ISLAMIC BANKING

ISLAMIC BANKING

 Presented By….
– Rushabh Doshi
– Surjeet Ghorpade
– Vinod Hande
– Pradhyna Hanjankar
– Manoj Ghode
 ISLAMIC BANKING

 Introduction

 Fact & Figures

 Trends

 Future Prospects
 Case Study
 ISLAMIC BANKING

 Introduction

 Fact & Figure

 Trends

 Future Prospects
 Case Study
Introduction ISLAMIC BANKING

 Islamic Banking refers to a system of banking or banking

activity that is consistent with Islamic law (Sharia)
principles.

 First modern theoretical literature on Islamic Banking

appeared in from the 1940’s through the 60’s. Modest
practical steps in the 1960’s were followed by the
establishment of several Islamic Banking in the private
sector in the 1970’s. During the 1980’s, Pakistan, Iran,
Sudan, and Malaysia adopted the new system officially.
officially
Introduction ISLAMIC BANKING

Rules govern investment behavior:

•
the absence of interest-based (riba) transactions;
•
the avoidance of economic activities involving speculation;
•
the discouragement of the production of goods and service which
contradict the value pattern of Islam (haram).

• The common Islamic concepts used in IB are :

•
Mudharabah (profit sharing)
•
Wadiah (safekeeping)
•
Musharakah (joint venture)
•
Murabahah (cost plus)
•
Ljarah (leasing)
Introduction ISLAMIC BANKING

Benefits

• The very idea of IB brings in ethical values to center of banking practices.

• It has increased banking habit in the Muslim community. Islamic investment

companies have brought out some hoarded wealth, encouraged people to
save more and helped Muslim entrepreneurs.

• At the community level, it brings them closer to the rest of humanity as it is

open to all.

• As per scholars, Islamic finance is less prone to inflation and less

vulnerable to speculation.

• Islamic finance is more efficient in that it allocates investable funds on the

basis of the expected value productivity of projects rather than on the
criterion of the creditworthiness of those who own the projects.

• Profit sharing principle more beneficial for depositor

Introduction ISLAMIC BANKING

Criticism

 IB cost more due to smaller size of these institutions which makes

them incur higher unit overhead costs

 Default in payment – blacklisting of customer : not satisfactory solution

 High training costs

 Technical and organisational problems

 Inadequate sensitivity to customer satisfaction

 Unsuitable supervision standards both internally and externally by

central banks

 Difficulty in accessing financial services, whether that be

geographically or culturally (language barriers)
Introduction ISLAMIC BANKING

Difference between Conventional banking and IB

 Concept of Interest

 Control on utilisation of funds provided by bank

 Principles of financial services

 Awareness about the absolute cost to be incurred

 Repayment of loan
Introduction ISLAMIC BANKING

DEPOSITORS/ BANK
INVESTORS
INVEST FUNDS

(MUDHARABAH)

Pre-agreed Profit- 30%

Sharing Ratio FINANCING AND
INVESTMENT
ACTIVITIES
70% PROFIT

100% LOSS
 ISLAMIC BANKING

 Introduction

 Fact & Figures

 Trends

 Future Prospects
 Case Study
Fact & Figure ISLAMIC BANKING

 There are around 270 IB worldwide with a market capitalisation in

excess of US$13 billion. These banks operate in 45 countries
encompassing most of the Muslim world, along with Europe, North
America and various offshore locations.

 Assets of IB worldwide are estimated at more than US$265 billion

and financial investments above US$400 billion.

 Global Deposits: IB deposits are estimated at over US$202 billion

worldwide with average growth between 10 and 20%.

 Some project IB will account for 40% to 50% of total savings of the
Muslim population worldwide within 8 to 10 years.
Fact & Figure ISLAMIC BANKING

The main five IB have maintained high rates of growth over the
first half of the year, according to results declared so far.

 Topping the list was Dubai IB with net profit of Dh1.5 billion
compared to Dh707 million during the same period in 2006. The
bank's assets rose by 51 per cent to Dh75.5 billion as opposed to
Dh49.9bn over the same period last year.

 Abu Dhabi IB posted a profit of Dh346 million, or a growth of 19 per

cent, compared to Dh292m over the same period last year. Assets
grew to Dh41.1bn, or 39 per cent over the Dh29.6bn in the same
period in 2006.

 Sharjah IB achieved Dh121.1m in the first half of this year, a 33 per

cent increase over the previous period's Dh91.3m.

 Dubai Bank increased net profit 237 per cent to Dh81.2m over
Dh24.1m in the first half of 2006.

 Emirates IB netted Dh 76m compared to last year's Dh 48m.

Fact & Figure ISLAMIC BANKING

 In countries like Malaysia, which took the lead in introducing Islamic

finance some thirty years ago, Islamic investments now account for
11% of the total banking assets. The Malaysian IB industry is firmly
positioned to capture 15% of the market share by 2007, and is
targeting 20% share by 2010.

