Islamic - Banking-The Common Perception&amp Future Prospects by Karimi.k

Al Huda Int’l Conference 2010
ISLAMIC BANKING:
The Common
Perception &
The Future Prospects
Abdul Jabbar Karimi
HMB-Islamic Banking Division
abduljabbar.karimi@gmail.com
Islamic Banking: The Common Perception & the

1 Future Prospects by : A. J. Karimi Alhuda Conf. 8-9 June’ 2010
TABLE OF CONTENTS
The common perception about

Islamic Banking….
What is Islamic Banking ?
How is Islamic Finance today at
Global Scene?
What about its future?

Table of contents
THE COMMON
PERCEPTION ABOUT
ISLAMIC BANKING….
 What is Islamic Banking ?
 How is Islamic Finance today at Global Scene?
 What about its future?

The Common FAQs about Islamic Banking..??
 Is this about Islam? Or about Banking?
 What has Religion got to do with Banking?
 Has Islamic Banking ever been practiced?
 What is Islamic Banking?
 Why Islamic Banking???
 Where is the misconception and what is
the acceptable answer?
 How Banking could be Islamic?
 How is it different from the Conventional
Banking?
 R U pricing your products on LIBOR/KIBOR
basis? Still it is Islamic…!!!!....
How to make the customers perception in the
desired direction?
 The Basic Knowledge of Shariah

Principles
 Accounting & Shariah Standards by
AAOIFI
 Psychological Marketing / With
reference to Quran + Sunnah
 The mean to achieve the end must be
right & Justified for a Muslim

What bothers Interest-based Financial
Institutions to have Shariah Compliant Products?
 Are the interest-based leading financial

institutions suddenly converting to
Islam?
 Interest-based system has reached a
level of stagnation & the Islamic system,
which built momentum about three
decades ago, is expanding at unflagging
speeds (Malaysia, Bahrain and Pakistan
who making steady progress).

Are IFI (Islamic Financial Institutions) Viable?
 The commercial viability of Islamic

finance is still a debatable issue
 The system is a cross between the
capitalist system and socialist order
 The advantage of a fairer distribution
 Reduced default risk and viability in
micro-finance
 Some thing that is Shariah Compliant
would be more viable.

Islamic Banking: The Stakeholders
Regulations/Policies guidelines Legal Framework
Central Government
Bank
Public opinion/Religious
Consumers Rulings
Madrasas/
Demand for Products & Services Religious
Scholars
External Islamic
Banking
Internal Institution Shariah supervision
Vision & Leadership
Shariah
Management Adviser/
Shariah
Productivity Board
Capital
Staff
Sponsors
Shariah Risk: A Unique IB Characteristic
 Basic Knowledge of Islamic Investment
 Firm Belief + Assurance (Haqq ul Yaqeen
or Ainul Yaqeen)
 Commitment at all levels
CONFIDENCE OF DEPOSITORS & SAVERS

“A bank licensed as an Islamic Bank may be running on a very
sound financial footing. However, if the depositors came to
know that the Bank has violated its Shari’ah mandate, the
depositors will lose confidence and the finding will trigger
deposit withdrawal and probably collapse of the bank. By
contagion effect this can lead to financial instability
threatening economic development.”

Table of contents
 THE COMMON PERCEPTION ABOUT ISLAMIC

BANKING….
WHAT IS ISLAMIC BANKING
?

What is Islamic Banking?
“Islamic Banking is interest free Asset
Backed banking governed by the
principles of Islamic Shariah”
“The ends of the both banking systems are same but only
the means to achieve these ends are different as one
system is God given in contrast to its rival system which
is ma made.”
(Karimi, Abdul Jabbar- ‘Islamic Banking :A necessary system, published in
the Finance & Business Review, The News, 18th Jun’ 2001)

The Basic principles of Islamic
Banking/Finance…(ICARE)
1. Interest Free Transactions
2. Contractual Certainty( Gharar free
contracts)
3. Asset & Service Backing
4. Risk Sharing
5. Ethical Banking

Table of contents

BANKING….
HOW IS ISLAMIC FINANCE

TODAY AT GLOBAL SCENE?

