Welcome to class of Islamic Banking in Emerging Markets Dr. Satyendra Singh University of Winnipeg Canada

Why Study This Topic? ↑ Market size  ↑ demand for the product  2 nd largest religion  1.6 billion  cannot ignore this market segment

Islamic Banking –The Concept Concept  principles  no deception and no riba (interest) It is not new  7 th 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

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!?