Evolution of the Islamic Financial System in the International Context - By Yousuf Ibnul Hasan - iCompetences IFC2012

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Evolution of the Islamic FinancialSystem in the InternationalContext

RESEARCH & PRESENTED

BY

YOUSUF IBNUL HASAN

PROGRAM CONSULTANT & FACULTY

ISLAMIC BANKING & APPLIED FINANCE

IQRA UNIVERSITY PAKISTAN



World disregarded Islamic Finance in

the Beginning Of Its Birth.

In 20th Century Islamic Finance is proven asparallel system with new dimensions, scope,

Benefits, in a unique classification.

Riba Free Financial System



Economists, Bankers Jurists & Monetary Pundits

accused movement of Islamic finance in the beginning of its birth as an agenda of IslamicFundamentalists, uniting a funding sources to be usefor international terrorism.

First Social Bank formed in 1960 was linked to themovement which was gaining a momentum against

the then Egyptian government during the period of 1958-65 which was also the growing period of Islamic

Financial System.



ISLAMIC FINANCIAL SYSTEMImportance , Approach, Scope & Benefits to Socio

Economic Growth

Today Islamic Finance, its concept, power & values are changing banking & finance as the worlds fastest developing capital

market.

It is sad to observe that international press still projecting Islamas an orthodox religion where Islam brings out most modern

lifestyle and Monetary system for the world that have effective

solution for all economic crises.

In reality, Muslims are devoted people and peace lovers, followinga very dynamic system that lead to socio economic growth instead

of economic growth.



All the

Myths, Mysteries, Magnificent,Develop a Question

What is Islamic Economics & Finance ?

Simply it is to developMan, Money & Commodity

into Participation & Cooperation

for all activities to gain the resources tosatisfy the needs



Islamic Economics is the theory.

Islamic finance is its application

Both are applied in accordance to

Islamic Jurisprudence in the guidanceof Holy Quran.

Shariah is the practice on the guidanceof Holy Quran Prophet Muhammad(PBUH)



Introduction to

Islamic Economic System

Islamic Economics is a system that identify AvailableResources blessed by Almighty Allah to the Mankind.

How these resources are distributed, utilized & consumed by man keeping the importance of Social Justice.

Seeking best of these resources through Participation and

Cooperation by applying knowledge, experience, ability and

efforts through the power of pen and book, granted by Almighty Allah.

In recognition and confirmation of the mens status on earth As Unique among all Creations & appointing man as

Custodian to all the resources, that Almighty Allah owns

solely, exclusively and absolute.



APPLICATION

Islamic Economics is a complete System for

Political, Social, Traditional, Commercial,Financial, Business & Economic affairs forIslamic & Non Islamic communities withoutDiscrimination, with Freedom of Choice, Act

and Speech but within defined limits.



ORIGIN OF ECONOMICS CONCEPT

The creation of Adam & the creation of Eve, from the ribs of Adam is

the allocation of Genders to two human bodies.

The role of these two genders as specified

Men to be Responsible & Women to be Obligatory to

Cooperate & Participate in achieving maximum benefits from theBlessings of Allah.

Both genders were empowered with SensesNeed, Want & Desire that lead to

Act, Acquire & Acceptance

for their basic needs

Employing best of their Efforts & Abilities*



Human mind having power to think, act, achieve andintegrated with these senses. is the supremacy to convert

planet The Earth into The World

World was given a unified system of lifestyle

Socio Economics System.

Socio Economics System develop community for People

People develop geographical boundaries around theircommunity & organize themselves into Nation *



Those Nations accepted Allah as

Almighty & AbsoluteHoly Messengers as Guide

Books of Revelation

as Manuals of System DEEN .Thus These Nations Declaring themselves as

Muslim Ummah. *



Islamic economics is independent with a separateidentity, having effective economic policies to benefits

humanity with Social Justice

It cover individual interests at Private, Public, Material as

Spiritual.

It identify human lifestyle for Earning, Expenditure,Business, Relationship, Right and Duties Responsibility, inLegal frame.

It emphasis in Unity, Faith Discipline, Moral & Ethical Values, Equality, Love, Transparencies, Cooperation &Sharing in all the Economics, Business, Social and

Commercial affairs in the best interest of humanity. *



4 Principles Islamic Economic SystemØ All wealth belongs to Almighty Allah.

Ø Man is the trustee of the wealth.

Ø Hoarding of wealth is prohibited.

Ø Wealth must be in circulation.

*



Islamic Economic Believes

Resources are unlimited and availability of resourcesattach to Human Efforts.

