Welcome to class of Islamic Banking in Emerging Markets Dr. Satyendra Singh University of Winnipeg Canada www.uwinnipeg.

1. Welcome to class ofIslamic Bankingin Emerging MarketsDr. Satyendra SinghUniversity of WinnipegCanadawww.uwinnipeg.ca/~ssingh5

2. Why Study This Topic? • ↑ Market size  ↑ demand for the product  2nd largest religion  1.6 billion  cannot ignore this market segment

3. Islamic Banking –The Concept • Concept  principles  no deception and no riba (interest) • It is not new  7th Century • Money is a medium of exchange • Interest can lead to injustice/exploitation in society Zulm • No real 'lending' as all 'lenders' obtain interests • To earn $ for banks, they must obtain an equity / ownership • Requires banks to participate, share risk  profit varies • Profit share is distributed instead of interest earned • Leads to more ethical society (Unlike West  you must pay interest) • This concept encourages better resource management

4. Terms • Shari’ah Islamic law • Riba  Interest • Hiba  profit • Ta'widh  Compensation • Ujrah Payment in exchange for services, benefits and privileges offered to the customers

5. Islamic Modes of Finances • Rental-based • Ijara  Lease • Trade-based • Murabaha  buy ↓, sell ↑ • Partnership-based • Musharaka  Partnership  time,$  share profit • Risk is shared b/w 2 person  loss or profit is shared • Mudharabah  Partnership one $, other effort • If profit, it is shared with the customer; bank takes its fee • If loss, customer loses; bank does not take its fee

6. Ijara Mortgages – Lease to Own Very Popular • Find a house to purchase and agree a sale price • Bank will then purchase the property outright • You then enter into 2 agreements with the bank • Pay back the purchase price fixed monthly instalments over 25 years • Pay agreed $ as rent each month  bank’s profit • Rent is set annually, ↓ yearly in % of payment • When fully paid ownership is transferred to you • Borrow  up to 90% of the purchase price • Legitimate under Sharia law

7. Murabaha Mortgages – Bank Resells House to You • Find a house and agree a purchase price with the seller • You then agree the loan required with your bank • Typically, you will need to deposit 20% now • Bank will then buy the house and immediately resell it to you for a higher price • You pay back the bank the resale price in fixed instalments  until you own the house  < 15 years • The difference between the original purchase price and the higher price at which the house is resold to you provides the bank with a profit  Sharia compliant

8. The Mortgages • Slightly more expensive than interest mortgages • Banks have to pay slightly ↑ rates for halal (permitted) funding • Few Islamic mortgages providers, so competition is not as intense as for interest mortgages • Arrangements are complex and banks take ↑ risk • Ijara bank owns house for 25 yrs before transferring ownership to you • Sharia Advisory Board  consists of experts on Sharia

9. Islamic Credit Cards • Ujrah Concept Payment in exchange for services, benefits and privileges offered to the cardholders • Mudharabah  Partnership  bank $, customer benefit • Minimum age  21, With parents  18 • Yearly Facility Charges RM 2400/7200/48000 • Payable Facility Charges  varies monthly; 0 if full payment paid on or < due date • Ta'widh (compensation)  1% of outstanding RM

10. Banks with Islamic Portfolios • England • HSBC, Lloyds TSB • Malaysia, Cambodia, Singapore • CIMB • Canada • Royal Bank of Canada!?