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ISLAMIC BANKING

GROUP MEMBERS
Vijesh Nair 67 Dipika Mohanty 71 Jainisha Doshi 79 Dhruv Bhatia 84 Shilpa Panda 93

ISLAMIC FINANCE - INTRODUCTION

The Islamic law (Shariah) prohibits taking or giving interest (Riba) which is the most essential feature of Islamic banking The basic sources of Shariah principles are the Quran and the Sunnah, which are followed by the consensus of the jurists and interpreters of Islamic law Profit sharing and fee-based financing approaches have developed in compliance with Shariah laws. These special modes of financing have emerged in retail, private and commercial banking for debt and capital markets, insurance, asset management, structured and project financing, derivates, etc.

Objectives

The objective of Islamic Banking is not only to earn profit, but to do good and bring welfare to the people, Islam upholds the concept that money, income and property belong to Allah and this wealth is to be used for the good of the society. Islamic Banks operate on Islamic principles of profit and loss sharing and other approved modes of Investment. It strictly avoids interest which is the root of all exploitation and is responsible for large scale inflation and unemployment. An Islamic Bank is committed to do away with disparity and establish justice in the economy, trade, commerce and industry; build socio-economic infrastructure and create employment opportunities.

SHARIAH PROHIBITS
Riba, which is taking or giving of interest Masir, which is involvement in speculative and gambling transactions Gharar, which is uncertainty about the terms of contract or the subject matter Investment in businesses dealing in alcohol, drugs, gambling, armaments, etc. which are considered unlawful or undesirable

ISLAMIC BANKING PRODUCTS.

Product Name Murabaha

Category/ Nature Asset based Cost Plus Financing

Characteristics
Bank purchases the commodity and resells it at a predetermined higher price to the capital user, disclosing the margin of profit included in the sales price The client pays for the goods in deferred payments or over a stated instalment period In case of default the client is liable only for the contracted sale price One party provides 100% capital and the other party manages the investment project Profits are shared in a pre-agreed ratio whereas losses accrued are borne by the provider of capital only Mudaraba is often used for investment funds, where investor provides money to the Islamic bank, which the bank invests charging a management fee

Mudaraba

Asset based Liability based Profit Sharing

Ijara / Ijara-waiktana

Asset based Leasing

The bank buys and leases out the asset for a rental fee, which includes the capital cost of the equipment plus a profit margin The ownership of the equipment remains with the lessor bank and in case of a finance lease, is transferred on pre-determined terms Available under both operating lease and finance lease (Ijarawa-iktana) Widely used in house and aircraft financing

Product Name Sukuk

Category/ Nature Islamic Bond

Characteristics Sukuks are similar to conventional bonds with the difference that these are asset backed and represent proportionate beneficial ownership in the underlying asset Sukuk holders are entitled to a share in the revenues generated and in the proceeds of the realization of the Sukuk assets

Takaful

Islamic insurance

Takaful is insurance based on mutual cooperation, responsibility, protection and assistance between groups of participants It is akin to a cooperative insurance wherein members contribute a specific sum of money to a common pool Every policyholder pays his subscription to help those that need assistance Losses are divided and liabilities spread according to the community pooling system

ISSUES IN ISLAMIC BANKING

Issues in Islamic banking

Taxation and legal issues various products attract taxes. posses a problem in many western countries Risk Management element of risk is higher to conventional banks. inability to charge default interest on late payment. Regulatory problems less stringent disclosure norms. Absence of single global regulatory regime creates issues in cross border transactions

Issues in Islamic banking


Excess liquidity due to prohibitions on investing in debt market and other impure markets large amount of fund remains unutilized and fails to earn adequate returns Fragmentation The industry is fragmented small players who are unable to compete with international players for large-scale deals

INDIAS TAKE ON ALLOWNACE OF ISLAMIC BANKING

Support for Islamic Banking is still at a miniscule in India. Muslims account for 13% of Indias population and accounts for 10% of the worlds Islamic population. Though Muslims are a minority in India and are generally less affluent than Hindus, in sheer numbers they make India the second largest Muslim nation in the world.

Cumulatively, their investment power is tremendous and represents an untapped resource for Islamic banks. In 2006 RBI committee came to the conclusion that Islamic Banking did not fit into the countrys financial system. This community does not believe in paying and accepting interest rates and it is due to this reason that they refrain for entering normal banking transactions.