Do not accept Inflation and link resources to be consume within the season for maximum benefits.

It declare money as Medium of Exchange in Volume

against the Value of commodity and services.

*



Factors

of Productions

Man

(Force)

Money

(Source)

Commodity

(Course)

Islamic Economic



Man, Money & Commodity develop the exchange system that putmoney to act as bridge between two system classified as

LendingandBorrowing FinancingandPar1cipa1on

Lending Pricing money with the Rate applied on Principle with time value

declaring Value of money as commodity

FinancingParticipation of Mans ability to use the Money to multiply,divide, subtract and add by exercising the money for specific

purpose with socio economics and commercial reasons.*



Islamic Shariah identify Riba

in all Economic Affairs

Any earning, income, profit or benefits being earned, taken or receivedthrough wrong means, bad intentions, shady practices or wicked

participation. Such earning, income, profit or benefits are classified as

RIBA.

Riba is immoral, unethical, unjustified commercial, economical,financial, political, social, cultural & traditional practice and activity togain benefit at individual, collective or institutional level.

The above receivables and acts leads to crimes, develop cruelty &exploitation, create self- importance & monopoly, discrimination,inflation & convert pluralistic community into singular society.

*



Impact of Riba on Financial

Affairs?

Riba is as a combination of evil and sins.

Riba is bad practice to earn & gain.

Riba bring instability in the community life.

Riba is the source of inflation.

Riba create classes in the society.

Riba create injustice in seeking the rights.Riba is non transparent economic activity.

Riba is the most hated practice in Islam

Riba is the social crime

Riba develop scarcity of resources againstunlimited needs

*



Interest is a Category Of Riba

Fix rate on principle amount taken in excess without risk,efforts, activity, in exploitation, cruelty, using force and

non transparency in monetary transaction, confirmingguaranteed return is an Interest and a price of money whereas money is only bridge between man andcommodity or services

*



Profit is an achievement on financing

Principle Finance deducting from the Proceeds of Sales & Services, realizing Gross Profit which then bededucted by Cost of Transaction, declaring the NetProfit which is distributed in Ratio according toinvestment Ratio. Appraisal, Precaution, Trust,Confidence, Experience, Knowledge, Purpose, Will &

Sprit are business ethics that act in realizing profit onthe transaction.

Riba- Interest are the Limitations of financing

Where as Profit is an achievement.

*



DEFINITION OF FINANCING

Finance is an intermediary source of money in volume in exchange of the values for ability,

commodity, equity & property in production,manufacturing & trading. It makes the volume of money to support for specific purpose withinspecific period, in between person to person, personto institution or institution with group or institutionon an understanding to share the results of transaction in profit and loss. *



Financingdevelops the ownership, support theentrepreneurship, line-up the procurement, production,

distribution, consumption and the utilization inparticipation & cooperation between skill & capital on the

basis of profit & loss at maturity.

Financing is use of money by one who owns it and other

who has an ability to use it for a common purpose to makeprofit by participation and cooperation. It is an act of money

without the concept of liability, collateral or the guarantee. Itsorigin is investment and its end is ownership. *



Difference Of Financing & Lending

Ø Financing is Equity and not the Liability

Ø Lending is liability and not the participation.

Ø Financing is made and Loan is given

Ø Lending is secured and financing is support.

Ø Financing is an investment and loan is facility.

Ø Lending is given at a price of money by applying of Rate

Ø Financing profit is shared in an agreed Ratio.

Ø Lending has to be secure by external factor of collateral*



Ø Financing is securitized within its own system

Ø Lending is given against the confirmation of guarantee.

Ø Financing cannot be made until the user is able to use it

Ø Lending leads to inflation and liquidation

Ø Financing ends at ownership

Ø Lending increase liability, cost and decrease the net worthØ Financing increase the capital base as well net-worth

Ø Financing is an act of money , classified as the opposite to lending.*



"Islamic finance appeared in 1960s from Northern

African Region, Egypt by the establishment of First SocialBank,

Early Islamic era rejected lending of money as it involve

pricing of money by applying RATE on Principle Amount by confirming results GUARANTEED which is SHIRK

Money was use as a force to exploit humanity forindividual benefit.

To give humanity into dignified status as force for alleconomic activities financing was introduced in themonetary world

*



Financing is taken as Equity for all Socio Economics Ventures through Input Method

SUKUK Issuance, Subscription & Contribution of Monetary Resources to

Structure Capital for Output methods through

Modaraba …………. Ability Financing Morabaha……… Commodity Financing Ijarah………Property (Asset) Financing Musharka. Equity/ Venture Financing



FINANCE

Ø Appreciates work ethic, wealth distribution, Social &Economic justice.

