Académique Documents
Professionnel Documents
Culture Documents
ACKNOWLEDGEMENT
With regard to this project, we would like to thank Almighty Allah whose help enabled us
in completion of this project. Secondly, we want to say thanks to our facilitator, Sir Jahan
zaib sultan whose kind support and guidance has always been there to complete the task
assigned to us in this project. The knowledge that he imparted to us and the level of
understanding that we developed in this course also acted as a key driving force and a
source of motivation to make this report possible.
2
INDEX
1 SUMMARY 01
3 MODES OF FINANCING
• ISLAMIC 05
• CONVENTIONAL
4 ISLAMIC MODES OF FINANCING 05
• MUSHARAKA
• MUDARABA
• IJARAH
• ISTISNA
• SALAM
• MANAGEMENT 19
21
• EARNING CAPACITY
22
• LIQUIDITY
7 MATURITY 24
8 REFERENCE 28
• The functions and operating modes of conventional banks are based on fully
manmade principles.
The functions and operating modes of Islamic banks are based on the principles of
Islamic Shariah
In contrast, it promotes risk sharing between provider of capital (investor) and the
user of funds (entrepreneur).
• The status of a conventional bank, in relation to its clients, is that of creditor and
debtors.
The status of Islamic bank in relation to its clients is that of partners, investors and
trader, buyer and seller.
• Lending money and getting it back with compounding interest is the fundamental
function of the conventional banks.
• Very often it results in the bank’s own interest becoming prominent. It makes no
effort to ensure growth with equity.
It gives due importance to the public interest. Its ultimate aim is to ensure growth
with equity.
• Since income from the advances is fixed, it gives little importance to developing
expertise in project appraisal and evaluations.
Since it shares profit and loss, the Islamic banks pay greater attention to
developing project appraisal and evaluations.
The Islamic banks, on the other hand, give greater emphasis on the viability of the
projects
The Islamic banks have no provision to charge any extra money from the
defaulters. Only small amount of compensation and these proceeds is given to
charity
Islamic bank can only guarantee deposits for deposit account, which is based on
the principle of al-wadiah, thus the depositors are guaranteed repayment of their
funds, however if the account is based on the mudarabah concept, client have to
share in a loss position.
Mode of financing
Islamic bank includes the following mode of financing
Musharakah
Mudarabah
Murabah
Ijarah
6
Istisna
Salam
Musharakah
What Does Musharakah Mean?
A joint enterprise or partnership structure with profit/loss sharing implications that is
used in Islamic finance instead of interest-bearing loans. Musharakah allows each party
involved in a business to share in the profits and risks. Instead of charging interest as a
creditor, the financier will achieve a return in the form of a portion of the actual profits
earned, according to a predetermined ratio. However, unlike a traditional creditor, the
financier will also share in any losses.
Investopedia explains Musharakah
Musharakah plays a vital role in financing business operations based on Islamic
principles, which prohibit making a profit on interest from loans. For example, suppose
that an individual (A) wants to begin a business but has limited funds. Individual (B) has
excess funds and wishes to be the financier in musharakah with A. The two people would
come to an agreement to the terms and begin a business in which both share a portion of
the profits and losses. This negates the need for A to receive a loan from B.
Mudarabah" is a special kind of partnership where one partner gives money to another
for investing it in a commercial enterprise. The investment comes from the first partner
who is called "rabb-ul-mal", while the management and work is an exclusive
responsibility of the other, who is called "mudarib".
(1) The investment in musharakah comes from all the partners, while in mudarabah,
investment is the sole responsibility of rabb-ul-mal.
(2) In musharakah, all the partners can participate in the management of the business and
can work for it, while in mudarabah, the rabb-ul-mal has no right to participate in the
7
(3) In musharakah all the partners share the loss to the extent of the ratio of their
investment while in mudarabah the loss, if any, is suffered by the rabb-ul-mal only,
because the mudarib does not invest anything. His loss is restricted to the fact that his
labor has gone in vain and his work has not brought any fruit to him. However, this
principle is subject to a condition that the mudarib has worked with due diligence which
is normally required for the business of that type. If he has worked with negligence or has
committed dishonesty, he shall be liable for the loss caused by his negligence or
misconduct.
