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2. An Introduction To Islamic Finance A Rapidly Growing Industry 2 PRESNETED By: Hafiz Tariq Mahmood 125 Kashif Yaseen 148 M. Azher Mushtaq 152 PRESENTED TO: PROF. SHAHID MAHMOOD

3. 3 Outline of Presentation  Introduction and Brief Perspective of Islamic Financing  Foundation of Islamic Financing  Important Element of Islamic Financing  Islamic Financing Tree  Industry Progress in Pakistan  International Over View  Challenges faced by the Industry

4. Shariah Compliant FiqhSunnahQuran 4

5. Islamic Finance Principles and Foundations laid down by Sharia (Islamic law) Quran – Revealed word of God Sunnah – Sayings and practices of the Prophet Mohammed Moral guidance or set of principles practiced by muslims Shariah Supervisory Board (SSB) 3-5 Islamic Scholars Decide what is compliance or not Interpret Islamic Fiqh 5

6. The Foundations of Islamic Finance Avoid Interest (Riba) Riba al Naseeyah or Riba al-Quran – excess resulting from a pre determined interest Riba al-Fadl or Riba al Hadith – Excess compensation without consideration Avoid Uncertainty/Deceit (Gharar) Final result is uncertain Short Selling Fraud Avoid Gambling (Maysir) Involvement In speculative and gambling transactions No Derivatives 6

7. 7 Important Elements of Islamic Finance  Bai ( Sale & Purchase )  Ijarah ( Islamic Leasing )  Basic Mode of Financing ( Musharkah & Modarabah)  Takaful ( Islamic Insurance )  Sukuk ( Islamic Bonds )  Qard  Zakat & Ushar

8. ISLAMIC FINANCING TREE Islamic Modes Trade Based Modes Partnership Based Modes Rental Based Modes  Musharaka  Mudaraba  Murabaha  Musawama  Salam  Istisna  Ijarah  Diminishing Musharaka 8

9. Musharakah Characteristics All parties share in the capital All parties share profits as well as losses Profits are distributed as per agreed ratio Loss is borne by the parties as per capital ratio Every partner is agent of other 9

10. MUSHARAKAH PARTNER APARTNER B VENTURE Rs.1000 PROFIT Rs. 100 LOSS Rs.100 Rs. 60 Rs. 40 Rs. 50 May be in any agreed ratio Must be according to capital ratio 10

11. Mudarabah One partner (Rab al Mal) contributes capital and the other (Mudarib) contributes his skills or services to the venture Venture may for a fixed period or purpose Both share profit in pre-agreed ratio Loss is borne by Rab al Mal only, Mudarib loses his services 11

12. MUDARABAH RABBUL MALMUDARIB VENTURE SERVICES CAPITAL PROFIT LOSS 40 %60 % ALL MONETORY LOSSLOSS OF SERVICES 12

13. Murabaha Financing (Installment Credit Sale) Deferred payment Sale/Installment Credit Sale + Profit Mark- Up Closing & payment date must be clear Bank can appoint client as agent (if bank is inexperienced) Technical ownership of good remains with bank Bank may request Collateral/Security/Guarantee Buyer knows the original seller price 13

14. 14 Car Dealership Client Honda City Islamic Bank Request for 3 Honda City Cars Buys 3 Honda City Cars 3 x14,50,000 (Rs43,50,000) Transfer ownership of 3 Honda City Cars Transfers 3 Honda City Cars Pays Rs1450,000 + Rs130,000 Profit (on deferred date) Murabaha Financing (Deferred Payment Sale Example)

15. Musawamah Financing (Installment Credit Sale) Negotiation of Selling Price Sale/Installment Credit Sale Closing & payment date must be clear Bank can appoint client as agent (if bank is inexperienced) Technical ownership of good remains with bank Bank may request Collateral/Security/Guarantee Buyer knows the original seller price 15