 According to Standard & Poor’s, the growth rate of IB services

“outpaced that of conventional banking during the past decade,
making it one of the most dynamic areas in international finance.
“The annual growth of Islamic financial institutions (IFI) has been
an estimated 10% in the Gulf and almost 15% worldwide over the
past 10 years,” report says. “IFI’s assets and funds under
management are estimated at about $200bn-$300bn. Islamic
banking activities are expected to grow even more rapidly in the
foreseeable future.”
Fact & Figure ISLAMIC BANKING

Presence of Islamic Bank - Country Overview

No
Islamic Islamic Banks
Bank
Small Medium High
Marginal Government
Market Market Market
Presence Legislation
Share Share Share
Iraq Algeria Malaysia Bahrain Kuwait Iran
Libya Lebanon Turkey Egypt Qatar Pakistan
Morocco Tunisia Yemen Jordan Sudan
Oman Saudi
Syria UAE
 ISLAMIC BANKING

 Introduction

 Fact & Figure

 Trends

 Future Prospects
 Case Study
Trends ISLAMIC BANKING

• Islamic banking and conventional banking are quickly

converging in the Gulf region
• As conventional investors gain more comfort with
Islamic structures, cost differential between Islamic
products and conventional products have almost
disappeared
• As a result, Islamic products may be more practical
because they appeal to both Islamic and conventional
investors
Trends ISLAMIC BANKING

• In Non-Islamic Countries, conventional banks began to

respond to requests from Muslim clients to offer
products that complied with Islamic law

• As the size of the potential market became clear,

conventional banks responded with the creation of
divisions dedicated to Islamic banking
Trends ISLAMIC BANKING

Conventional International Banks with Islamic Windows in

country like China, UK, Germany, Luxembourg etc:

• Citigroup
• HSBC
• Deutsche Bank
• UBS
• ABN AMRO
• Standard Chartered Bank
Arab investors hold approximately $800 billion of assets
in European banks, with a growing trend to invest that
money in Islamic products
 ISLAMIC BANKING

 Introduction

 Fact & Figure

 Trends

 Future Prospects
 Case Study
Future Prospects ISLAMIC BANKING

• Islamic banking and financing has gained a foothold

both nationally in Muslim countries and internationally in
the financial world.
• Islamic banking industry faces issues of a different sort.
That is, how to …………
(1) consolidate the gains made so far and sustain
itself,
(2) protect against any meltdown and
(3) grow.
Future Prospects ISLAMIC BANKING

• Survival of Islamic banking depends on the following:

• its economic viability, -
Economic viability of Islamic banking/financing is not an
issue for two reasons:
> Islamic banking is just another way of banking.
> Islamic banking offers a better financial
architecture, on economic grounds.

(2) Its stability,

> During downswing in an interest-based economy,
depositors’ existing claims remain a liability of
the banking system.
> Islamic banking has advantage that bank obligations
to depositors automatically adjust, both in downswing and
recovery phases,
Future Prospects ISLAMIC BANKING

Likely Shape of Islamic Banking & Finance in

Future

• Islamic Banks as Pure Financial Institutions

• Islamic Banks will primarily be Economic Institutions

• Standardization of Islamic Financial Products

• Structure of Islamic Finance Industry

Future Prospects ISLAMIC BANKING

Future Challenges for Islamic Banking & Finance

• Financial Innovation in Critical Areas

• Competition

• Misuse of Islamic Banking

Future Prospects ISLAMIC BANKING

“Highly ethical, well-regulated and beneficial Islamic

financial architecture is possible. Indeed, working in this
field with more transparency, with effective corporate
governance and with better interaction with relevant
international, regional and national institutions, will
definitely help all [those] who want to contribute to the
welfare of their community as well as to the welfare of the
world as a whole.”
Dr. Tahir Memmi of the IDB, Jeddah.
 ISLAMIC BANKING

 Introduction

 Fact & Figure

 Trends

 Future Prospects
 Case Study
Case Study ISLAMIC BANKING

Islamic Development Bank (IDB)

• IDB is an international financial institution and it was
formally opened on 20th Oct 1975 with main office in
Saudi Arabia with three regional offices.
• Staff at start was 78, now 942.
• Official Language is Arabic, but English and French are
used.
• Currently the bank has 56 member countries, member
countries must also be a member of Organization of
the Islamic Conference.
• Bank purpose is to support the economic development
and social progress of member countries and Muslim
communities.
Case Study ISLAMIC BANKING

Islamic Development Bank (IDB)

• Bank receive deposits and mobilize financial resources
through method acceptable accordingly to Shari’a.
• Bank provide technical assistance to member countries
and assist in training personnel working with
development activities in Muslim countries.
• Authorized capital of Bank is 15 billion Islamic Dinar
and the subscribed capital is 8.1 billion Islamic Dinar.

IDB Subscriber
Case Study ISLAMIC BANKING
Case Study ISLAMIC BANKING

Islamic Development Bank (IDB)

• During the period 1975 – Jan 2007, IDB had financed
5272 projects for $ 45.9 billion.
Case Study ISLAMIC BANKING
Case Study ISLAMIC BANKING

1978

2007
Case Study ISLAMIC BANKING
Question ???? ISLAMIC BANKING