Islamic Banking

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Vivek S. Kanojiya (78)
1

INTRODUCTION TO ISLAMIC BANKING
 Islamic Banking refers to a system of banking or banking activity that is consistent with the principles of Islamic

law

(Shariah) .Shariah prohibits Riba. . i.e. interest free business.  It is based on the Islamic economic system.
 It is not restricted to Muslims only.

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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.
ORIGIN
The Prophet himself acted as an agent for his wife's trading operations.

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NATURE OF BANKING SERVICES
• Same as conventional Bank.
• Clearing mechanisms, bank drafts, bills of exchange, travelers cheques, Loans etc.

• Current accounts, savings accounts, and investment accounts.

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PRINCIPLES OF ISLAMIC BANKING
• Justice, equality and solidarity.
• Property (wealth) should be used in a rational but fair Way. • Prohibits the payment of charges for the renting of money.

• Rules of Permissibility.
• Profit-and-Loss Sharing.


Making money from money is not Islamically acceptable.

• Gharar (Uncertainty, Risk or Speculation) is also prohibited. 5

OBJECTIVES OF ISLAMIC BANKS
• To help Muslims, execute their financial dealings in social values of the Shariah.
• To Serve all Muslim communities in mobilizing and utilizing

the financial resources.
• To serve the Islamic communities strengthening the economic ability.

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How does it Works ?
• The bank entirely depends upon the fixed deposits and does not borrows money from the central bank.
• Bank gives loan on basis of mutual agreement.

• Majorly focuses on sales transaction.

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Business Model of a Conventional Bank

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Business Model of a Islamic Bank

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BASIC TENETS OF ISLAMIC BANKING
1. Prohibition of interest-based (RIBA) transactions.
Trade is [just] like interest." But Allah has permitted trade and has forbidden interest."

1. Ban on speculation and excessive risk taking (GHARAR).
2. Islamic tax system (ZAKAT).
3. Discouragement of the production of goods and services
which contradict the value pattern of Islam (HARAM).

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PRODUCT TREE

Islamic Modes of
Finance
Partnership
Based Modes

Musharaka

Trade Based
Modes

Murabaha

Rental Based
Modes

Ijarah

Mudaraba

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EXAMPLE OF ISLAMIC BANKING
•Incorporated on June 21st, 1992 as a public limited company. •Branches in Pakistan, Bahrain, Bangladesh & Afghanistan, registered office at Karachi.

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Products of BANK ALFALAH Ltd

General
Banking

Financial
Services

Consumer
Finance

Treasury &
Intl.

Islamic
Banking

• Deposit A/c
• Lending &
Depositing
Rates
• Lockers
• Debit card

• Structured
Finance
• Trade Finance
• Lease Finance
• SME
• Agro Finance

• Credit cards
• Home Loans
• Auto/Vehicle
Loans
• Prepaid card
• Debit Card

• Money
Market
• Forex Market
• Nostro A/c

• Personal
Banking
• Corporate
Banking
• Consumer
Banking
• Profit Rates
on Deposits
• Profit
Distribution
Ratio

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PRINCIPAL ISLAMIC INSTRUMENTS
Musharakah
Musharakah is a contractual relationship formed through mutual consent of the parties for sharing of profits and losses in a joint venture. Assets in the venture are jointly owned in proportion to each partner’s contribution. The profits are shared in a pre-agreed ratio.

Mudarabah
Mudarabah is also a form of partnership. Whereas all partners in Musharakah contribute capital, under Mudarabah partnership is formed between provider of

capital and provider of expertise or human resource. Proportions for sharing profit are decided upfront. Losses are incurred solely by the partner contributing capital.
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Cont…
Murabaha
Murabaha is a non-participatory mode of Islamic financing where the bank sells the asset required by its client to the...
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