Islamic Agricultural Finance: Products, Modes, and Global Perspective

2. Outline of Presentation • Introduction and Brief Perspective of Islamic Banking • Islamic Banking in the Global Prospectus • Product Tree of Islamic Agricultural Finance • Mode of Financing in Islam ( Musharakah & Modarabah ) • Bai ( Buying & Selling ) – Murabaha , Salam, Istisna • Takaful – Islamic Insurance • Takaful Products for Agricultural Finance • Crop Takaful Presented by Zubair Mughal CEO – AlHuda : Centre of Islamic Banking & Economics Regional Head – Takaful Pakistan Limited.

3. Year 2001 2002 2003 2004 - 05 2006 - 07 2 3 4 10 18 • Meezan Bank (113) • Al Baraka (20) • MCB (8) • Alfalah(32) • SCB (8) • Bank AlHabib(4 ) • HMB(4) • Bank of Khyber(17) • Soneri Bank ( 4) • HBL(1) • Bank Islami(37) • DIB (20) • EGIBL (24) • Dawood(14) • NBP(3) • RBS (3) • Askari(14) • UBL (5) • Meezan Bank • Al Baraka • Meezan Bank • Al Baraka • MCB • Meezan Bank • Al Baraka • MCB • Alfalah • Meezan Bank • Al Baraka • MCB • Alfalah • SCB • Bank AlHabib • Habib AG Zur. • Metropolitan • Bank of Khyber • Soneri Bank Industry Progress in Pakistan • 6 Full fledge Banks having 228 and 12 Conventional Banks have 103 SAIBBS and 10 Sub Branches till August, 08 • Total IB Branches = 341

4. Industry Progress in Pakistan

5. Industry Progress in Pakistan

6. Industry Progress in Pakistan

7. City - Wise Breakup

8. City - Wise Breakup

9. Industry Progress in Pakistan

10. Industry Progress in Pakistan

11. Industry Progress in Pakistan

12. Industry Progress in Pakistan

13. Germany:4 • - Bank Sepah • - Commerz Bank • - Deutsche Bank • Switzerland: 6 • UAE: 13 • - Dubai Islamic Bank • - Abu Dhabi Islamic Bank • - HSBC Amanah • Bahrain: 26 • - Bahrain Islamic Bank • - Al Baraka • - ABC Islamic Bank • - CitiIslamic Investment Bank • Kuwait: 9 • - Kuwait Finance House • United States: 20 • - Al Manzil Financial Services • - American Finance House • - Failaka Investments • - HSBC • - Ameen Housing Cooperative • UK: 26 • - HSBC Amanah Finance • - Al Baraka International Ltd • - Takafol UK Ltd • - The Halal Mutual Investment Company • - J Aron & Co Ltd (Goldman Sachs) • Qatar: 4 • - Qatar Islamic Bank • - Qatar International Islamic • Iran: 8 • Pakistan: 21 • India: 3 • Bangladesh:9 • Turkey: 7 • - Faisal Finance Institution • - Ihlas Finance House • Egypt: 12 • - Alwatany Bank of Egypt • - Egyptian Saudi Finance • Malaysia: 49 • 2 - Pure Islamic Banks (Bank Islam, Bank Muamalat) • Rest - conventional banks • Sudan: 9 • Saudi Arabia: 17 • - Al Rajhi • - SAMBA • - Saudi Hollandi • - Riyadh Bank • Yemen: 5 • Indonesia: 4 Islamic products and services offered by 300+ Financial Institutions around the world .

14. International Overview • The size of Islamic Financial Industry has reached US$ 300 Bln. and its growing annually @ 15% per anum. • 51 countries have Islamic Banking Institutions • 27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan • 24 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia

15. International Overview Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as: • Standard Chartered Bank • Citibank • HSBC • ABN AMRO • UBS

16. International Overview • 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

17. International Overview • Governments of Bahrain ,Malaysia and now Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks in managing their liquidity. • Issuance of these bonds has also paved the way for Shariah compliant Government borrowings

18. International Overview • Institutions like Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Finance Services Board (IFSB) have been formed. • 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.

19. PRODUCT TREE OF ISLAMIC AGRI FINANCE Islamic Modes of Agricultural Finance Partnership Based Modes Trade Based Modes Rental Based Modes • Musharaka • Mudaraba • Murabaha • Musawama • Salam • Istisna • Ijarah • Diminishing Musharaka

20. Partnership Based Modes of Islamic Agricultural Finance ( Modarabah & Musharakah)

21. Musharakah • Characteristics • All parties share in the capital • All parties share profits as well as losses • Profits are distributed as per agreed ratio • Loss is borne by the parties as per capital ratio • Every partner is agent of other

22. MUSHARAKAH May be in any agreed ratio PROFIT Rs. 100 Rs. 40 Rs. 60 PARTNER A PARTNER B VENTURE Rs.1000 Rs.1000 Rs. 50 Rs. 50 LOSS Rs.100 Must be according to capital ratio

23. Mudarabah • One partner (Rab al Mal) contributes capital and the other (Mudarib) contributes his skills or services to the venture • Venture may for a fixed period or purpose • Both share profit in pre-agreed ratio • Loss is borne by Rab al Mal only, Mudarib loses his services

24. MUDARABAH PROFIT 60 % 40 % VENTURE SERVICES CAPITAL RABBUL MAL MUDARIB ALL MONETORY LOSS LOSS OF SERVICES LOSS

25. Bai (Buying & Selling) Trade Base Mode of Islamic Agricultural Finance

26. Basic Rules of Bai • Existence of Product/Commodity • Ownership of Product/Commodity • Possession of Product/Commodity • Unconditional basis • Product have value/Price.