Islamic products and services offered by 300+
Financial Institutions around the world
UAE: 9
Germany: 3 - Dubai Islamic Bank
United States: 20 - Bank Sepah - Abu Dhabi Islamic Bank
Bahrain: 26
- Al Manzil Financial Services - Commerz Bank - HSBC Amanah Kuwait: 5
- American Finance House - Deutsche Bank - Bahrain Islamic Bank - Kuwait Finance
- Failaka Investments Switzerland: 6 - Al Baraka House
- ABC Islamic Bank Qatar: 4
- HSBC
- Ameen Housing Cooperative - CitiIslamic Investment Bank - Qatar Islamic Bank
- Qatar International Islamic
UK: 26 (primarily branches of
Gulf and glo Iran: 8 Pakistan: 5
bal banks) India: 3
- HSBC Amanah Finance
Bangladesh: 3
- Al Baraka International Ltd Turkey: 7
- Takafol UK Ltd - Faisal Finance
- The Halal Mutual Investment Sudan: 9 Institution
Company - Ihlas Finance Malaysia: 49
-J Aron & Co Ltd (Goldman House 10 2 - Pure Islamic Banks
Egypt: 7 Saudi Arabia:
Sachs) (Bank Islam, Bank
- Alwatany Bank of Egypt - Al Rajhi
-Britain Islamic Bank Muamalat)
- Egyptian Saudi Finance - SAMBA Rest - conventional banks
- Saudi Hollandi
- Riyadh Bank Indonesia: 4
Yemen: 5
Planning to go for Islamic
Banking

14
Note: Figure indicates
Future number of by
Prospects Islamic
: A. J.FIs Alhuda
in the country. Only some of the key
Karimi FIs Conf. 8-9 June’
are shown for 2010
each
country
Global Scenario……
 Establishment of IFSB (Islamic Financial Services Board),
IIFM (International Islamic Financial Market) & Accounting
and AAOIFI (Auditing Organization for Islamic Financial
Institutions)
 In Feb 1999, Dow Jones introduced the Dow Jones Islamic

Market Index (DJIM) of 600 companies worldwide whose
business complies with Islamic Shariah laws.
 At present there are more than 105 Islamic Funds

operational through out the world with a total fund base of
over USD 3.50 billion.
Global Scenario…….
 According to ‘The Banker’s 2009 survey, the volume of the
Shariah Compliant Assets of the top 500 Islamic Financial
Institutions grew by 28.6% rising to US$822bn from $639 in
2008 at a time when the top 1000 World Banks’ assets slumped to
6.8% from 21.6% from the previous year.
 The Shariah Compliant Assets are projected to grow to US$1.60

trillion by 2012.
 Sukuk (Islamic Bond) Issuance expected to hit US$200 Billion by

2010
 The opportunities to tap the surplus funds of oil rich Muslim

nations is strong as many non Muslim countries are trying to tap it
including, Japan, UK, Singapore, France, Hong Kong US,
Germany, Australia, Thailand, etc.
 The United Kingdom has emerged as a leading centre for offering
Islamic Financial Services (IFS) as at present there are 22 banks in
UK offering Islamic Financial Services, out of which 05 are fully
Shariah Compliant (4 wholesale & 1 retail bank).
 Lloyds TSB Bank PLC (LYG ), Britain's fourth-largest, recently

introduced Islamic mortgage products to cater to Britain's 2.5
million Muslims.
 France by indicating the adjustments in its legal and fiscal

framework aims to the development of Islamic Finance to cater the
faith-based clientele in the country in addition to gain attention of
Middle Eastern Investors holding abundant liquidity. (report by
Standard & Poor, 2009)
 German state became the first European government body to issue

an Islamic bond last year -- a $121 million.
 Governments of Bahrain ,Malaysia and now

Pakistan have issued Islamic Bonds (Sukuk) in
order to facilitate Islamic Banks in managing their
liquidity.
 Issuance of these bonds has also paved the way

for Shariah compliant Government borrowings.
 These institutions are playing a key role in setting

up and standardizing Shariah , Financial and
Accounting standards for Islamic Financial
Institutions.
 Major business schools such as Oxford, Harvard,

Rice and Durham has started post graduate
programs in Islamic Finance
 Harvard University has developed a major database

by the name of Harvard Islamic Financial Information
Program (HIFIP) for Islamic Banking.

Islamic Banking in Pakistan:
An Overview

Islamic Banking In Pakistan: An Overview
The Islamic banking market in Pakistan continued to expand during
the last year as well and the assets growth has registered 59% p.a.
growth since 2005 as stated by Deputy Governor SBP.
Assets = about PKR 370 bn + (Industry Share constitute 5.60%)
Deposits = about PKR 280bn + (Industry Share constitute 5.90%)
Financing and Investment = about PKR 230 bn +(Industry Share

constitute 4.30%)
 Projected growth for the next 5 years of Islamic Banking is 15%
to 20% per annum.
The Islamic Banking Market share would reach 12% by 2012 as per
strategy plan of SBP
In 2008 the assets of Islamic Banking increased by 34% as
compared to the assets of overall industry by 8.8%. (SBP Bulletin)

Islamic Banking In Pakistan: An Overview
There are 06 full fledged Islamic Banks and 13
Commercial Banks having Stand alone dedicated Islamic
Banking Branches
At present there are more than 600 Islamic Banking
Branches in Pakistan.
The six full – fledged Islamic Banks are...

