Starting in the Name of Allah, The Most Beneficent, The Most Merciful

Group Members
ASAD RAZA

SUHAIB MANSHA
HAFIZ SHABBIR SEHRISH HINA ASHRAF NOOR UL AIN

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) . Sharia prohibits, (Riba, usury) . i.e, interest free business.

EVOLUTION OF ISLAMIC BANKING

Islamic banks are seen to involve themselves as financial intermediaries and investment oriented institutions in bringing about wellbeing of the community, society and the economy in the light of Shariah

NATURE OF BANKING SERVICES

Set of banking services are same as

conventional Bank. Clearing mechanisms, bank drafts, bills of exchange, travelers cheques, etc. are offered. Current accounts, savings accounts, and investment accounts. are offered by conventional banking

Basic Framework: Prohibition of Riba

Riba as interest Interest in all forms prohibited All interest-based transactions should be avoided

Interest-based transactions are seen as unjust: risk on the borrower

Modern Islamic Banking

Mirza Basheer-ud-din Mahmood Ahmed discuss Islamic Economics in his books. Nizame Nau Islam ka Iqtisadi Nizaam Later work included that of Naeem Siddiqi and Maulana Maududi.

Iqtisaduna
Written by Muhammad Baqir al-Sadr.

It is a major work on Islamic economics .

It still forms much of the basis for modern Islamic

banking.

Continued
They have all recognised the need for

commercial banks and a banking system based on the concept of Mudarabha - profit and loss sharing. In the next two decades interest-free banking attracted more attention, partly because of the political interest it created in Pakistan and partly because of the emergence of young `Muslim economists.

Continued
The early 1970s saw greater institutional

involvement. The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image. This experiment lasted until 1967 , by which time there were nine such banks in country.

Largest Islamic banks

Iran, Saudi Arabia and Malaysia have the biggest

sharia-compliant assets. Seven out of ten top Islamic banks in the world are Iranian.

Expansion into Islamic banking services

In May 2012, Trend News Agency reported that

the Chairman of the International Bank of Azerbaijan announced that his bank would expand into Islamic banking services. The expansion will take place in countries around Azerbaijan, such as Russia and Kazakhstan.

Hafiz Shabbir Hussain MB-10-69

Principles
The basic principle of Islamic banking is based on

risk-sharing. Islamic banking introduces following concepts

Mudharabah Wadiah Musharakah Murabahah Ijar

Islamic Financial Accounting Standards

The Institute of Chartered Accountants of

Pakistan issues Islamic Financial Accounting Standards (IFAS) for Islamic Mode of financing.
IFAS 1 (issued in 2005)

concernsMusharakah and Mudarabah.

While, IFAS 2 (issued in 2007) relates to Ijarah.

Fundamentals of Islamic finance

Based on Shariah
Shariah prohibits what is called "Maysir" and

"Gharar". Islamic law prohibits usury Islamic law prohibits investing in businesses that are considered unlawful, or haraam

Islamic banking in Pakistan

Separate Interest-free counters started

operating in all the nationalized commercial banks, and one foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis.
Government is committed to eliminate Riba

and promote Islamic banking in the country.

steps are under way

1. A legal framework is designed to encourage

practice of Islamic banking by banks and financial institutions as subsidiary operations of their main operations.
2. Consultations and exchanges are

undertaken with brother Islamic countries and renowned institutions of Islamic.

Cont..
3. Amendments in HBFC Act are being made in line with the directive of the Supreme Court. 4. Shariah compliant modes of financing like Musharaka and Mudaraba will be encouraged so that familiarity and use of such products is enhanced and their adoption at a wider scale made possible.

Asad Raza
MB-10-9059

ROLE OF STATE BANK IN ISLAMIC BANKING

Criteria to convert
Camel s rating as fair Islamic banking license Shariah advisers certificate 3 years plan & employees training guideline Informed to clients 4 weeks before

Commercial Bank

In case of Commercial Bank

Rule & Regulation department

Islamic banking department

Established in September15, 2002.

