Participation (Islamic)

Banking and Finance System.

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BANK
is a financial institution and a financial intermediary that
accepts deposits and channels those deposits into lending
activities, either directly by loaning or indirectly through
capital markets. A bank links together customers that have
capital deficits and customers with capital surpluses.
Modern conventional banking system
came into existence nearly 429 years
ago-Banco Della Pizza in Venice 1587

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Types of Banks
Commercial banks
Ethical banks
Community banks
Direct or Internet-Only bank
Community development banks
Investment banks "underwrite
Land development banks
Merchant banks
Credit unions or Co-operative Banks
Universal banks
Postal savings banks
Central banks
Private banks
Participation/Islamic banks
Offshore banks
Savings Banks
Savings bank
Indigenous Banks
Building societies and Landesbanks
Mortgage Banks
Spare Bank
Exchange Banks
Consumers Bank

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Islamic banking refers to a system of banking or banking
activity that is consistent with the principles of the Shari'ah
(Islamic rulings).

Do not charge your brother interest, whether on money or food or anything else
that may earn interest. (Deuteronomy 23:19)
CHRISTIANITY Do not take interest of any kind from him, but fear your God, so that your
countryman may continue to live among you. (Leviticus 25:36)
If you lend money to one of my people among you who is needy, do not be like a
moneylender; charge him no interest (Exodus 22:25)

24. When you lend money to any of My people, to the poor among you, you shall
not be to him as a creditor, nor shall you impose upon him any interest.
JUDAISM
25. If you take your neighbors [night]garment a s a pledge (collateral), you shall
return it to him by nightfall.

Those who devour usury will not stand except as stand one whom the Evil one
by his touch Hath driven to madness. That is because they say: "Trade is
like usury," but Allah hath permitted trade and forbidden usury. Those who
ISLAM after receiving direction from their Lord, desist, shall be pardoned for the past;
their case is for Allah (to judge); but those who repeat (The offence) are
companions of the Fire: They will abide therein (for ever). (Quran 2:275)

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The pulse of the international Participation
banking industry are the nine core markets
Bahrain, Qatar, Indonesia, Saudi Arabia,
Malaysia, United Arab Emirates, Turkey,
Kuwait and Pakistan (QISMUT plus three
contributions).
Together, they account for 93% of industry
banking assets in the world, it exceeds
US$920 billion in 2015.

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Unlike traditional
banks, Islamic
banks funding
comes from
deposits (on which
they pay no
interest) and profit-
sharing investment
accounts with a
return decided by
the banks profit.

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Rapid-growth markets: fast-
tracking to global economic
importance
Ernst and Young has classified top 9 countries
as rapid growth markets(RGMs) in Islamic
finance based on following principles:

-their economic growth to date and future

outlook
-the size of their economy and population
-their strategic importance for global business

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World Bank:
The Islamic finance industry has expanded rapidly
over the past decade, growing at 10-12% annually.
Today, Sharia-compliant financial assets are
estimated at roughly US$2 trillion, covering bank
and non-bank financial institutions, capital markets,
money markets and insurance (Takaful).
CIBAFI (The General Council for Islamic Banks and
Financial Institutions) and the World Bank Sign
Memorandum of Understanding to Foster
Cooperation on Islamic Finance (July, 2015).

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Islamic Banking Activities
in accordance
Different Accounts in IB
with
Shariah:
Musharakah
Mudarabah
Murabahah
Ijarah
Qard Hassan
Salam and Istisna
Sukuk
Zakat and so on
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What is Shariah?

