Islamic Banking Future of Banking?

1. Islamic BankingFuture of Banking? IMT, Dubai 2nd Jan, 2012 Sachin Bansal

2. International Overview • Islamic products and services offered by 300+ Financial Institutions around the world • The size of Islamic Financial Industry has reached US$ 700 Bln. and its growing annually @ 15% per annum, including Islamic financial institutions, Conventional banks’, Islamic window, Islamic capital markets, Takaful assets & Non-banking financial institutions • 42 countries have Islamic Banking Institutions • 27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan • 15 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia • In Feb 1999, Dow Jones introduced the Dow Jones Islamic Market Index (DJIM) of 600 companies world wide whose business complies with Islamic Shariah laws • At present there are more than 105 Islamic Funds operational through out the world with a total fund base of over USD 3.50 billion • Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as: • Standard Chartered Bank • Citibank • HSBC • ABN AMRO • UBS

3. History of Islamic Banking • 1940s and 50s: development of theory • 1960s: first Islamic banking efforts • 1970s and 80s: more organized commercial banking, trade finance, syndication, Islamic conglomerates • 1990s: Concentrations of Islamic banks growing in selected countries, hard asset private equity fund management • 2000s: Structured sukuk and capital market development, mega project finance, large commercial banks, Islamic derivatives

4. What is Islamic Economics? In the West, Religion/Ethics/Legal only loosely overlap. Islamic Sharia’a encompasses all three. Sharia’a is the body of islamic principles with respect to life’s activities Islam is a complete way of life which gives guidance for • Aqidah (Faith & Belief) • Ibadah (Worshipping our creator) • Akhlaq (Morals, Character & Ethics) • Mu’amalat (Dealings with Fellow Man) Economic Activities fall under the purview of Mu’amalat. • Informal Dealings • Formal, Contractual/Institutional Islamic Finance • Banking • Insurance • Money Market • Capital Market

5. What is “Islamic Banking” • Islamic banking is defined as “banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah”. • Interest-free banking is a narrow concept denoting a number of banking instruments or operations which avoid interest. • Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices. • In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services

6. Important Concepts in Islamic Economics Islam encourages Restrictions in Islam • Everyone is allowed to trade as they like with the free market exception of economy • Development of the entire community & eradication of concentration of wealth • Partners share the risk of reward & loss • Money as a medium of exchange and not as a commodity by itself • Financing must be asset-backed and not money on money! Divine Restrictions: • Riba(Usury/Interest) • Uncertainty(Gharar) • Gambling (Maisir) • Unlawful Products/Services • Unlawful Contracts Govt. Restrictions: • Islam allows Govt. to intervene Moral Considerations: • Maximum benefit in the life for hereafter

7. But what happened in 2008?Why did it fare better Conventional Finance Islamic Finance • Interest creates an artificial money supply • Sell money when you have none • Sell assets before they exist • Push all the risk to the borrower • Interest free system that forces risk sharing • No profit without risk • Money advanced is always backed by real assets and services • Contractual certainty • “ Islamic Banking is interest free Asset Backed banking governed by the principles of Islamic Shariah”

8. Islamic Banking Standards • Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) • Islamic Financial Services Board (IFSB) • International Islamic Financial Market (IIFM) • Islamic Research & Training Institute (IRTI) OTHER DEVELOPMENT INSTITUTIONS • Islamic International Rating Agency • General Council for Islamic Banks & Financial Institutions • Liquidity Management Centre  Arbitration Centre • Islamic Indexes (Dow Jones, S&P’s, FTSE/DIFC) These institutions are playing a key role in setting up and standardizing Shariah , Financial and Accounting standards for Islamic Financial Institutions. Due to these collective efforts Islamic banking is now recognized by IMF, World Bank and Basel Committee.

9. Thank you! Sachin Bansal sachbansal@gmail.com 050 1512380

10. Back Up

11. Structure of Key Islamic Products • Murabaharefers to contracts in which a financial institution purchases goods upon the request of a client, who makes deferred payments that cover costs and agreed-upon profit margin for the financial institution. It is a is a fixed income loan • A Musharakais a partnership between parties in which one or several parties supply working capital. Notes of participation sold to investors provide the funding. Musharaka is widely used for joint venture investments • An Ijarais a lease purchase contract in which a financial institution purchases capital equipment or property and leases it to an enterprise. The financial institution may either rent the equipment or receive a share of the profits earned through its use

12. Structure of Key Islamic Products • Mudaraba : It’s an investment arrangement under which an investor places funds in a bank or financial institution (Mudareb) that provides expertise and manages the fund by investing in Sharia compliant investment in return for a fee, typically based on profit sharing. Mudaraba is a trust financing principle • Istina’aor custom manufacturing is a sales contract for custom manufactured goods which may be used for public and private project financing. • Sukuk: They are Islamic bonds. They are medium or long term, islamically compatible trust certificate backed by certain approved assets, usufructs or services • Takaful or Islamic insurance is an arrangement such as a charitable collection of funds based on the idea of mutual assistance

13. Islamic or Workaround? • Tawaruqis the islamic way of obtaining cash when required. It involves buying something on a deferred credit and selling the item on to get cash. The cash has then been obtained without taking out a loan and paying interest.