(4) The liability of the partners in musharakah is normally unlimited. Therefore, if the
liabilities of the business exceed its assets and the business goes in liquidation, all the
exceeding liabilities shall be borne pro rata by all the partners. However, if all the
partners have agreed that no partner shall incur any debt during the course of business,
then the exceeding liabilities shall be borne by that partner alone who has incurred a debt
on the business in violation of the aforesaid condition. Contrary to this is the case of
mudarabah. Here the liability of rabb-ul-mal is limited to his investment, unless he has
permitted the mudarib to incur debts on his behalf.
(5) In musharakah, as soon as the partners mix up their capital in a joint pool, all the
assets of the musharakah become jointly owned by all of them according to the
proportion of their respective investment. Therefore, each one of them can benefit from
the appreciation in the value of the assets, even if profit has not accrued through sales.
The case of mudarabah is different. Here all the goods purchased by the mudarib are
solely owned by the rabb-ul-mal, and the mudarib can earn his share in the profit only in
case he sells the goods profitably. Therefore, he is not entitled to claim his share in the
assets themselves, even if their value has increased.
Business of the Mudarabah : -
The rabb-ul-mal may specify a particular business for the mudarib, in which case he shall
invest the money in that particular business only. This is called al-mudarabah al-
8
muqayyadah (restricted mudarabah). But if he has left it open for the mudarib to
undertake whatever business he wishes, the mudarib shall be authorized to invest the
money in any business he deems fit. This type of mudarabah is called 'al-mudarabah al-
mutlaqah" (unrestricted mudarabah)
A rabbul-mal can contract mudarabah with more than one person through a single
transaction. It means that he can offer his money to A and B both, so that each one of
them can act for him as mudarib and the capital of the mudarabah shall be utilized by
both of them jointly, and the share of the mudarib shall be distributed between them
according to the agreed proportion. In this case both the mudâribs shall run the business
as if they were partners inter se.
The mudarib or mudâribs, as the case may be, are authorized to do anything which is
normally done in the course of business. However, if they want to do an extraordinary
work, which is beyond the normal routine of the traders, they cannot do so without
express permission from the rabb-ul-mal.
Ijarah
- All rights and liabilities emerging from use shall be borne by the Lessee
5. The period of Lease must be determined in clear terms
6. The Lessee cannot use the leased asset for any purpose other than that specified in the
lease agreement.
7. The Lessee is liable for damage to the asset caused by his negligence
8. The leased asset shall remain in the risk of the Lessor throughout the lease period
-any damage to the asset, not caused by the Lessee’s neglect, is to be borne by the Lessor
-Normal maintenance is Lessee’s responsibility
9. A property jointly owned by two or more persons can be leased out
10. The lease rental for the entire period must be determined at the time of entering into
the lease contract.
• Different amounts of rents can be fixed for different periods, but they
must be known
• The rent may be tied to a known benchmark, acceptable to both the
parties
13. The Lease period will start when the asset has been delivered to the Lessee
• in a usable condition
• whether or not the Lessee has started using it
• But if it was the Lessee’s fault, he is liable to compensate the Lessor for
the loss
Istisna’a
• Istisna’a is a contract of sale of specified items to be manufactured (or
constructed), with an obligation on the part of the manufacturer (or
contractor) to deliver them to the Customer upon completion.
• It is necessary for the validity of Istisna’a that the price is fixed with the
consent of the parties.
• Unlike Murabaha where only raw material can be financed, Istisna’a’ can
be easily utilized to facilitate payment of overheads etc. in addition to the
purchase of raw material.
2. Bank would then enter into an Istisna transaction with the Customer for the
production of specific Goods. At this time quantity, price, specification and
delivery date of Goods will be agreed. The delivery of goods could be
lump sum or in trenches.
