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Islamic Banking and Investment


The body which is nourished by non-pure sources is bound to hellfire. ... Wastefulness and overindulgence in pleasurable activities are not allowed ... – PowerPoint PPT presentation

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Title: Islamic Banking and Investment

Introduction to Islamic Banking and
Finance Presentation to Bosnian Parliament May
8th 2006 Presented by Nizam Yaquby Bahrain
Introduction To Islamic Banking Finance
  • Nizam Yaquby
  • Bahrain

(No Transcript)
Importance of Purifying the Source of Income in
  • The body which is nourished by non-pure sources
    is bound to hellfire.
  • On the day of Judgment, a person will not be
    moved from the place which he stands until he is
    asked about the sources of his income, and the
    ways he spent it.
  • Purifying the source of ones nourishment is one
    of the important reasons for the acceptance of
    supplications by Allah.

Historical Background
  • Pre-colonial Era
  • (Partnership Profit in Medieval Islam) by Prof.
  • Colonial Era
  • Post Colonial Era
  • (Dr. Najatuallah Siddiqi, Dr. Issa Abduh,
    Abu-alala Mawdudi,.etc)

Prohibition of Interest
  • Usury Interest
  • Judaism
  • Christianity
  • Islam

Latest Research And Literature On The Subject
  • Teachings On Usury In Judaism, Christianity And
  • By Susan L. Buckley
  • PhD Dissertation, University Of Aberdeen
  • The Edwin Mellen Press, Lampeter, UK, 2000

Inception of Islamic Banking
  • Dubai Islamic Bank - 1975
  • - modest beginnings
  • - Initiated by businessmen who did not want to
    deal with interest based system
  • - Hostile environment
  • - Challenged by conventional banking system
  • - Lack of public awareness

Success Story
  • 300 Islamic financial institutions
  • 500 - 800 bn in funds
  • Post graduate degrees offered in Islamic banking
    by major academic institutions
  • Important database system (HIFIP)
  • Standards for the Industry (AAOIFI)
  • Recognition by IMF, World Bank and Basel

Important Reasons for Global Interest in Islamic
  • Good opportunity for investment
  • Challenge to the conventional interest-based
    Capitalistic System
  • Demand of Muslim population in many countries
    outside the Muslim world.

Important U.K and Singapore legislative efforts
  • U.K waving double stamp duty laws and recognition
    of ijara , musharaka and murabaha for house
  • Singapore

Uniqueness of Islamic Banking
  • Commingling between Finance Religion and ethics
  • Sharia Supervisory Boards (SSB)
  • Studies Articles of associations and bylaws
  • Approval of all contracts
  • Contribute in designing new products
  • Audit the actual implementations
  • Issuance of Fatwas (Responsas)
  • Conferences - Research - Training

Basic Difference between Islamic and Conventional
Modes of Finance
  • Conventional

money money (interest)
Basic Difference between Islamic and Conventional
Modes of Finance
  • Islamic

Major Contracts Used in Islamic Banking
  • Buying Selling
  • Mudaraba Investment management
  • Musharaka Partnership
  • Ijarah Leasing
  • Wakalah Agency
  • Istisna Contract of works

Main Objective Of Islamic Banking Banking
Without Riba
  • The main objective of an Islamic Bank is to
    prohibit Muslims from dealing with interest or
    usury (Riba) which has been strictly prohibited
    by Allah, and to protect them from one of the
    biggest sins.
  • Dubai Islamic Bank Statement

Theoretical Conceptual Considerations Social
Economic Justice
  • The Islamic economic order is based upon a set
    of principles found in the Quran. No matter what
    aspect of the Islamic economic order is
    itroduced, for practical operations it has to
    base itself on the Quranic concept of social
    justice. The Islamic financial system, therefore,
    cannot be introduced merely by eliminating riba,
    but only by adopting the Islamic principles of
    social justice and introducing laws, practices,
    procedures and instruments which help in the
    maintenance and dispensation of justice, equity
    and fairness.
  • Muazzam Ali (1988)
  • A Framework of Islamic Banking Directory Of
    Islamic Institutions, John R Presley (ed.),
    London, Croom Helm

  • The Objectives and philosophies of Islamic banks
    must thus be in line with the teachings of Quran
    and Sunnah of the Prophet (PBUH)
  • Islamic banks must be guided by the entire
    comprehensive principles and rules of Islamic law
    derived from these two basic sources
  • Holding tight to these principles indicates
    whether a particular Islamic bank is acting
    according to Sharia or not

Principles of Islamic Business
  • Eliminating riba is an important task, but
    Islamic banks, by default, must conform to all
    other Islamic business principles
  • All teachings imposed on Muslim individuals are
    also applicable to Islamic banks

Most Important Islamic Teachings Related to
  • Honesty Fair trade (Thus, trade manipulations
    malpractices like hoardings, black marketing,
    cheating, profiteering, short-weighting, hiding
    the defective quality of merchandise and
    adulteration are all prohibited activities).
  • The Prophet (PBUH) said the truthful honest
    merchant is with the Prophets, the truthful and
    martyrs in the day of judgment. Narrated by

  • Spending in good causes for the benefit and
    welfare of the people. Wastefulness and
    overindulgence in pleasurable activities are not
  • Upholding justice in all dealings and
    transactions with both friends and enemies (Quran
    429, 4135). Thus, all customers must be treated
    equally (e.g. when imposing charges and fixing
    profit sharing ratios).

  • The prohibition of Gambling and other risk
    related purely speculative activities based on
    mere luck (most derivatives are prohibited)

Important Achievements
  • Attracting depositors in under-banked societies
  • Encouraging saving and investment activities
  • Channeling depositors funds into productive and
    commercially beneficial activities
  • Relieving Muslims from trading in prohibited
    sectors or activities (e.g. opening an LC for
    alcoholic beverages
  • Encouraging Zakat and charity
  • Disseminating knowledge in the field of Islamic
    transaction law (Fiqh al-Muamalat)

  • Educating Muslim scholars in modern banking
  • Encouraging Takaful (Islamic Insurance)
  • Gaining wide acceptance in the international
    financial community

The Way Ahead
  • Islamic banks must develop the concept of
    Musharakah (participating in profit loss) and
    Mudaraba, and use it more aggressively
  • Adopt new financing policies to encourage
    development and support for the small scale
  • Develop the Islamic liquidity management and
    Islamic money market
  • Must improve its services to be competitive with
    the best in the market

Thank You