Islamic perspective in business_Islamic banking

Islamic Banking and Development:An Alternative Banking Concept?

Collective Presentation by Monzer Kahf, Ausaf Ahmad, & Sami HomudIRTI 1998

Islamic Perspectives in Business

Prepared by

Bobby Darmawan – CGA110107

Financial Sector Outlook: Regulatory Reforms, Islamic Finance, & Risk Management, guest lecture for UM by Anita Menon, April 2012.

Essential Islamic Economic System Principles Sources

God created the whole universe and made it subject and available to men and women to use and benefit from. Sahih International

It is He who made the earth tame for you - so walk among its slopes and eat of His provision - and to Him is the resurrection ( QS Al-Mulk, 67:15)

Rasulullah SAW,” A believer will never be satisfied of doing good until he finally reaches Heaven”

Ethical & moral values are integrated in and interwoven with recommended patterns of personal behavior as well as inter-personal transactions.

Sahih InternationalAnd those within whose wealth is a known right. For the petitioner and the deprived (QS Al-Ma’arij, 70:24-25)

Rasulullah SAW,” He who cheats is not one of us”

www.quran.com

Essential Islamic Economic System Principles Sources

Justice, fairness, and standing against oppression and exploitation are hallmarks of the Islamic socio economic-order. The word justice and it’s derivative is the third most repeated words after “Allah” and “knowledge” Sahih International

O you who have believed, be persistently standing firm in justice, witnesses for Allah , even if it be against yourselves or parents and relatives. Whether one is rich or poor, Allah is more worthy of both. So follow not [personal] inclination, lest you not be just. And if you distort [your testimony] or refuse [to give it], then indeed Allah is ever, with what you do, Acquainted (QS An-Nisa’ 4: 135)

Islam enjoins that people shouldhelp each other, share the bounties of God with each other and cooperate with each other in all that is good

Sahih InternationalO you who have believed, do not violate the rites of Allah or [the sanctity of] the sacred month or [neglect the marking of] the sacrificial animals and garlanding [them] or [violate the safety of] those coming to the Sacred House seeking bounty from their Lord and [His] approval. But when you come out of ihram, then [you may] hunt. And do not let the hatred of a people for having obstructed you from al-Masjid al-Haram lead you to transgress. And cooperate in righteousness and piety, but do not cooperate in sin and aggression. And fear

Islamic Financial System• A commerce law known as fiqh al-mu'amalat

is the basis for the Islamic financial system.

• Issues of social justice, equity, and fairness in all business transactions, and rests on the promotion of entrepreneurship, the protection of property rights, and the transparency and sanctity of contractual obligations.

• A commercial transaction is permissible as long as it is free from Riba (interest), gharar(uncertainty), maisir (gambling), and non-halal(prohibited) activities. Ariss (2010)

Islamic Banking & The Purpose • QS Al-Baqarah, 2:275

Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.

• QS Al-Baqarah, 2;276,278; QS Ali Imran, 3:130; QS An-Nisa, 4:161; QS Al-Ma’idah, 5:62; QS Al-An’Am ,6:146; QS Al-Isra, 17:64; QS Ar Rum, 30:39.

www.quran.com

Islamic Banking & The Purpose Siddiqi (2001)

• Islamic banking is founded mainly on the prohibition of riba and sharia based finance institution.

• To provide an Islamic alternative to the conventional system that is based on riba. As an alternative to riba, the profit and loss sharing arrangement are held as an ideal model of financing in Islamic finance.

Required condition for Islamic Banking

• Complete Segregation of Funds

• Shari’a Supervisory Board

• Managerial Commitment

• Safeguarding Muslim Investors' Funds

• Compliance with AAOIFI (The Accounting and Auditing Organization for Islamic Financial Institutions) Standards

Conventional Banks VS

Islamic BanksSimilarities:

Same core of their business (intermediation)

Profit-Maximizing

Their products are somehow similar in their essence.

Conventional Banks VS

Islamic BanksDifferences :

Features Conventional Banking Islamic Banking

Reward for depositors Investors get a pre- determined return while bank bears the risk

Risk is shared between depositors and the Islamic bank through Profit Sharing Investment Accounts (PSIA) where reward is variable.

Risk sharing with borrowers Borrowers are asked to pay certain rate of pre-determined interest plus the installments

Share the risk with borrowers through Mudarbah & Musharkah contracts

Prohibition No as long as match with bank’s criteria Prohibition on several financial instruments TOXIC derivatives & haramgoods project related

Social responsibility Does not exist ZAKAT deducted by bank according to savers’ approval

Source of borrowing Has the ability to easily acquire those mechanisms.