1.Meezan Bank
2.Dubai Islamic Bank
3.Al-Barakah Islamic Bank
4.BankIslami
5.Emirates Global Islamic Bank
6.Dawood Islamic Bank

Table of contents

BANKING….
WHAT ABOUT ITS FUTURE?

1. A FEW SAYINGS BY KEY PLAYERS FOR ISLAMIC
BANKING………
 "There is a segment within the current market that would switch to
Islamic if the quality and benefits offered were as good as
conventional financial products," says Ray Ferguson, CEO of
Standard Chartered Bank UAE in Dubai.
 “A conservative approach to risk and a close link between the

financial sector and real assets has helped shield the sector from
the worst of the credit crisis,” said. Brian Caplen, An editor of a
London-based magazine
 "Islamic banking isn't just for conservative or radical Muslims. It's

mainstream business now, "That's why every bank wants a bigger
piece of it."
says Ross Mohamad Din, director of HSBC Amanah Malaysia

2. What Motivates an
individual?

Universal Motivating Factors:
1.Fear
2.Reward (in Cash or Kind))

Motivating Factor- Fear
“O you who believe, Fear Allah and give up what remains of

your demand for Interest, if you are indeed a believer. If you do
not, then you are warned of the declaration of war from Allah
and His Messenger; But if you turn back you shall have your
principal: Deal not unjustly and you shall not be dealt with
unjustly.”

27 Al Baqarah 278 - 279by (Fourth
Future Prospects
Revelation)
: A. J. Karimi Alhuda Conf. 8-9 June’ 2010
Motivating Factor- Fear
What Hadith says about Riba?
From Hazrat Abu Hurayrah (RA):

The Prophet, peace be on him, said:
"Riba has seventy segments, the least
serious being equivalent to a man
committing adultery with his own
mother."
28
Future Prospects by : A. J. Karimi
(IbnAlhuda
Majah)
Conf. 8-9 June’ 2010
What Hadith says about Riba?
From Hazrat Jabir Ibn-e-Abdullah (RA):

The Prophet may peace be on him, cursed
the receiver and the payer of interest, the one
who records it and the witnesses to the
transaction and said; “They are all alike (in
guilt).”
Ref: (Muslim, Tirmidhi and Musnad Ahmed)

3. Changing the perceptions
of the clients by offering
the required basket of
goods @ market rate
addressing the Qs…..

The Common Perceptions: The Key
Questions
Q: Is It True Islamic Banking? (Profit Calculation Method)
Questions about IB Products:

Q: Cover business requirements?
Q: Cost effective? (Pricing formula…)
Q: Any complications? (LIBOR/KIBOR…)
Q: Why stage wise documentation?
Confusion about Islamic Banking

 Biased advice of consulting conventional bankers should be dealt with
carefully..
 Different Opinions from Religious Scholars

Why Islamic Banking?
Market Approach
 20% of the world population is Muslims
 15 million Muslims residing in non-Islamic countries in

Europe, mostly in France, Germany and in UK. And
members of this community were not getting benefit
from the conventional banking
 Sizable proportion who will only avail financial services

if assurance of Shariah Approval is given
 The Oil Rich Middle East, which has a huge potential

for investing in a Shariah approved financial system
Why Islamic Banking?
Islamic Approach:
Interest has to be eliminated from the financial
system on account of the followings;
 Islamic Shariah/Law enjoins it (Qura’n + Sunnah)
 Consensus of Ummah (Fiqh Academy of IDB

(OIC)) issued fatwa (religious ruling that the
Banking interest is harram in its all shapes….
ReligiousBoards of all Islamic Banks (IBs) have

repeated the same fatwa of OIC Fiqh Academy.

Is our vision to create a Market
Segment?
The tale of Telecom.

Telecom Revolution…Year 2000
No of connections and
306,493 , market share
9%
, 0%
3,056,460 ,
91%
“In the Year 2000, after 8 years

mobile phone operator’s share was only 9%”
36
Source: Future Prospects by : A. J. Karimi Alhuda Conf. 8-9 June’ 2010
Pakistan Telecommunication Authority
No of connections and
4,884,607 , market share
8%
1,757,198 ,
3%
55,617,101 ,
89%
“Now mobile phone operators share of the industry is

89%!!!
37
Mobile Phone
Industry
55 Mn Connections Fixed Line
Industry
5 Mn Lines
“The market segment has become larger than the

basic industry itself”
38
What is the inspiration…
Basic functionality with

out the wire
Financial solutions with

out Riba
“ Vision is to create an industry itself

and not a segment”
Accessing New
Market segments
through Islamic
products
Accessing New Market segments
through Islamic products
At the time of branch opening…
- 15 branches of 13 banks
on the same road
- IBB branch would in fact

not be 14th branch rather 1st
in that area offering Islamic
products

Accessing New Market Segments
What does this Market

Want ?
Source:
Oasis International research 2006
What does this Market Want?

