Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1 Essentials of Islamic Banking and Finance IRSHAD AHMAD AIJAZ Advanced topics in Islamic banking

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2 Contents  Treasury Operations; − Capital market opearations; − Money market operations; − FX market operations;  Stock market in Islamic finance;  Relation of Islamic bank with banks;  International trade and finance and Islamic banking;  Interest rate benchmarking in Islamic banking;

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 3 Treasury Operations  Treasury operation are important for every financial institution;  Treasury is concerned about management of liquidity – cash;  Treasury department takes care of bank's short or long positioning;  Treasury operations comprise of main three functions: − Capital market operations; ► Financial instruments of >1 year life are dealt under the umbrella of this market; ► Investment in stock and bonds are done through this department;; − Money market operations; ► Financial instruments of <1 year life are dealt trough this market; ► Treasury bills and other short term arrangements are done through this market;

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 4 − − FX market operations: ► ► These operations belong to trade in all sorts of currencies; ► ► Bank manage their requirement of foreign currencies through this department; ► ► Local and international payments are made through this department;   These three functions of treasury departments are usually done in overlapping ways;   One department may take care of other operations; Treasury Operations

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 5   Islamic banks do not deal in bonds and other fixed income securities as they are non permissible instruments;   Islamic banks deals in Sukuk which are Islamic bands;   Details will be presented by group # ;   All stock are not eligible for investment as many of them are of banks, insurance companies and of those companies which are not acceptable in Islam;   There is criteria for selection of stocks;   This criterion is called Stock Selection Criteria; Treasury Operations – capital market operations

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 6   T bills and other ways of short term liquidity management are not acceptable to Shari'ah;   There is almost no any practicable alternative for Islamic money market;   Repo and Reverse repo are buy back arrangements;   Many other ways of liquidity provisioning are not Shari'ah accepted ways; Treasury Operations – capital market operations

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 7   Trade of currencies is a special kind of sale which has different rules;   According to a view of some Fuqahaa’ currencies are substitute to gold and silver and thus must be exchanged on two basis: − − Spot basis, ► ► Immediate payment of both ends; − − Equality of both side if the exchanged currencies are same; ► ► Any additional amount is not allowed; ► ► More payment for new currencies is an example of it hence not allowed; ► ► Different currencies could be exchanged for higher and lower price; ► ► 1 $ could be exchanged with Rs. for higher price; Treasury Operations – FX operations

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 8 Stock market and equity investment in Islamic finance  Stock market is part of capital market;  It deals in share of companies;  Stocks are classified in Shari'ah as a 'proof of undivided ownership in a partnership';  The stock holder is owner of the partnership up to the value the share reflects (face value, book value or market value);  The profit a partnership earns and distribute (dividend) or increase / decrease in value of share (capital gain / loss) both go the stock holder because of his right of ownership;  A stock will be Shari’ah compliant if it does not fall under the four prohibitions we studies earlier;  Since a stock is an undivided portion in a partnership, rules of partnership (Shirkah / Musharakah) apply on stocks also;

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 9   Three major issues are there in current financial system: − − No concept of non-Shari’ah compliance in general prohibitions; ► ► Majority of corporate bodies do not discriminate between Halal or Haram activities; − − Involvement in Riba; ► ► Major part of financial system is interest-based; ► ► Companies pay interest and earn it; − − No attention to laws of contract in Islam; ► ► Partnerships do not pay attention to rules set out by Shari’ah for partnerships; Stock market and equity investment in Islamic finance

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 10 − − Now, three possible status of business activities of a firm are there: ► ► Purely Haram business activities; Film making, pornography, liquor making/ trading, gambling companies, conventional financing companies, banks and conventional insurance are example of this type; Some scholar include unethical businesses in this type like weapon industry and tobacco companies in this category as well; − − Purely Halal business activities; ► ► Almost all manufacturing and general business activities are example of this kind; − − Mixed business activities; ► ► The companies that are involved primarily in Halal business but they have some involvement in non-Shari’ah compliant activities; ► ► The structure of big companies is generally of this nature; Stock market and equity investment in Islamic finance

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 11   Fatwas about these companies: − − The first category is absolutely Haram with no ambiguity; − − The second category is Halal completely; − − The third category is a point of discussion; − − Majority of companies involve in interest based activities; − − Fuqaha have explained some flexibilities in state of need; − − Therefore Ulema have set two criteria: ► ► If a firm is leveraged (from interest bearing loans) then this should not be more than majority ► ► If a firm is earning interest then this income: Must not be in considerable size; Must be subtracted from total income (purification process); Stock market and equity investment in Islamic finance

Essentials of Islamic Finance – IU Gulshan Campus, Slide # 12 Regulator; Ameen – Islamic banks deposit money without taking any profit – CRR and SLR requirements Relationship of Islamic bank with other banks Mudarabah Musharakah Can not invest with this bank; May have other transaction based relation – trading of goods. Regulator; Ameen – Islamic banks deposit money without taking any profit – CRR and SLR requirements Regulator (SBP or SECP) Other Islamic Financial Intermediary Islamic Financial Intermediary – Bank or Insurance Co. Other Non Islamic Financial Intermediary Other Islamic Financial Intermediary Other Islamic Financial Intermediary DepositorsCustomers Many types of funding are possible; Trade, Rental and Partnership;