Improve the banking

Promote Islamic financing In global market

Vision

To make Islamic banking, the banking of first choice for the providers and users of financial service

Mission Statement

To promote and develop Islamic banking industry in line with best international practices, ensuring Shariah compliance

Objective of Islamic Banking Department

Strategic plan

Strengthen the existing regulatory framework

Broaden the scope & function Arrangement of IFSB event( Islamic Financial Services
Board)

Coordinate with BPRD(Banking Policy & Regulations

Department)

Cont
Coordinate with BID(Banking Inspection
Department)

Utilize the shariah advisory forum for

conflict resolution Conduct awareness programs Publication of Islamic banking bulletin Human resource capacity building

Five Pillars of Islamic banking strategy:

Extension of outreach
Strong Shariah compliance mechanism Regulatory framework

Capacity building through human resource

development Internal and external relations

Guideline for Islamic microfinance

Provide guideline for microfinance banks to improve

poverty based on shariah compliance

Full-fledged Islamic Microfinance Banks (IMFBs)

Islamic Microfinance Services by Full-fledged Islamic Banks

Islamic Microfinance Services by Conventional Banks Islamic Microfinance Services by Conventional Microfinance

Banks (MFBs)

Hina Ashraf
MB-10-936

PRODUCT TREE

Islamic Modes

Partnership Based Modes

Trade Based Modes

Rental Based Modes

Musharaka Mudaraba

Murabaha Musawama Salam Istisna

Ijarah Diminishing Musharaka

Musharakah
Characteristics
All parties share in the capital All parties share profits as well as losses Profits are distributed as per agreed ratio Loss is borne by the parties as per capital ratio

Every partner is agent of other

MUSHARAKAH
PROFIT Rs. 100 May be in any agreed ratio Rs. 40

Rs. 60

Rs.1000

Rs.1000

PARTNER A

VENTURE

PARTNER B

Rs. 50 LOSS Rs.100

Rs. 50

Must be according to capital ratio

Mudarabah
One partner (Rab al Mal) contributes capital

and the other (Mudarib) contributes his skills or services to the venture Venture may for a fixed period or purpose Both share profit in pre-agreed ratio Loss is borne by Rab al Mal only, Mudarib loses his services

MUDARABAH
PROFIT 60 % 40 %

CAPITAL

SERVICES

RABBUL MAL

VENTURE

MUDARIB

ALL MONETORY LOSS LOSS

LOSS OF SERVICES

Islamic Modes Murabahah

Murabahah:
Murabahah is simply a sale contract which fixes the price in terms of the sellers cost plus a specified percentage markup. The seller must disclose all items of expense which are included in the cost ie. All direct expenses incurred in acquiring that goods trust relationship between bank and the clkient.

Uses of Murabaha
Sale of raw material Sale of equipment Sale of agricultural inputs Sale of real estate and vehicles

Islamic Modes Murabahah

Process Flow:
Approval of Credit Facility
Negotiation/Approval of overall limit MOU/Murabahah Facility Agreement Requisition + Undertaking + Security Deposit
2
Bank

MOU/Facility Agreement

Client

Approval of Limit

1 3

Requisition, Undertaking, Sec. Dep.

Islamic Modes Murabahah Process Flow:

Agency/Payment to Supplier
Client appointed as agent [Optional] When the

option to be used? Payment to the Supplier Direct

Bank Bank

Client

Agency Agreement Payment

2 1

Supplier
3 2

Islamic Modes Salam

Salam: Forward Purchase

A salam transaction is the purchase of a commodity for deferred delivery in exchange for immediate payment. It is a type of sale in which the price, known as the salam capital, is paid at the time of contracting while delivery of the item to be sold, known as subject matter of salam, is deferred. Salam is also known as Salaf (lit: borrowing)

Uses:
Purchase of commodities (financing for

production of agricultural commodities/ minerals) Liquidity requirements of sugar mills, etc.