16. 16 Car Dealership Client Honda City Islamic Bank Request for 3 Honda City Cars Buys 3 Honda City Cars 3 x14,50,000 (Rs43,50,000) Transfer ownership of 3 Honda City Cars Transfers 3 Honda City Cars Pays Rs1580,000 (on deferred date) Musawamah Financing (Deferred Payment Sale Example)

17. SALAM (Advance payment) It is an exception to the general principle of instant exchange of counter values in a contract of sale Full payment of purchase price, No deferment or installment in advance money allowed No loan adjustment is allowed Quality and quantity must be specified Date of delivery must be specified 17

18. Introduction Istisna’ is sale transaction where commodity is transacted before it comes into existence. Definition It is an order to producer to manufacture a specific commodity for the purchaser. ISTISNA 18

19. IJARA CONTRACT (LEASING) Similar to the a conventional lease contracts A bilateral contract allowing the transfer of the usufruct Rental could be fixed for the life of repayment or adjusted periodically Sub-leases are acceptable so long as lessor agrees Bank (lessor) & client (lessee) agree to the terms of lease. (object/lease date/rent) Additional security is acceptable (guarantees, collateral) Title remains with bank until full repayment 19

20. IJARAH Usufruct of an asset is passed to other party against a periodic rent payment The asset must have corpus (body) and be in existence The asset must not be consumable in nature (should not vanish if used) Ownership will remain with the lessor and he will bear all the risks related to ownership 20

21. IJARAH IJARAH LESSORLESSEE Asset Usufruct Ownership Periodical payments/Rent Usufruct Use/ usufruct Only 21

22. In Diminishing Musharakah the financier and the client participate either in joint ownership of a property or an equipment, or in a joint commercial enterprise a property or an equipment, or in a joint commercial enterprise The share of the financier will be divided into a number of units The share of the financier will be divided into a number of units The client will purchase these units one by one periodically until he is the sole owner of the property The client will purchase these units one by one periodically until he is the sole owner of the property DIMINISHING MUSHARAKAH 22

23. Three components of Diminishing Musharaka Joint ownership of the Bank and customer Joint ownership of the Bank and customer Customer as a lessee uses the share of the bank Customer as a lessee uses the share of the bank Redemption of the share of the Bank by the customer Redemption of the share of the Bank by the customer 23

24. Industry Progress in Pakistan Currently there are 6 full fledged Islamic Banks, while 6 Full fledge Banks having 186 and 12 Conventional Banks have 103 SAIBBS Total IB Branches = 289 Year2001 Meezan Bank Al Baraka Meezan Bank Al Baraka MCB Alfalah SCB Bank AlHabib Habib AG Zur. Metropolitan Bank of Khyber Soneri Bank 20022003 Meezan Bank Al Baraka MCB Meezan Bank Al Baraka MCB Alfalah 210 2006 - 07 Meezan Bank (100) Al Baraka (18) MCB (8) Alfalah(32) SCB (8) Bank AlHabib(4 ) HMB(4) Bank of Khyber(17) Soneri Bank ( 4) HBL(1) Bank Islami(36) DIB (17) EGIBL (10) Dawood(5) NBP(3) ABN AMRO (3) Askari(14) UBL (5) 2004 - 05 1843 24

25. Industry Progress in Islamic Financing in Pakistan 25

26. International Overview The size of Islamic Financial Industry has reached US$ 300 Bln. and its growing annually @ 15% per anum. 51 countries have Islamic Banking Institutions 27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan 24 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia 26

27. International Overview Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as: Standard Chartered Bank Citibank HSBC ABN AMRO UBS 27

28. International Overview 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 28

29. International Overview Governments of Bahrain,Malaysia and now Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks in managing their liquidity. Issuance of these bonds has also paved the way for Shariah compliant Government borrowings 29

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31. Challenges Facing Islamic Financing Regulatory & tax issues Sharia’a scholars & Sharia’a compliant products Trained & Skilled Islamic Bankers Understanding by its clients Arabic Terminology 31