3. Bank could pay the Istisna price to the Customer either in full or in
installments.
4. After manufacturing, the Customer will inform Bank and will request for
acceptance of delivery. A Bank representative will accept the delivery after
physical inspection of the goods at the site. This delivery could be through
identification and separate storage of Bank goods (so that they are not
mixed with Customer’s own goods). A Goods Receiving Note will be
executed at this moment to evidence the delivery of goods to Bank.
5. Bank will also enter into a separate Agency Agreement with the Customer
for sale of goods on Cash basis to credible buyers on behalf of Bank in a
specified number of days. In this manner the Agent will be responsible for
recovery of Sale price and its payment to Bank.
6. Bank’s ownership and risk in goods remains until the Agent sells these
goods to the Buyer in the market. Takaful may be obtained to cover this
risk.
7. Bank Agent will sell the goods in the market and will pay the price to Bank.
13
1. The customer (as Agent of Bank) will sell the goods to Credible Buyers on
Credit (instead of Cash) and collect the sale proceeds in a specified
number of days.
This agreement sets out the terms & conditions upon which the Bank, from time
to time, orders the Customer to manufacture the Goods.
Components:
2. Agency Agreement
Components :
A. Notice of Appointment
Demand finance
Running finance
Letter of credit
Leasing
Demand Finance
Credit facilities extended against registered mortgage of property (i.e., land/buildings
constructed or to be constructed) is by nature classified as a Secured Advance. A formal
charge on the property is established and recorded with the Registrar Land and Property
termed as registered mortgage. Advances are also made against equitable mortgage of
property, whereby the original title Deeds are deposited with the Bank as Security and the
charge is registered with the Registrar SECP.
In case the Finance is allowed to Limited Companies, where the original title documents
of Land/Building and other Fixed Assets are held by the senior charge holders, our charge
(Pari-Pasu or ranking) as approved by Credit Committee, shall be recorded with the
Registrar Securities & Exchange Commission of Pakistan (SECP). However, in case of
Pari-Pasu Charge, NOCs from the senior Charge Holders shall be obtained before
registration of charge with SECP. In case of borrower’s failure to liquidate the obligation
or on classification of the advance to “Non-Performing” the Bank has a legal recourse to
apply for a decree in a court of law, to sell off the mortgaged property through auction as
ordered by the court
Running finance
Running finance is nothing but the finance offerings by financial institutions against
mortgages.It works under the working capital finance. Specifically, the running finance is
a credit facility established for a specific time limit at variable interest rates. Housing
Price Index (HPI) is a contributory agent for successful operation of the running finance
scheme. The running finance is implemented by means of allowing the over draft facility
and the corresponding amount is determined by the repaying capacity of the borrower.
16
Overdraft is one sort of offering credit by the account providers, in that withdrawals are
permitted exceeding available balance of the bank account. It is nothing but an over-
drawing leading to a negative balance. The situation is more common with the credit card
offerings by the banks. For enjoying overdraft facility, there should be some agreement or
approval in advance with the account provider. Generally, the over-draft facility is
offered by the banks for some maximum amount and the same is required to be returned
to them (in the respective account) within some specified time limit.
Letter Of Credit
Before you lease a vehicle, you need to determine if leasing is right for you. Before going
car shopping, you should talk to various lenders for an explanation of the differences,
including the costs and benefits of both leasing and purchasing the vehicle you select
Capital adequacy
this includes the capital adequacy by using two ratios debt to equity and apital to
risk assets.
18
This ratio shows during the period 2005---2009 the Islamic bank maintained a very
high a very high CRAR which means that they had abundant capital and to
manage any shock to the balance sheet. While on the other hand conventional
banks have power to resist such shocks the mean of Islamic and conventional banks
shows that both banks have been strong to cushion any loss and protect their lenders
and depositors.
ASSET QUALITY
The study evaluates the asset quality by UNCOL and loan loss reserve ratios.
