   “Islamic Banks deal in Goods and Documents”

       ► Transaction   (Process) Documents (“Debt Creation”)

       ►Security    Documents (similar)

                                                               45
Basic Difference between Islamic and
   Conventional Modes of Finance


            Conventional Mode
                         money
          Bank                              Client

                 money + money (interest)




                                                     46
 Basic Difference between Islamic
and Conventional Modes of Finance



      Islamic Transaction

     Bank       Goods &      Client
                Services


                money


                                      47
     Conventional Vs Islamic Economics
     Difference in Factors of Production
Conventional                Islamic
► Land                      Land

► Labour                    Labour
 (+Entrepreneur)             (incl. Entrepreneur)



► Capital



                                                    48
Key Misconceptions




                     49
Key Misconceptions
  “Islamic banking looks the same as
        conventional banking”

 A halal meat and haram meat may look exactly
 the same but one is permissible while the
 other is not




                                            50
Key Misconceptions
 “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

                                              51
          Onus Shifts!!
                                      Halal
                  Halal      Onus
Client   Onus                       Abattoir/
                Restaurant
                                     Butcher




                 Islamic            Shariah
Client   Onus     Bank
                             Onus   Advisor




                                                52
►ANY   QUESTION?



          ?        53
Jazakumullah!



                54
                   Thank
                    You




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