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ISLAMIC FINANCE AND ECONOMIC DEVELOPMENT

9/15/2012. 2. CONTENTS OF THE PRESENTATION. This Presentation consists of three parts:Salient Features Of Islamic FinanceFinancial Requirements Of Economic Growth And Development.Relevance Of Islamic Finance. 9/15/2012. 3. SALIENT FEATURES OF ISLAMIC FINANCE . 9/15/2012. 4. ISLAMIC PRINCIPLES OF

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ISLAMIC FINANCE AND ECONOMIC DEVELOPMENT

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    1. 9/15/2012 1 ISLAMIC FINANCE AND ECONOMIC DEVELOPMENT AUSAF AHMAD Presentation at Azerbaijan Marketing Society Baku

    2. 9/15/2012 2 CONTENTS OF THE PRESENTATION This Presentation consists of three parts: Salient Features Of Islamic Finance Financial Requirements Of Economic Growth And Development. Relevance Of Islamic Finance

    3. 9/15/2012 3 SALIENT FEATURES OF ISLAMIC FINANCE

    4. 9/15/2012 4

    5. 9/15/2012 5 Islamic Banks, Financial Institutions and all Businesses. ALL BUSINESSES

    6. 9/15/2012 6 FINANCIAL INTERMEDIATION

    7. 9/15/2012 7

    8. 9/15/2012 8

    9. 9/15/2012 9 FINANCIAL INTERMEDIATION Financial intermediation improves the efficiency of saving and investment processes. It removes the mismatches between the preferences of savers and investors through portfolio diversification. Small savers can not get information regarding investment opportunities. Financial Institutions gather this information and provide it to the prospective investors.

    10. 9/15/2012 10 ISLAMIC FINANCING TECHNIQUES MUDARABAH (SLEEPING PARTNERSHIP) MUSHARAKAH (ACTIVE PARTNERSHIP) MURABAHAH (SALE ON PROFIT) IJARAH (LEASING) ISTISNA (A MANUFACTURING CONTRACT) BAY’ MAWAJJAL (DIFFERED PAYMENT)

    11. 9/15/2012 11 ECONOMIC DEVELOPMENT AND FINANCE

    12. 9/15/2012 12 Financial sector and Development Which way is the causality? Financial Sector Development Economic Dev. Finance There appears to be a two way causality Financial Sector Development As development proceeds financial sector deepens. The expansion of financial sector helps development. Thus, the two re-enforce each other.

    13. 9/15/2012 13 RELEVANCE OF ISLAMIC FINANCE TO ECONOMIC DEVELOPMENT

    14. 9/15/2012 14 Islamic Finance is more efficient Islamic Finance is directly related with productive processes. Conventional Finance allocates resources on the basis of credit worthiness , Islamic finance allocates resources on the basis of profitability.

    15. 9/15/2012 15 IF makes the system more stable In Islamic Finance both assets and liabilities are subject to same amount of risk sharing. If there is a bad loan, it is reflected in the net worth of the bank. Bank runs are less likely. Banking system becomes more stable.

    16. 9/15/2012 16 Islamic Finance Controls Excessive Credit Creation Credit creation in Islamic Finance is confined by the limit of actual capacity expansion. Money is not given in return of future money. Money is advanced Speculative activities related to interest rate fluctuations are also reduced, if not eliminated altogether.

    17. 9/15/2012 17 Islamic Finance reduces Moral Hazards and Adverse Selection Working as universal banks, Islamic finance reduces moral hazards. Equity finance reduces firm’s incentives to substitute riskier assets for safer assets. Equity financing reduces moral hazards and adverse selection Islamic financing improves the efficiency of the corporate sector.

    18. 9/15/2012 18 Islamic Finance Induces Growth Affects the critical mass of business firms Acts as a catalyst Being directly related with the business activity, promotes real investment. Mobilizes new and hidden resources, which would not come otherwise to the money market.

    19. 9/15/2012 19 Islamic Finance widens risk sharing Allows depositors to share risks with the investors, more participatory in nature. The real and financial sectors, banks and savers, investors and fund owners all are well integrated in the system. Economic system becomes more compact and performs better.

    20. 9/15/2012 20 Developmental Character of Islamic Financing Project Financing: Mudarabah and Musharakah [Equity based financing] Working capital Financing: Murabaha, Leasing, differed sale [sale based financing] Islamic Financing is related with Production plans. It increases productive capacity. The chances of leakage are minimal.

    21. 9/15/2012 21 Social Commitment of Islamic banks Islamic banks are socially committed to ethical and social principles. No financing of non ethical products….. gambling, pornography, alcohol, prohibited items. Interest Free loans (Qard Hasan) Zakah Funds

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