Welcome to class of Islamic Banking in Emerging Markets Dr Welcome to class of Islamic Banking in Emerging Markets Dr. Satyendra Singh Professor, Marketing and International Business University of Winnipeg Canada s.singh@uwinnipeg.ca http://abem.uwinnipeg.ca www.abem.ca/conference

Why Study This Topic? ↑ Market size  ↑ demand for the product  2nd largest religion  ~2 billion  cannot ignore this market segment Source: worldometers.info

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

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

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

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

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

Slightly more expensive than interest mortgages 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

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

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

Surya University Jakarta, INDONESIA 2015