Ø Defines role of the state, responsibilities & duties of thecitizen.

Ø Established absolute prohibition of payment or receipt of

fixed & guaranteed returns.

Ø Encourages entrepreneurshipØ Discourages speculative behavior

Ø Emphasizes sanctity of contracts

Ø Enforce rules for handling economic, social, political, andcultural characteristic of Islamic societies

*



R isk Indicator for Financing Application of 12-P for pre-financing activities

1. Person who is financing to whom?

2. Purpose for which financing is work out?3. Project for which financing is required?

4. Period for which finances to stay as financing?

6. Product that develop through financing?

7. Process to be use for financing?

8. Price volume of finance require?

9. Place locations where finance shall be utilize?

10. Participation, relation & responsibilities

11. Pact terms & condition between participators?

12. Professionalism repute, ability, experience, knowledge

13. Perfectness at all levels of methods and operations ?

*



Islamic Finance Growth In Six

Decade

In Mid of 19th Century Islamic Financial declared a parallelmonetary system to Conventional System of world

Egypt is the pioneer of Islamic Finance and has the highest volume of contribution in the development of IslamicFinance recognized by the 21st Century s bankers, Jurists

Economists, Bankers and all those who are link to Money Business.

*



Finance from Egypt penetrated in the other regionalcountries and number of personalities enter as researchers,

scholars, Advocator, professors, jurists and economist in theIslamic Financial Movement .

Egypt now has 14 Islamic banking licenses and several

Islamic finance windows, with approximately 120 BillionEgyptian Pounds of assets in Egypt's Islamic bankingindustry out of Total assets of the entire banking sector areabout 1.3 Trillion Pounds, according to Egypt Central Bank.*

Egypt Influence on financial system



In 1977 Pakistan Military Dictator General Zia-ul-Haqtook the initiative in converting Pakistan economic systeminto ZERO Rate of Interest and ask Counsel of IslamicIdeology to give recommendations.

The Counsel drafted a remarkable report on Islamic

Economic and Finance with the contribution of over 400leading Pakistan and international reputed personalities asin almost three years.

*

Pakistan participation



Finance Committee of OIC declared the report as one of themost authentic documents covering Islamic Economics,

Finance, Banking, Takaful and Jurisprudence .

In 1984 Pakistan moved Modaraba Ordinance & declaredModaraba Financing as NBFI ( Non Banking Financial Institution) with a vision of SME value in economy.

SME penetrated in the international monetary market assolution for economic crises due to Riba Free & Transparent way for Ability support through Capital.

*

Birth of Modaraba in 19th Century



Ø In 1963 Dr. Ahmed Al Naggar, made the pioneering efforts inestablishing a saving bank which was based on profit-and loss sharing

at Egyptian town of Mit Ghamr. Till 1972 it expanded to 9 banks withthe name as Nassir Social Bank.

Ø Dr. Naggar organize the first International conference on IslamicBanking and Islamic Economic in 1978 to start the program of

awareness for leading personalities of Islamic countries which agreed toform a platform Human Resource Development on the Islamic Finance

Egyptian Scholar Dr. Ahmed Al Naggar



Ø International Institute of Islamic Banking & IslamicEconomics (IIIB&E) was established in Cairo, Egypt in the mid of seventy in 19th Century for Human Resource Development

Ø International Association of Islamic Banking (IAIB) withHeadquarter in Heliopolis Cairo was formed and initial Membership wastaken by Egypt, Pakistan, Sudan, Turkey, United Kingdom, UAE, Saudi Arabia, Malaysia, Iran, Morocco, Algeria, Senegal, Niger and then with

passage of time Kuwait, Bahrain, Qatar, Oman and Indonesia enter intothe club.

Ø All the credit goes to Dr. Ahmed Al Naggar & his team

*

Institutionalize Support



Islamic Finance Institutions

In 1974 on IAIB proposal Islamic Development Bank (IDB) was established to operate on the Shariah principles for

intergovernmental activities in providing funds fordevelopment projects running into member countries withHeadquarter in Saudi Arabia

Dubai Islamic Bank established in 1974 was the second Big

achievement after IDB.The beginning of 80s two groups entered in Islamic Financenamely DMI Group and Al-Baraka Group by registering atBahamas and operation from Switzerland . *



In the mid of 80s in the 19th Century Algeria entered into theIslamic Finance with the introduction of one Banks affiliated with

Egypt and Tunisia and 2nd bank affiliate to an Islamic Bank of Bahrain.