Islamic Modes Salam

Wisdom of allowing Salam Beneficial for both seller and purchaser Three major problems

1. Risk of default by seller

2. Banks need to liquidate goods

after delivery 3. Sellers inabillity to produce or procure commodity

Islamic mode_Ijarah

Ijarah is an Islamic alternative for leasing

As per the concept of Islamic Micro Leasing, an IsMFB can lease certain fixed assets to individual microfinance

customers.
The assets would be purchased by IsMFB either directly or through the agency agreements with the customer The asset would remain in the ownership and risk of IsMFB through out the lease period Application Include agri machinery,farming tools, small shops, carts, transport & other related equipments.

Sources of funds Besides their own capital and equity, Islamic banks rely on two main sources of funds, a) transaction deposits, which are risk free but yield no return and, b) investment deposits, which carry the risks of capital loss for the promise of variable. In all, there are four main types of accounts:

Current accounts Current accounts are based on the principle of alwadiah (safe keeping), whereby the depositors are guaranteed repayment of their funds. At the same time, the depositor does not receive remuneration for depositing funds in a current account, because the guaranteed funds will not be used for PLS ventures

Savings accounts Savings accounts also operate under the al-wadiah principle. Savings accounts differ from current deposits in that they earn the depositors income: depending upon financial results, the Islamic bank may decide to pay a premium , hiba ,at its discretion, to the holders of savings accounts.

Investment accounts An investment account operates under the mudaraba al-mutlaqa principle, in which the mudarib( active partner) must have absolute freedom in the management of the investment of the subscribed capital. Special investment accounts Special investment accounts also operate under the mudaraba principle, and usually are directed towards larger investors and institutions

Definition for Takaful

Takaful is an Arabic word that means

"guaranteeing each other". It is a system of Islamic insurance based on the principle of TA-AWUN (mutual assistance) and Tabarru (Voluntarily) where the risk is shared collectively by the group Voluntarily. This is a pact among a group of members or participants who agree to jointly guarantee among themselves against loss or damage to any of them as defined in the pact.

Suhaib Muhammad MB-10-52

Global Islamic Finance Institutes and Industry

Global Islamic financial industry stands at above

US$ 1 trillion. Standard & Poor's estimates global Islamic finance market have growing trend 20 per cent annually between 2011-15 1. Young, fast-growing Muslim populations 2. Robust macroeconomic environments 3. Large infrastructure projects that require

Cont
Out of US$ 1.1 trillion industry shares, the

OIC member countries have 98 percent shares. The largest centre's for Islamic finance remain concentrated in Middle East

Penetration level of Islamic banking industry

120 100 80 60 40 20 0 Conventional Banking islamic Banking

Complaint Asset December 2011

Austraillia and Europe Sub Saharen Africa GCC countaries Non GCC Mena countries Asia

Country wise spread of Islamic Financial Assets

Iran billion

$ 388

Saudi Arab $ 155 billion

Malaysia $ 133 billion

Islamic financial system also includes its institutional infrastructure organizations

Payment-settlement system Financial markets including market microstructures, trading

and clearance systems Support facility providers, legal institutions and framework, safety net, liquidity support providers Regulators and supervisors including monetary authorities/central banks, licensing authorities and industry regulators Governance infrastructure, including Sharia governance institutions Standard setters for financial supervision and infrastructure, including financial reporting, accounting and auditing and capital adequacy & solvency

Islamic Banking Branch Network in Pakistan

Total Branches 948
48 Islamic Bank Branches 308 Islamic Branches of Conventional Banks Sub Branches

592

Islamic Banking Branch Network in Pakistan

Punjab 418 Fata 2 Sindh 322

Balochista n 44

KP 100

AJK 11

Islamaba d 50

THANK YOU

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