PROJECT

IBF
SUBMITTED TO:
DR. Sabeen Khurram Khan

SUBMITTED BY:
1. ABDULLAH ANJUM (SP20-BAF-005)
2. SAIM ZEIB ABBASI (SP20-BAF-081)
3. DAUD REHMAN (SP20-BAF-023)
4. ZEERAK SOHAIL (SP20-BAF-099)
Title: Where Islamic bank Stands today.

 WHAT IS ISLAMIC BANKING?

Islamic banking is a banking system that is consistent with the principles of the
Shari'ah (Islamic rulings). Shari'ah prohibits the payment or acceptance of
interest charges (riba) for the lending and accepting of money, as well as
carrying out trade and other activities. Islamic banking completely follows the
teachings of the religion Islam and cannot deviate from that which has already
been described.
 Introduction:
People are curious to learn about the processes and activities of Islamic banks,
which are often deemed as unique in the banking world. Among the banking
functions, the two most important ones are receiving deposits and making
investments. In the case of the former, people who have surplus money will
deposit it into banks; the banks have little role to play. However, the latter, i.e.,
investment, is crucial. In other words, a bank’s success largely depends on its
efficient investment operations. Therefore, to understand Islamic banks, the
performance and profitability of their investing operations should be evaluated.
Islamic banking has been defined as banking in consience of the ethics and
value system of Islam, in addition to the conventional good governance and risk
management rules, by the principles laid down by Islamic Shariah. Interest free
banking is a narrow concept denoting several banking instruments or
operations, which avoid interest. Islamic banking, the more general term is
expected not only to avoid interest-based transactions prohibited in the Islamic
Shariah, but also to avoid unethical practices and participate actively in
achieving the goals and objectives of an Islamic economy.
Over the last three decades Islamic banking and finance has developed into a
full-fledged system and discipline reportedly growing at the rate of 15 % per
annum. Today, Islamic financial institutions, in one form or the other, are
working in about 75 countries of the world
The network of Islamic banking industry in Pakistan consists of 21 Islamic
banking institutions (5 full-fledged Islamic banks and 16 conventional banks
having standalone Islamic banking branches) with a network of 2,589 branches
spread across the country. Bahrain has the largest concentration of Islamic
financial institutions in the Middle East region and is hosting 26 Islamic
financial institutions dealing in diversified activities.
  The functions of Islamic Banks:
The functions of Islamic banks may be like those of conventional banks with
some exceptions regarding general banking principles, mainly accepting
deposits from depositors and the operating functions of customers as agents.
Moreover, finance (i.e., advances and loans) can be used to carry out business
regarding various purposes not in the relationship between lenders and
borrowers but like that of partnership or modaraba. It can also extend its
function to the foreign exchange business in the same manner. Based on Islamic
principle, the functions are to be carried out by Islamic banks in accordance
with Islamic jurisprudence

 Products offered by Islamic Banks

Following are the products offered by Islamic Banks

1. Deposit products:

2. Investment products

3. Financing products

4. Insurance products

1. DEPOSIT

 Wadiah (safekeeping)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits

funds in the bank and the bank guarantees refund of the entire amount of the
deposit, or any part of the outstanding amount, when the depositor demands it.
The bank cannot overcharge or take any kind of payment for this activity. This
is just for depository purposes.

 Hibah
It is a gift given to the depositors by the bank for placing their trust on them in
keeping their monetory items safe.

2. Investment
  Murabahah
Refers to the sale of goods at a price, including a profit margin agreed to by
both parties, and clearly stated in the sale agreement/contract.

The bank cannot charge additional profit on late payments. However, the asset
remains as a mortgage with the bank until the default is settled.

 Mudarabah ( Profit sharing)

Is a contract, with one party providing the capital needed while the other party
is providing its specialized knowledge to invest the capital and manage the
investment project. One is called a “Mudarib” and the other is called “Rab-ul-
Maal”

Profits and losses are shared between the parties according to a pre agreed ratio.
The profit is usually shared 50%-50% or 60%-40% for rabb-ul-mal but can
vary.

 Wakalah (power of allorney)

This occurs when a person appoints a representative (usually from an agency) to

undertake transactions on his/her behalf, similar to a power of attorney.

Power/ Letter of allorney is a written authorization to represent or act on

another's behalf in private affairs, business, or some other legal matter,
sometimes against the wishes of the other.

 Musawamah

It is the negotiation of a selling price between two parties without reference by

the seller to either costs or asking price. While the seller may or may not have
full knowledge of the cost of the item being negotiated, they are under no
obligation to reveal these costs as part of the negotiation process.