By the end of 1999 Islamic Finance reach to almost all the five

continents and their member countries.

Conventional bank started introducing Islamic Banking &Finance window at their institutions.

*

North African Region



TunisiaTunisia's government aims to develop Islamic banking.Central Bank move a plans to allow the banks to operate

"Islamic windows" to segregate money fromconventional operations.

Tunisia adopted Islamic Finance in late 70s by establishing 2 offshore Banking & 1 Financial House

Bank Zitouna establish in 2010 for domestic market with active financing in under Real Estate in Musharka,Equipments on Ijarah & Morabaha for Trade Finance..



In 1990 IDB, Central Bank of Morocco and Bank Al-Maghrib hosted a conference on Islamic finance which was

the initiative to bring change in the banking sector.In 2007 Morocco began introducing Islamic bankingproducts in through Moroccan Central Bank by allowingcertain types of Islamic financial products in response togrowing consumer demand.

To mobilize Islamic financial products a draft bill with wasplace before parliament for approval. It will add a chapter tothe Morocco's Banking Law, providing a set of regulationson all Islamic finance products.

*

Morocco …



Power Plant Project a 300 MW at $180.05 million was

structured as an Installment Sale (Morabaha).

Water Supply Expansion project through an IjarahIstisnah facility worth US$37.83 million.

*

Moroccan government enter into project under

Islamic mode of financing.



Libya…

Libyan government under the previous regimen havealways been to keep the financial matter isolated from

the international monetary markets.

Recently Gumhouria Bank had declared its intentionto establish an Islamic banking subsidiary which will add

Libya as member in Islamic Financial Market .



Islamic Finance Development

in Global Aspect

International Banks that took initiative inintroducing Islamic Windows Between

80 & 90

Ø Citigroup

Ø HSBC

Ø Deutsche Bank Ø UBS

Ø Standard Chartered Bank



Equity Participation to structure CapitalBase an opportunity to common saver

Sukuk

From 2000 to 2011

In 2009 IFC listed first long-term Sukuk an rank first non-Islamic financial organization to issue a Sukuk in the Gulf Cooperation Council for term financing.

German State of Saxony-Anhalt issued Sukuk €100 mil

Islamic Development Bank issued Sukuk $400 mil World Bank issued Sukuk $200 mil



Islamic Finance In ProjectSadaf, a joint venture between Shell Oil & Saudi ArabianBasic Industries Corporation (SABIC), US $13 in 1995

Rabigh Refinery Petrochemicals Saudi Arabia US$10 Billion

Commercial banks contributed over US $ 28 Bil throughIslamic Financial products in last decade and expected to bethree time more ending 2015.

Morocco has been the largest beneficiary of trade financefacilities from the IDB at ID1.67 billion (US$2.38 billion),followed by Algeria with ID1.49 billion (US$2.13 billion),and Egypt with ID1.38 billion (US$1.97 billion).



Islamic Finance Conclusion

Islamic finance and conventional finance are quickly come together in the Gulf region for single purpose.

As conventional investors gain more comfort withIslamic structures, cost differential between Islamicproducts and conventional products have almost

disappeared As a result, Islamic products may be more practical because they appeal to both Islamic and conventionalinvestors

Islamic Finance in World News 2012



Islamic Bank of Britain plc reported 63% increase in home

financing and a 43 per cent increase in long-term savings

deposits for the first three quarters of 2012.

Minister for Jobs, Enterprise & Innovation, Richard Burton,

Said Amine Advisors is to establish operation in Dublin.

Standard Chartered launched "industry s first Islamic Euro

nostro account

Real estate Investment Trust Turkey signed a $50 millionMurabaha facility with a syndicate of banks from Gulf region

Russia has made a solid pathway into the Islamic finance

which is expected to reach over $2 trillion dollars by 2012



Issuers, public & private, may consider tappingthe Islamic capital markets as Islamic finance isasset-based industry and business can fit withthe structures developed in Islamic finance.

High-liquidity of Islamic banks & Islamicinvestment funds, issuers who tap this marketmay be able to obtain relatively favorable pricingrelative to the conventional market



Almighty Allah is the Creator of this life & makes man,custodian to all the blessings for humanity.

Mans determination towards Almighty Allah overcomesall & guides man to the right path.

It is also impossible for the Muslims to raise thecommunity in prosperity or the awareness that evilness can

show the way to advancement, going against theprohibitions of Almighty Allah.

*

Documents

Evolution of the Islamic Financial System in the International Context - By Yousuf Ibnul Hasan - iCompetences IFC2012