Introduction to Islamic Banking and Finance

Presentation to Bosnian Parliament May 8th 2006 Presented by : Nizam Yaquby Bahrain

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Nizam Yaquby - Bahrain

Introduction To Islamic Banking & Finance

Nizam Yaquby
Bahrain

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Nizam Yaquby - Bahrain

Importance of Purifying the Source of Income in Islam

The body which is nourished by non-pure sources is bound to hellfire. On the day of Judgment, a person will not be moved from the place which he stands until he is asked about the sources of his income, and the ways he spent it. Purifying the source of ones nourishment is one of the important reasons for the acceptance of supplications by Allah.
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Historical Background
* Pre-colonial Era
(Partnership & Profit in Medieval Islam) by Prof. Udovitch

* Colonial Era * Post Colonial Era

(Dr. Najatuallah Siddiqi, Dr. Issa Abduh, Abu-alala Mawdudi,.etc)

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Prohibition of Interest
Usury = Interest Judaism Christianity Islam

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Latest Research And Literature On The Subject

Teachings On Usury In Judaism, Christianity And Islam By: Susan L. Buckley PhD Dissertation, University Of Aberdeen The Edwin Mellen Press, Lampeter, UK, 2000

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Inception of Islamic Banking

Dubai Islamic Bank - 1975 - modest beginnings - Initiated by businessmen who did not want to deal with interest based system - Hostile environment - Challenged by conventional banking system - Lack of public awareness
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Success Story
300 + Islamic financial institutions $ 500 - 800 bn in funds Post graduate degrees offered in Islamic banking by major academic institutions Important database system (HIFIP) Standards for the Industry (AAOIFI) Recognition by IMF, World Bank and Basel Committee

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Important Reasons for Global Interest in Islamic Banking

Good opportunity for investment

Challenge to the conventional interestbased Capitalistic System Demand of Muslim population in many countries outside the Muslim world.

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Important U.K and Singapore legislative efforts

U.K waving double stamp duty laws and recognition of ijara , musharaka and murabaha for house finance.

Singapore

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Uniqueness of Islamic Banking

Commingling between Finance & Religion and ethics Sharia Supervisory Boards (SSB)

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Studies Articles of associations and bylaws Approval of all contracts Contribute in designing new products Audit the actual implementations Issuance of Fatwas (Responsas) Conferences - Research - Training
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Basic Difference between Islamic and Conventional Modes of Finance

Conventional
money Bank money + money (interest) Client

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Basic Difference between Islamic and Conventional Modes of Finance

Islamic

Bank

Goods & Services money

Client

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Major Contracts Used in Islamic Banking

Buying & Selling Mudaraba: Investment management Musharaka: Partnership Ijarah: Leasing Wakalah: Agency Istisna: Contract of works

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Main Objective Of Islamic Banking: Banking Without Riba

The main objective of an Islamic Bank is to prohibit Muslims from dealing with interest or usury (Riba) which has been strictly prohibited by Allah, and to protect them from one of the biggest sins. Dubai Islamic Bank Statement

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Theoretical & Conceptual Considerations: Social & Economic Justice

The Islamic economic order is based upon a set of principles found in the Quran. No matter what aspect of the Islamic economic order is itroduced, for practical operations it has to base itself on the Quranic concept of social justice. The Islamic financial system, therefore, cannot be introduced merely by eliminating riba, but only by adopting the Islamic principles of social justice and introducing laws, practices, procedures and instruments which help in the maintenance and dispensation of justice, equity and fairness. Muazzam Ali (1988) A Framework of Islamic Banking Directory Of Islamic Institutions, John R Presley (ed.), London, Croom Helm
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 The Objectives and philosophies of Islamic banks must thus be in line with the teachings of Quran and Sunnah of the Prophet (PBUH) Islamic banks must be guided by the entire comprehensive principles and rules of Islamic law derived from these two basic sources Holding tight to these principles indicates whether a particular Islamic bank is acting according to Sharia or not
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Principles of Islamic Business

Eliminating riba is an important task, but Islamic banks, by default, must conform to all other Islamic business principles All teachings imposed on Muslim individuals are also applicable to Islamic banks

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Most Important Islamic Teachings Related to Business

1. Honesty & Fair trade: (Thus, trade manipulations & malpractices like hoardings, black marketing, cheating, profiteering, shortweighting, hiding the defective quality of merchandise and adulteration are all prohibited activities). 2. The Prophet (PBUH) said: the truthful honest merchant is with the Prophets, the truthful and martyrs [in the day of judgment]. Narrated by Al-Tirmidhi
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3. Spending in good causes for the benefit and welfare of the people. Wastefulness and overindulgence in pleasurable activities are not allowed 4. Upholding justice in all dealings and transactions with both friends and enemies (Quran 4:29, 4:135). Thus, all customers must be treated equally (e.g. when imposing charges and fixing profit sharing ratios).
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5. The prohibition of Gambling and other risk related purely speculative activities based on mere luck (most derivatives are prohibited)

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Important Achievements
Attracting depositors in under-banked societies Encouraging saving and investment activities Channeling depositors funds into productive and commercially beneficial activities Relieving Muslims from trading in prohibited sectors or activities (e.g. opening an LC for alcoholic beverages Encouraging Zakat and charity Disseminating knowledge in the field of Islamic transaction law (Fiqh al-Muamalat)
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Educating Muslim scholars in modern banking Encouraging Takaful (Islamic Insurance) Gaining wide acceptance in the international financial community

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The Way Ahead

Islamic banks must develop the concept of Musharakah (participating in profit & loss) and Mudaraba, and use it more aggressively Adopt new financing policies to encourage development and support for the small scale traders Develop the Islamic liquidity management and Islamic money market Must improve its services to be competitive with the best in the market

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Thank You