 Sukuk

It refers to the Islamic equivalent of bonds. Sukuk securities are structured to

comply with the Islamic law and its investment principles, which prohibits the
charging interest. This is generally done by involving a tangible asset in the
investment, such as by giving partial ownership of a property built by the
investment company to the bond owner. The bond owner is then able to collect
his profit as a rent, which is allowed under Islamic law.

3. FINANCING

 Musharakah (joint venture)

It is a relationship between two parties or more that contribute capital to a

business and divide the net profit and loss.

The profit is distributed among the partners in pre-agreed ratios.The loss is

supported strictly in proportion to capital contributions.

 Ijarah (lease or rent)

It refers transferring the right of use of an item. Under this concept, the Bank
makes available to the customer the use of service of assets / equipment such as
plant, office automation, motor vehicle for a fixed period and price. The leasee
then has to pay an already specified amount under the contract in periods of
time

 Oard hassan (good loan)

It is a loan extended on a goodwill basis, with the debtor only required to repay
the amount borrowed. However, the debtor may, pay an extra amount beyond
the principal amount of the loan (without promising it) as a token of
appreciation to the creditor.

 Bai Salam

Is a contract in which the seller (bank) supplies a specific good to the buyer at a
future date in exchange of an advance price fully paid at the time of
contract.The quality of the good should be described before the payment by the
seller and all of its problems (if any) be explained.

4. INSURANCE

 Takaful

Takaful is based on the idea that what is uncertain to an individual may cease to
be uncertain to a very large number of similar individuals. It's a type of
Insurance where members contribute money into a pooling system in order to
guarantee each other against loss or damage.

Evaluation of performance by Islamic bank

Therefore, to understand Islamic banks, their performance and profitability their
investment operations should be evaluated. In other words, a bank’s success
largely depends on its efficient investment operations
Today the growth of Islamic banking industry cannot be denied. The assets of
Islamic banks (IB) have been growing at 17.6% annually across the world since
2009 (World Islamic Banking Competitive Report 2014-2015). The
fundamental reason behind this fast growth is Shariah (Islamic law) based
banking. Unlike Conventional banks (CB), IB follow rules derived from the
Quran and Sunnah (explanation and actions of the Prophet Muhammad
P.B.U.H.).
Islamic banking has proved over time that it is based on firm and sound
economic principles and has a good potential for become an alternative system
of banking especially in view of the global financial crises. However, there is a
need for dedicated research & steps from the government to develop a sound
legal and regulatory framework for Islamic financial industry. Attempts should
be made to modify the existing structure to provide better products and quality
service within the ambit of Islamic laws. While interest-based banking has taken
hundreds of years to mature to the level where it is today, expecting the same
maturity from Islamic banking in its nascent stage will be expecting too much.
To develop an economic system truly reflective of the sacred principles of
Islam, all stakeholders should understand the limitations at this stage and work
towards its advancement.
Challenges and future potential of Islamic bank
The banks include both commercial banks and Islamic banks that have
specialized in the performance of commercial transactions based on Islamic law
and its rules. Islamic banks have recently developed, and their ideas are derived
from the Islamic Shariah. They are based on the rejection of dealing with the
interest between the Bank and its customers in the taking and giving, and this is
dealt with in accordance with what Allah and the Noble Sunnah have revealed.
For the Bank to be Islamic, the services, operations, and areas in which the
Bank deals or finances must be entered into by the Halal Department, in
accordance with Islamic law. Thus, Islamic property depends on the source of
power in any bank and not in the board of directors or the total shareholders, but
in the owner of everything is the source of power and the law, God Almighty.
Economic changes in Islamic countries have led to increased reliance on market
mechanism, privatization, liberalization, and fiscal restraint. This was
accompanied by an Islamic revival that strongly pushed for the development of
Islamic financial systems. The work continues today to develop Islamic
financial instruments that are compatible with Islamic assets. In order to create
the required infrastructure for the movement of financial markets, and because
of the large growth in deposits, financial institutions are seriously looking for
investment opportunities. In contrast, banks and non-banking financial
institutions in Western countries have responded to this request and contribute
to it.
Some of the challenges that the Islamic banking industry faces today includes:
 Lack of awareness & skepticism at different levels – including investors,
bankers, regulators, researchers & customers.
 Being a new industry, a major challenge in its growth is the worldwide
shortage of trained Human Resource in Islamic banking & finance.
 Limited number of Shariah Scholars that create over-reliance and raise
questions about Shariah compliance of the institutes involved.
 Focus efforts needed for New Product Development & Research
 Solutions for Liquidity Management & creation of Islamic Inter-bank
Market
 Absence of a separate Regulatory, Legal & Risk Management framework
to cater the Specific need of Islamic banking Institutes