Introduction to Islamic Banking and Finance

Slides on the introduction of Islamic Banking

1. ISLAMIC BANKING DANSOOR ONLINE COURSES

2. Course outline Introduction​ History of banking and Islamic banking ​Fundamental principles of Islamic banking Islamic economics Riba , its prohibition & classifications Sources of Islamic Financing Technology banking

3. introduction Islam as a comprehensive system provides guidelines for human behavior throughout life. It does that through a set of beliefs. These beliefs organize the relationship between the individual and Allah, the individual and other human beings, as well as the individual and the environment. Economics is one of the most important aspects of human life. Economic behavior, as expressed in terms of economic activities involves the production, distribution and consumption of goods and services. As a part of its guidance, Islam renders clear guidelines towards the economic behavior of human beings.

4. Contin’d In the last few decades, the world has witnessed a renaissance of Islamic Economics. Islamic Economics and Finance is not an uncommon terminology and philosophy at present. Following the recent global financial crisis, a great deal of attention has been given to this subject by scholars and people. In the view of its importance, a module to introduce the subject of Islamic Economics and Finance is being presented. Let us begin with the subject of Islamic Economics. The principles and fundamentals of Islamic Economics are derived from two primary sources, i.e., the Quran and the Sunnah.

5. Contin’d What is an Islamic economics? Islamic economics is the knowledge and application of injunctions and rules of the Shariah (Islamic law) that prevent injustice in the acquisition and disposal of material resources in order to provide satisfaction to human beings and enable them to perform their obligations to Allah and the society. Islamic Economics, therefore, neither recognizes nor appreciates wrong or illicit means and laws of acquiring, utilizing and distributing the wealth.

6. Contin’d

7. Contin’d The first principle of Islamic economics is that of ownership or that of the real owner. It is clearly mentioned in the Quran that Allah has created all the wealth available on the earth and in the heavens. Hence, He is the real owner of this world with all its resources, wealth and factors of production.

8. Contin’d The individual and collective ownership of human beings in the resources and wealth is recognized in a sense that one should acquire the resources with one’s personal efforts and utilize them, thus adding and deriving utility through economic activities. Every human being has an equal right to utilize the natural resources created by Allah. It is not permitted to hold the property or resources unused or barren for a reasonably longer period. The Quran states that if some property or wealth is left behind after an individual’s demise, then it has to be distributed to others through the Quranic ‘law of inheritance’.

9. Contin’d What is Banking in General? Banking includes a wide variety of financial institutions that store the money of individuals, businesses and other entities. Banks provide financial services that help people save, manage and invest their money. Banking is the business of protecting money for others. Banks lend this money, generating interest that creates profits for the bank and its customers. A bank is a financial institution licensed to accept deposits and make loans. But they may also perform other financial services.

10. Contin’d The term “bank” can refer to many different types of financial institutions — including bank and trust companies, savings and loan associations, credit unions or any other type of institution that accepts deposits.

11. What is Islamic bank ? Definition: “an Islamic bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principle of Shariah and to the banning of the receipt and payment of interest on any of its operation…” (OIC) Moreover, the Malaysian Islamic Banking Act 1983, defines an Islamic bank as “… a company which carries on Islamic business. Islamic business means banking business whose aims and operations do not involve any element which is not approved by the religion of Islam…” Thus, Islamic banking is banking that complies with Shari’ah or Islamic law.

12. Contin’d All of the above is only possible when the bank is awarded a banking license by the monetary authority. To qualify for a license, the bank amongst others must put up a minimum required capital to support the deposit it acquires from the public. It must have also a sound business plan and credible group of individuals to run the business. An Islamic bank is usually set up as a joint-stock company. To raise capital, the bank which the company issues put up the shares for sale to the public.

13. Contin’d The bank's management team who devise business strategies usually consists of the principle officers such as the chief executive officer (CEO), the chief financial officer (CFO) and the heads of retail, corporate and risk management departments to name a few. These officers are appointed by the Board of Directors (BOD) who represents the shareholders. Members of the Board draw up banking policies while the management team executes them.

14. Contin’d The banking regulator draws many policies and guidelines to ensure safety and protection of deposits. Banks must be supervised and regulated since they are using public's money to generate earnings for the shareholders. Negligence as well as taking excessive risk will lead to high bad debts and erodes deposits.

15. Banking business Bank is an authorized deposit-taking institution (ADI) Facilitates intermediation between savers and investors. Transfer funds from surplus units to deficit units. It manages payments and clearing systems (EFTPOS, Cards, Cheques,…) Islamic and conventional banking The prohibition of riba (interest, usury), gharar (excessive uncertainty) and haram (impermissible) activities. The implementation of profit and loss sharing (PLS) principle. The emphasis on productivity and real economic activity (rather than credit worthiness).

16. Level Responsibilities in Corporate governance Shareholders* Elect board members Board of Directors (BOD) – Appointed by the Shareholders Set overall policy and strategy, e.g. code of conduct Accountability of the senior management Senior Management – Appointed by the BOD Implement policies set by the board in a sound and responsible manner Operate day to day functioning of the bank CORPORATE STRUCTURE OF A BANK