Cannot opt to interbank markets or money markets

Credit consideration Credit worthiness of their clients Viability and the worthiness of the projects

Islamic Banking Products

Investment Definition

Musharakah A joint enterprise formed conducting some business in which all partners share the profit according to pre agreed ratio while loss is shared according to the ratio of contribution

Mudaraba Profit is shared according to agreement while loss is born by capital provider only

Al-Wadiah People keep money with the Islamic bank. It is known as deposit.


Istasna

Financing Definition

Diminishing Musharaka A form of declining partnership between IFI and client generally used to finance real estates.

Bai Salam A form of sale contract where by IFIs purchase goods for spot payment with deferred delivery

Bai Muajjal Is deferred / credit sales used this mode to finance the customers’ needs by supply of desired commodities.

Istasna Designed to transect business through an order to manufacture and/or supply

Ijara A rental contract whereby IFI leases an asset for a specific rent and period to the client. Ownership risks of the asset are born by IFI while expenses relating to use the asset are the responsibility of client. The difference between Ijara and sale is that ownership in Ijara remains with lesser while in case of sales it is transferred to purchaser.


Istasna


Bai Bisaman Ajil Bank sells goods or real property to a customer with deferred payment facility usually by installments.

Ijarah Muntahia Bittamlik(bai al-tajiri, ijarah summa al-bai and kiraa waqtina. Ijarah)

A service providing contract whereby an agreement is made between two parties. One party agrees to provide certain services (known as service provider) to other party and the other party (known as service receiver) agrees to pay for the services provided.

Ujrah Is deferred / credit sales used this mode to finance the customers’ needs by supply of desired commodities.

Al-qardul Hasan Benevolent loan given to a needy person for a fixed period of time.

Murabaha A cost-plus sale contract whereby disclosure of cost to the buyer is necessary. Under Murabaha arrangement customer requests to the Islamic Financial Institution (IFI) to purchase an asset for him (customer) and sell on deferred payment.


Istasna


Wakalah An agency contract between the principal and the agent. The principal is known as muakkil and the agent is known as wakil. In wakala contract, the wakil agrees to perform a certain act on be half of the muwakkilfor payment as agreed by the parties.

Ar-Rahnu Charge or pledge or mortgage. In ar-rahnu, borrower of money puts his valuable property such as land, building, gold jewellery etc. as charge to secure the loan he takes from an Islamic bank.

Kafala Guarantee. It is an alternative to ar-rahnu. Islamic bank can provide qard al-hasan or credit facility to someone if another person becomes a guarantor for the loan or the credit.

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Criticisms and challenges of Islamic Banking:

Lack of a unified or universal authority that assures the compliance of Islamic banking products and services with Shari‘ah interpretation

No unified set of rules and guidelines for adoption by all Islamic banks and financial institutions all over the world.

Lack or the limited number of well equipped Islamic finance experts who are aware of both Islamic and conventional banking products

Criticisms and challenges of Islamic Banking:

Form of liquidity imbalances, long- term assets funded by short-term liabilities

Islamic banks cannot opt to the interbank

Face a fierce competition with their counterparts of conventional banks

Conclusion:

Basic principles of Islamic Banking align harmoniously with reality and the human nature

Put attention to community (Zakah)

Growth in challenging opportunity

Less risky and more profitable (Kyeong 2012)

Conclusion:

Basic principles of Islamic Banking align harmoniously with reality and the human nature

Put attention to community (Zakah)

Growth in challenging opportunity

References :

1. Kahf, Ahmad, Homud. 1998. Islamic banking and development: an alternative concept?

2. Jalil, Rahman. 2010. Financial transactions in islamic banking are viable alternatives to the

conventional banking transactions. International Journal of Business and Social Science. Vol. 1 No. 3; December 2010

3. Menon . 2012. Financial sector outlook: regulatory reforms, islamic finance, & risk management,. Public lecture for UM April 2012.

4. Siddiqi, M.N., 2004. Riba, Bank interest and the rationale of its prohibition. Islamic Research & TrainingI nstituteJeddah.

5. Ernst & Young. 2012. A brave new world report of sustainable growth: report 2011-2012. The world islamicbanking competitiveness report.

6. Islamic banking…principles and challenges. May 2012. Alex Bank Working Paper

7. Kyeong P. R. 2012. A Comparative Study between the Islamic and Conventional Banking Systems and Its Implications. Scholarly Journal of Business Administration, Vol. 2(5) pp.48-54 May, 2012