27. Basic Rules of Bai • Bai on Such product which is permissible in Islam. • Product Must be Identify, clear with all demanding Qualities. • Not based on any incident, struggle etc • Price must be clearly identified.

28. Kinds of Bai • Bai Musawamah • Bai Murabaha • Bai Surf • Bai Salam • Bai Istisna’ • Bai Eenna • Bai Touliya • Bai Wadhia

29. Takaful (Islamic Insurance )

30. Introduction “Takaful” is the Sharia Compliant brand name for the Islamic alternative to conventional insurance. Its based on the principle of Ta’awan or mutual assistance.

31. Origins of Takaful In the event of death caused by someone from another tribe, the member of the offender’s tribe would share the “ blood money” (Khoon Baha) to provide for the family of the victim.

32. Why Insurance ? Is Some thing wrong with Concept ? • Risk Aversion • Assuring others • Risk sharing

33. From the Holly Quran • The need for insurance is shown in the following verse of The Quran. “ Those of you who die and leave widows should bequeath for their widows a year’s maintenance and residence” (2.240)

34. From the Hadiths • By Anas-bin-Malik, One day Prophet Muhammad(PBUH) notced a bedouin leaving his Camel without tying it. He asked the bedouin, “Why don’t you tie down your camel”? The Bedouin answered, “ I put my trust in Allah (SWT)”. The Prophet (PBUH) then said,” Tie your camel first, then put your trust in Allah(SWT)” <Tirmidhi>

35. What wrong with practice ? The contract between the insurer & the insured is technically wrong from the sharia perspective because of • Interest (Riba) • Gharar (Uncertainty)) • Gambling (Qamar & Maisir) • Risk Transfer Issue

36. Riba in Insurance • Direct Riba Excess on one side in case of exchange between the amount of premium. • Indirect Riba The interest earned on interest based investments

37. Gharar • Lexically it means uncertainty and technically it means the uncertainty of the counteract or the subject matter.

38. Wakala-Waqf Model Share Holder S H A R E H O L D E R S’ F U N D (S.H.F.) Wakalah Fee Investment Income Mudarib’s Share of PTF’s Investment Income Management Expense of the Company Profit/Loss Takaful Operator Investment by the Company WAQF Claims & Reserves Surplus (Balance) Operational Cost of Takaful / ReTakaful Investment Income Participant P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.)

39. Different Models of Takaful • Pure Mudarabah Model : The participants and operator enter into modarabah Contract. • Wakalah Model : An Agency Agreement is made between participants and Operators on the basis of Wakalah ( Agency agreements) • Wakalah Based on Waqf Model : The participant's donate the fund and operator charge an agency fee.

40. General Takaful Types • General Takaful – offers all kinds of non-life risk coverage. It is normally divided into following classes: • Property Takaful • Marine Takaful • Motor Takaful • Miscellaneous Takaful

41. Types of Family Takaful • Term Life Takaful • Whole Life Takaful • Endowment Takaful • Universal Takaful • Marriage Plan • Education Plan

42. Takaful Operators • The number of Takaful operators worldwide is now estimated at: • 152 Takaful companies • 9 Retakaful companies • In 39 Countries. • Average growth rate higher than conventional insurance companies (around 25%). • Non–Muslims increasingly opting for Takaful products for commercial benefits.

44. INTRODUCTION OF TAKAFUL PAKISTAN LIMITED • Takaful Pakistan is a joint venture of prestigious local & foreign institutions, including: • Emirates Investment Group (Sharjah). • Al-Buhaira National Insurance Co. (U.A.E.) • Al Raji Bank - KSA • House Building Finance Corporation. • Emirates Global Islamic Bank. • Arif Habib Securities. • Sitara Chemicals. • Large initial paid-up Capital.

45. INTRODUCTION OF TAKAFUL PAKISTAN LIMITED • Managed by dedicated professionals, committed to the cause. • Only A rated Takaful Company in Pakistan • ReTakaful arrangements with a consortium of internationally reputed ReTakaful operators. • Shariah Board comprises of eminent scholars. • BancaTakaful, Crop Takaful and MicroTakaful products • We intend to be the trend-setter for excellent Clients’ Servicing, Operational bench marks and prudent Underwriting practices.

46. Thank You.