islamic banking and culture for BBA students

this chapter used for islamic banking and culture. the students in management class may find this chapter more usefulness

1. Chapter 1 Introduction to Islamic Finance and Islamic Economics

2. Chapter 1 - Learning outcomes Define Islamic finance and explain its distinctive features. Discuss the relationship between Islam and Economics and the role of Islamic Economics in Social Welfare. Describe the evolution of Islamic finance from the early days to the modern Islamic finance and banking industry. Identify the timeline of the development of contemporary Islamic finance and banking.

3. Introduction Islam is a way of life Islamic law or Shariah law Birth of Modern Islamic Finance Discovery of oil Petro dollars Budget surpluses of GCC countries Increased demand amongst global Muslim population First experiment – Mit Ghamr, Egypt, 1963

4. Creation of Money and Conventional Finance and Banking Economic exchange – Barter Medium of exchange – livestock, grains, precious metal, coins, paper money Financial institutions – match those with surplus money with those with shortage of money Western commercial banking – Florence, 14 th Century Established by – Rich merchants, money lenders, goldsmiths

5. Definition of Islamic Finance and Banking Islamic finance – based on Shariah Law and Islamic Economics Features of Islamic Finance Religious basis Prohibition of interest Link to real assets Bank as a partner Profit and loss sharing More prudent selection Productive investment Unnecessary and excessive risk

6. Economics Economics in Ancient Times – based on faith or capitalism Interlinked economic concepts emerging in the 13 th century- Justice in economic exchange Private property Money, usury and prohibition of interest Modern economics – production, distribution and consumption of goods & services The classic economic problem Economic models – Market economy, Mixed market economy, Mixed socialist economy, Command or planned economy

7. Islamic Economics Islamic social science & Islamic economics History of Islamic economic thought includes: Hijra to AH450 (AD 1058) – Shariah rulings related to economic issues AH450 to AH850 (AD1446) – development of Islamic economics AH850 to AH1350 (AD1932) – stagnation in the intellectual thinking of Islamic economics Principles of Islamic economics Islam’s solution to the classic economic problem – wants should not be unlimited, avoid luxury and waste; increase supply by productivity

8. Islam and the Welfare Economy Property ownership in Islamic economics Zakat – compulsory charity levied on all Muslims who own a certain minimum wealth at the rate of 2.5% per lunar year Zakat is the backbone of the Islamic economic and social welfare system Sadaqah – voluntary charity Ban on Interest but not on cost of capital

9. Conventional Economics Versus Islamic Economics Factors Conventional Economics Islamic Economics Ownership of wealth and property In capitalism individuals can be the absolute owners, while in socialism society collectively is the owner. Absolute ownership is with God, Man is only the trustee. Wants and resources Wants are unlimited while resources are limited creating the scarcity problem. Wants should be limited, and sufficient resources have been provided by the Creator. Scarcity is created by improper distribution of resources, overconsumption, luxury and wastage. Accumulation of wealth Any amount of wealth can be accumulated, and the owner can use or waste it as they please.   Individuals can accumulate wealth, if this is done in a Shariah compliant manner. Though owner needs to share this wealth with the less privileged in society through the compulsory Zakat and voluntary Sadaqah. Islam says produce more than needed and consume only what is needed. Market economy Market economy is the main determinant in capitalism, while in socialism demand and supply are not linked to prices since supply is decided centrally. Market economy applies, demand and supply determine prices, though all this needs to be done within a framework of social wellbeing. Role of the state In capitalism, markets play a more dominant role than the state, while in socialism, state plays a dominant role. State ensures ethical activities, protects individual’s and society’s interest and ensures efficient allocation of resources. Law of inheritance Individuals can pass on their wealth and property to anyone they please. Islam has specific inheritance law and does not allow giving away more than one third of one’s assets to anyone besides the legitimate heirs. Thus, ensuring fairness in the process of transfer of wealth and property. Economic cycles Economic cycles show significant ups and downs. These ups and downs are reduced in Islamic economics through the moderation in consumption, avoidance of luxury, wastage and unnecessary debts. Reward for capital Interest is accepted as the reward for capital. Interest is completely forbidden, and an alternative profit and loss sharing mechanism is applied as reward for capital. Social welfare In capitalism, this is achieved by free market and self-interest drive; while in socialism state achieves this by centralized production and distribution. Islam encourages productivity at the individual level but through the moral requirements of sharing of ones’ wealth aims to create social welfare.

10. Evolution of Islamic Finance Early Days began with the birth of Islam in the 7 th Century continued during the time of the Prophet and his companions up to early 11 th century while Islamic civilization grew evidenced in Prophet’s role as an agent, in Islamic trade and business contracts, in shipping especially in the Indian Ocean and in Islamic mercantile law Decline – with fall of Ottomans, colonisation in the Muslim world, Shariah and Islamic financial tools went into disuse and Shariah restrictions got blurred

11. Birth of Modern Islamic Finance Re-emergence in mid 20 th century Institutional developments Mit Ghamr experiment Tabung Haji Islamic Development Bank Dubai Islamic Bank Rapid growth of the Islamic finance and banking industry Islamic Finance and Banking in Muslim Communities and Countries in non-Muslim countries

12. Current Status of Modern Islamic Finance and Banking Industry Countries with Islamic finance & banking presence Islamic finance and banking institutions globally Muslim population Asset size and growth rate of the industry Presence in affluent GCC region Shift of economic power to Asia Presence in the UK

13. Timeline of Development of Contemporary Islamic Finance and Banking 1890s Commercial banking in the Muslim World 1900 -1950 Discussions on Prohibition of Riba 1951 -1962 Designing of interest free banking 1963 – 1975 Founding Period Mit-Ghamr Savings Association, Tabung Haji or Pilgrims Fund Corporation, Few books published. 1972 Nasr Social Bank and 3 rd Conference of Foreign Ministers of Islamic Countries Philippines Amanah Bank 1975 – 1990 Formative Period

14. Timeline of Development of Contemporary Islamic Finance and Banking 1975 The Islamic Development Bank IDB and Dubai Islamic Bank 1976 First International Conference on Islamic Economics 1977 Kuwait Finance House, Bahrain Islamic Bank, Faisal Islamic Bank of Sudan and Faisal Islamic Bank of Egypt Jordan Islamic Bank, Centre for Research in Islamic Economics, Islamic Finance House, Luxembourg 1979 First Takaful Company Pakistan legislature Islamic Research and Training Institute, Dar Al-Maal Al-Islami Trust Sudan banking reforms, Bank Islam Malaysia Berhad, Bank Islami Bangladesh Iran establishes interest-free banking

15. Timeline of Development of Contemporary Islamic Finance and Banking Al Rajhi of KSA 1990 – now Developmental Period 1990 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established in Bahrain. 1991 Bank Muamalat Indonesia 1990s Global Expansion 2000s Entry of Large Conventional Banks and Several International Islamic regulatory bodies 2002 UK and Singapore Governments extend support 2004 Islamic bank of Britain 2006 Dubai Financial Market