IMT, DUBAI 2 ND JAN, 2012 Islamic Banking Future of Banking? Sachin Bansal

International Overview Islamic products and services offered by 300+ Financial Institutions around the world The size of Islamic Financial Industry has reached US$ 700 Bln. and its growing 15% per annum, including Islamic financial institutions, Conventional banks’, Islamic window, Islamic capital markets, Takaful assets & Non-banking financial institutions 42 countries have Islamic Banking Institutions 27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan 15 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia In Feb 1999, Dow Jones introduced the Dow Jones Islamic Market Index (DJIM) of 600 companies world wide whose business complies with Islamic Shariah laws At present there are more than 105 Islamic Funds operational through out the world with a total fund base of over USD 3.50 billion Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as:  Standard Chartered Bank  Citibank  HSBC  ABN AMRO  UBS

History of Islamic Banking 1940s and 50s: development of theory 1960s: first Islamic banking efforts 1970s and 80s: more organized commercial banking, trade finance, syndication, Islamic conglomerates 1990s: Concentrations of Islamic banks growing in selected countries, hard asset private equity fund management 2000s: Structured sukuk and capital market development, mega project finance, large commercial banks, Islamic derivatives

What is Islamic Economics? In the West, Religion/Ethics/Legal only loosely overlap. Islamic Sharia’a encompasses all three. Sharia’a is the body of islamic principles with respect to life’s activities Islam is a complete way of life which gives guidance for Aqidah (Faith & Belief) Ibadah (Worshipping our creator) Akhlaq (Morals, Character & Ethics) Mu’amalat (Dealings with Fellow Man) Economic Activities fall under the purview of Mu’amalat. Informal Dealings Formal, Contractual/Institutional Islamic Finance  Banking  Insurance  Money Market  Capital Market

What is “Islamic Banking” Islamic banking is defined as “banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah”. Interest-free banking is a narrow concept denoting a number of banking instruments or operations which avoid interest. Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services

Islam encourages Restrictions in Islam Everyone is allowed to trade as they like with the free market exception of economy Development of the entire community & eradication of concentration of wealth Partners share the risk of reward & loss Money as a medium of exchange and not as a commodity by itself Financing must be asset-backed and not money on money! Divine Restrictions: Riba(Usury/Interest) Uncertainty(Gharar) Gambling (Maisir) Unlawful Products/Services Unlawful Contracts Govt. Restrictions: Islam allows Govt. to intervene Moral Considerations: Maximum benefit in the life for hereafter Important Concepts in Islamic Economics

Conventional Finance Islamic Finance Interest creates an artificial money supply Sell money when you have none Sell assets before they exist Push all the risk to the borrower Interest free system that forces risk sharing No profit without risk Money advanced is always backed by real assets and services Contractual certainty But what happened in 2008? Why did it fare better “ Islamic Banking is interest free Asset Backed banking governed by the principles of Islamic Shariah”

Islamic Banking Standards Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Islamic Financial Services Board (IFSB) International Islamic Financial Market (IIFM) Islamic Research & Training Institute (IRTI) OTHER DEVELOPMENT INSTITUTIONS Islamic International Rating Agency General Council for Islamic Banks & Financial Institutions Liquidity Management Centre  Arbitration Centre Islamic Indexes (Dow Jones, S&P’s, FTSE/DIFC) These institutions are playing a key role in setting up and standardizing Shariah, Financial and Accounting standards for Islamic Financial Institutions. Due to these collective efforts Islamic banking is now recognized by IMF, World Bank and Basel Committee.

Thank you! Sachin

Back Up

Structure of Key Islamic Products Murabaha refers to contracts in which a financial institution purchases goods upon the request of a client, who makes deferred payments that cover costs and agreed-upon profit margin for the financial institution. It is a is a fixed income loan A Musharaka is a partnership between parties in which one or several parties supply working capital. Notes of participation sold to investors provide the funding. Musharaka is widely used for joint venture investments An Ijara is a lease purchase contract in which a financial institution purchases capital equipment or property and leases it to an enterprise. The financial institution may either rent the equipment or receive a share of the profits earned through its use

Structure of Key Islamic Products Mudaraba : It’s an investment arrangement under which an investor places funds in a bank or financial institution (Mudareb) that provides expertise and manages the fund by investing in Sharia compliant investment in return for a fee, typically based on profit sharing. Mudaraba is a trust financing principle Istina’a or custom manufacturing is a sales contract for custom manufactured goods which may be used for public and private project financing. Sukuk : They are Islamic bonds. They are medium or long term, islamically compatible trust certificate backed by certain approved assets, usufructs or services Takaful or Islamic insurance is an arrangement such as a charitable collection of funds based on the idea of mutual assistance

Islamic or Workaround? Tawaruq is the islamic way of obtaining cash when required. It involves buying something on a deferred credit and selling the item on to get cash. The cash has then been obtained without taking out a loan and paying interest.