In October 2009 in Kerela, a state development corporation received commitments of up to $214 million from non-resident Indians working in the Gulf region to set up an Islamic finance company. To introduce a full-fledged Islamic bank, amendments are required in the Banking Regulation Act, which states that Indian banks can accept deposits from the public only for further lending.

Also, no bank in India can directly or indirectly deal in buying or selling or bartering of goods. Many Islamic financial institutions exist in India which are currently under RBI scanner. Indias private-sector players like ICICI Bank and Kotak Mahindra Bank have Islamic products -these are sold exclusively to clients overseas. Parsoli Corporations managing director Zafar Sareshwala, says we have 160 million Muslims in India. Given our growth rate, this has potential to be the biggest market for Islamic finance.

Islamic finance in India is marginal and provided by charitable trusts and loan societies. Islamic finance in India has been around since 1961 with setting up of Muslim fund Deoband in Uttar Pradesh. Next is the Bait-un-Nasr Urban Co-operative Credit Society, set up in Mumbai in 1980. This firm ran on the Islamic principle of interest-free banking for 25 years through 19 branches in the city. But in March 2005, amid mounting losses, Bait-un-Nasr had to close down.

ISLAMIC FINANCIAL INSTITUTIONS IN INDIA.


1)

Al Baraka Financial Services: It runs on the principles of Shariah It is advised by Ernst & Young and Taqwaa Advisory and Shariah Investment Solutions (TASIS, which has a tie-up with Dubai Islamic Bank). This firm plans to invest in Indias infrastructure -- in ports, airports and expressways.

Through a product called Ijara, or leasing, Al Baraka will buy capital equipment and receive rent in return for leasing them out. The success of Al Baraka could lead to the setting up of Indias first Islamic bank.

2) Bait-un-Nasr: It was a co-operative Islamic financial institutions. 3) Al Idafa: It has 750 clients and has offices in Mumbai and Surat. 4) Parsoli Corporation: It has one office in Mumbai. This is the only listed non-banking financial entity in India that sells Shariah-compliant Islamic investment products

They have devised the Parsoli Islamic Equity (PIE) Index where companies selected are compliant with the Shariah, the Muslim way of life. Parsoli has interests in stock broking and offers depository services. It has an institutional equity sales and trading team, and offers portfolio management services

The firm has today about 15,000 clients spread across 70 locations in India, and it advises its clients to invest in companies that belong to the PIE Index. They disqualify companies directly engaged in gambling, alcohol and sale of cigarettes. There is a concept of debt to market capitalization where the former cannot exceed 33% of market capitalization

Parsolis calculations allow nearly 58% of the Bombay Stock Exchange as eligible for Islamic investment.

DUBAI ISLAMIC BANK

Dubai Islamic Bank

The first private Islamic Bank, the Dubai Islamic Bank was set up in 1975 by a group of Muslim businessmen from several countries. DIB has been proactive in creating partnerships and alliances at both the local and international level. It has established DIB Pakistan Limited, a wholly owned subsidiary. The bank remains true to its roots as a customer-centred organisation where close personal service and understanding form the basis of all its relationships. Tradition and heritage join with a commitment to flexibility, innovation and modernity, so that customers of every nature are provided with comprehensive solutions to all their financial needs.

The bank has been spreading its wings. In early February, its subsidiary the Jordan Dubai Islamic Bank opened its first branch in Amman, the first of 10 branches planned this year. In December last year, it had opened 10 new branches in Pakistan. Its rapid pace of expansion has not been slowed by the global financial crisis. Currently, it is one of the banks that wants to enter in India but is not able to do so due to Indian Banking Laws.

EMERGING HUBS

Emerging Hubs
London,

New York and Hong Kong have emerged

as hubs There are only 3 million muslims in UK compared to 160 million muslims in India, still London is a hub for Islamic finance Muslims account for about 13% of Indias population This is smaller than the Muslim population of Pakistan and Indonesia, but still accounts to 10% of the worlds muslims

If we consider Indias growth rate, it has the potential to be the biggest market for Islamic finance Unlike the neighbouring countries, Muslims always remain to be a minority community There are large sections which need social upliftment Since these being religious people who are not much into the banking sector, islamic products will help bring this community into financial mainstream

THANK YOU

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