Quran Sunnah

Ijmah Qiyas

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SHARIAH
QURAN holy book of Islam and understood
by Muslims literature word of God.
SUNNAH- sayings, actions and approvals of
prophet Muhammed (pbuh).
IJMAH- this is consensus reached on particular
issue by Islamic Scholars.
QIYAS- analogy, simply to say decisions made
by Islamic scholars on particular issue by
comparing with similar situations may have
happened before.
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Main Prohibitions
RIBA
(interest)
Impermissi
ble
Activities
GHARAR
(uncertaint
y)

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Key Objectives of Islamic Banking and Financial
Principles

TRANSPAREN
CY
SOCIALLY
RESPONSIB
LE
CURBING
SPECULATIO
N
FINANCING
REAL
ECONOMY

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Musharakah
Musharakah is an Islamic mode of financing in the form of a
partnership between the bank and its client whereby each
party contributes to the capital of the partnership in equal
or varying degrees either to establish a new project or share
in an existing project.
The accruing profit is divided between the partners pre-
agreed formula, while losses are shared on pro rata basis.
The word Musharakah is derived from the Arabic word
Sharikah meaning partnership. Islamic jurists point out that
the legality and permissibility of Musharakah is based on the
injunctions of the Qur'an, Sunnah, and Ijma (consensus) of
the scholars.

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Mudarabah
Mudarabah is an Islamic mode of financing between the bank,
providing a specified amount of capital, and the Mudarib,
providing management for carrying out the venture, trade or
service with a view to earning profit. It is a special kind of
partnership where one partner gives money to another for
investing it in a commercial enterprise. The former is called
Rabb- ul- mal and the latter is called Mudharib.
Thus, Mudarabah is a contract between those who have
capital and those who have expertise, where the first party
provides capital and the other party provides the expertise
with the purpose of earning Halal (lawful) profit which will be
shared in a mutually agreed upon proportion. This type of
business venture serves the interest of the capital owner and
the Mudarib (agent).

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Murabahah
Murabaha is one of the Islamic Finance modes and it is very
popular worldwide nowadays. Murabaha; sometimes referred
to as Murabahah is also known as corporate asset
support. The concept of murabaha can be summed up as;
Bank finances the needed purchase, buys it, and resells it
with a mark up. murabaha financing means, cost plus
financing.
Murabaha is an Islamic finance instrument which of course
does not include interest (usury riba) in it. The philosophy
laying in the roots of murabaha financing is to supply a
needed service, good or commercial right. Bank; Islamic bank
in this situation, buys that needed property or service in
advance with cash money than resells it to the client with an
added profit as deferred payment base.
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Ijarah
Ijarah is an operating lease contract whereby
the bank avails assets to the customer against
a periodic rental fee for a specified period of
time. The asset continues to be owned by the
bank, and will revert back to the bank at the
end of the lease contract. Ijarah is commonly
used for the finance of expensive equipment.

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Ijarah

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Sukuk
A sukuk is an Islamic financial certificate, similar
to a bond in Western finance, that complies with
Sharia - Islamic religious law. Since the traditional
Western interest-paying bond structure is not
permissible, the issuer of a sukuksellsan
investor group a certificate, and then uses the
proceeds to purchase an asset, of which the
investor group has partial ownership. The issuer
must also make a contractual promise to buy
back the bond at a future dateat parvalue.

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Takaful
Takaful is a type of Islamic insurance, where
members contribute money into a pooling
system in order to guarantee each other
against loss or damage. Takaful-branded
insuranceis based on Sharia, Islamic religious
law, and explains how it is the responsibility of
individuals to cooperate and protect each
other.

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From the legal point of view, the main
ingredient of a Qard-ul Hassan contract is a loan
that is not contaminated in any way by Riba.
There is a lender and a borrower, with no
reference to a market, which might give one the

Qard-ul-Hassan
impression that there should be a price for it.
The relationship between lender and borrower is
one of creditor and debtor, and the principal of
the money loaned out remains the responsibility
of the borrower. The lender cannot demand his
dues before the end of the contract period.
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Thank You for Your Attention!

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Murabahah vs Short Term
Loan Short Term Loan:
-Advance Money
Murabahah: (money is treated as
-Sale of Tangible Asset commodity)
-Profit Margin (Cost Plus Mark -Interest Rate on Balance
Up) outstanding
-No penalty acceptable for -Penalty Acceptable for delay
delay in payments. in payments.
-Commodity has got intrinsic -Money does not have any
value and quality in condition. intrinsic value and quality in its
condition, it is only medium of
exchange.

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