Research:
10%
10%
I will only bank I will Not bank
with an Islamic with an Islamic
Bank Bank
80%
All things equal I

Will prefer an
“The winning formula” Islamic Product

What does this Market Want?
An Example…
IBB
Launched in
an area
already Highest incremental
having growth in the entire
Conv.banking banking industry
branches “All things equal
I will prefer an Islamic product”
Accessing New Market Segments
The road ahead…
“Nothing is more powerful than

an idea whose time has come”
For having desired Future prospects…
To address the challenges facing the IB industry
including…
Diversification & Innovation in financial structures
while adhering the Shariah credentials+
 Standardization of products in the country and then
across the globe+
Enhance understanding and capacities of IB Risk
management +
An acceptable solution of liquidity placements..+
HR Training by having education of Islamic Finance
at all levels…
Ref: For More Info. Read my article, ”CHALLENGES FACING ISLAMIC BANKS’
Published in DAWN on 04th December ’2006 (http://www.dawn.com/2006/12/04/ebr12.htm), on
http://www.nzibo.com/governance.html), (www.gcu.edu.pk/library/NI_Dec06.htm - 219k) and
46 Islamic Banking: The Common Perception & the Alhuda Conf. 8-9 June’ 2010
www.bankseta.org.za/downloads/IEDP_UK_2007_%20Islamic_Finance_Research_Report.pdf
Future Prospects by : A. J. Karimi
Concluding Point
The Main Motivating Factor and Driver of

Islamic Banking …..
“ROIA”
 In anticipation of ROIA and in an effort to abide by the prohibition of Riba,
a surprisingly increasing number of Muslim deposit holders all across the
world, have non-interest bearing accounts and they refrain from Interest
Based Banking.
 This will also go true for Afghanistan as well……..
 The rewards in this life and especially in the life hereafter are the main
motivating factors for them.
Thank you
FOR FURTHER INFORMATION:
Abdul Jabbar Karimi
Cell: +92 300 8245995

Ph: +9221 32639665
Email: abduljabbar.karimi@gmail.com


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Al Huda Int’l Conference 2010

Islamic Banking: The Common Perception & the

The common perception about

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

 The Basic Knowledge of Shariah

Islamic Banking: The Common Perception & the

 Are the interest-based leading financial

Islamic Banking: The Common Perception & the

 The commercial viability of Islamic

Islamic Banking: The Common Perception & the

CONFIDENCE OF DEPOSITORS & SAVERS

Islamic Banking: The Common Perception & the

 THE COMMON PERCEPTION ABOUT ISLAMIC

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

 THE COMMON PERCEPTION ABOUT ISLAMIC

HOW IS ISLAMIC FINANCE

 What about its future?

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

 In Feb 1999, Dow Jones introduced the Dow Jones Islamic

 At present there are more than 105 Islamic Funds

 The Shariah Compliant Assets are projected to grow to US$1.60

 Sukuk (Islamic Bond) Issuance expected to hit US$200 Billion by

 The opportunities to tap the surplus funds of oil rich Muslim

 Lloyds TSB Bank PLC (LYG ), Britain's fourth-largest, recently

 France by indicating the adjustments in its legal and fiscal

 German state became the first European government body to issue

 Governments of Bahrain ,Malaysia and now

 Issuance of these bonds has also paved the way

 These institutions are playing a key role in setting

 Major business schools such as Oxford, Harvard,

 Harvard University has developed a major database

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

Deposits = about PKR 280bn + (Industry Share constitute 5.90%)

Financing and Investment = about PKR 230 bn +(Industry Share

Islamic Banking: The Common Perception & the

The six full – fledged Islamic Banks are...

Islamic Banking: The Common Perception & the

 THE COMMON PERCEPTION ABOUT ISLAMIC

WHAT ABOUT ITS FUTURE?

Islamic Banking: The Common Perception & the

 “A conservative approach to risk and a close link between the

 "Islamic banking isn't just for conservative or radical Muslims. It's

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

“O you who believe, Fear Allah and give up what remains of

Islamic Banking: The Common Perception & the

What Hadith says about Riba?

From Hazrat Abu Hurayrah (RA):

From Hazrat Jabir Ibn-e-Abdullah (RA):

Islamic Banking: The Common Perception & the

Islamic Banking: The Common Perception & the

Questions about IB Products:

Confusion about Islamic Banking

Islamic Banking: The Common Perception & the

 15 million Muslims residing in non-Islamic countries in

 Sizable proportion who will only avail financial services