19
The mean ratio for both banks shows a slight difference between their assets
qualities .lower ratio is favorable as the risks of loans to become uncollectable decreased
and asset quality improves. The average UNCOL ratio for Islamic bank is better than
from conventional banks.
20
This ratio shows the loan loss lower ratio is favorable for the banks from the
above figure we can see that the mean of conventional banks is low on the other
hand it is high for Islamic banks it shows that the progress of conventional banks is
better.
MANAGEMENT QUALITY
This ratio indicates how much amount is spending by banks on operations lower this ratio
is favorable for banks. This ratio can be seen from another aspect that Islamic banks
efficiency is better than because they are spending more on operations from which their
quality can be improved.
This ratio indicates the cost per money lent ratio highlights the operating cost incurred
to lend one unit of money from the mean data we can see that the mean cost of
conventional banks is lesser than the Islamic it means conventional banks are performing
well.
EARNING ABILITY
This ratio provides the return on asset which are invested from the above graph or trend
analysis we can see that the conventional banks are earning well on invested capital as
compared to Islamic banks so in this regard Islamic banks have poor efficiency
LIQUIDITY
This is measured by the two ratios loan to asset ratio and deposit to asset ratio..
23
Both Islamic and conventional banks exhibited high loan to asset ratio couples with
higher debt and risk of default. On average Islamic banks average is lower than the
conventional banks which mean that Islamic banks should pay lesser for loan settlement
this reflects better quality of Islamic banks.
0.3
Y
TL
0.2
0.1
0
2005 2006 2007 2008 2009 2010
islamic 0.7439 0.6543 0.7159 0.7162 0.7439 0.7148
conventional 0.8369 0.7745 0.7601 0.7564 0.7564 0.7769
24
This ratio indicates the deposits ratio how much a bank has. From the above graph we can
see that the both ratio are same nearly as of conventional as well as Islamic both are
working parallel in this ratio.
Maturity
Year wise entry of players in Islamic banking
2003
Meezan bank
Bank of Khyber
MCB bank
Bank of alfalah
25
2004
Habib bank
Metropolitan bank
Soneri bank
2005
Bank al habib
2006
ABN amro
National bank
2007
KARACHI: The asset base of Islamic banking industry expanded by 30 percent to Rs477
billion in 2010 from Rs366 billion in 2009, State Bank of Pakistan (SBP) said in a report
on Tuesday.
Their non-performing finances (NPF) increased by 38.2 percent to Rs13.8 billion from
Rs10 billion in 2009, the report added.
The central bank said that during the last quarter of 2010, Islamic banks’ assets grew by
12.5 percent to Rs477 billion from Rs424 billion in the quarter ended September 2010.
27
The NPF increased marginally during the quarter to Rs13.8 billion from Rs13.5 billion at
the beginning of the quarter.
Recovery increased to Rs1.25 billion from last year’s figure of Rs0.8 billion.
Cotton harvesting commences during the October-December quarter that gives significant
rise to credit demand by textile sector. Share of financing by Islamic banks to the textile
sector increased from 18 percent to 22 percent during the quarter, said the report.
Investments and financing increased to Rs158 billion and Rs180 billion, respectively, in
2010 from Rs72 billion and Rs153 billion in December 2009.
The central bank said that despite rapid growth in their assets and deposits, Islamic
banks’ profitability remained considerably lower than the industry average.
The Return on Assets and Return on Equities at 0.6 percent and 5.2 percent, respectively,
for the quarter ended December 31, 2010, was significantly lower than the industry
average of one percent and 9.8 percent, respectively.
This is evident from the operating expense to gross income ratio for IBIs which is at 73
percent as compared to 53 percent for the industry.
The conversion of conventional branches into Islamic banking branches has picked up
28
pace. In the last seven months, 15 conventional banking branches have been converted
into Islamic banking branches, the SBP said.
REFERENCES
www.scribd.com
www.wikipedia.com
www.investopedia.com
www.ehowfinance.com
www.docstoc.com
www.yahooanswers.com
www.busineessviews.com
www.kse.com
www.accounting.com
29
www.financialratios.com