introduction to banking

By: Jawaid IqbalRajab 8, 1429 Saturday July 12, 2008

Al- Sadiq (A.S) Institute of Islamic Banking, Finance & Takaful

Classification of businesses by activity

Manufacturing Business

Merchandising Business

Service Business

Classification of businesses by formation

Sole Proprietorship

Partnership

Company (Private/Public)

Bottom Line / Equation

Assets = Liabilities + Capital

The name bank derives from the Italian word banco "desk/bench“.

In Italy, Florentines bankers, used to make their transactions above a desk covered by a green tablecloth.

(Source: http://en.wikipedia.org/wiki/Bank)

Definition

A banker or bank is a financial institutionwhose primary activity is to act as a payment agent for customers, and to borrow and lend money.

Bank as a payment agent

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers„ accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, and ATM.

Bank as a borrower

Banks borrow money by accepting funds deposited on current and savings accounts, accepting term deposits and by issuing debt securities such as bonds i.e. TFC‟s.

Bank as a lender

Banks lend money by making advances to customers on current account, by making installment loans, and by investing in marketable debt securities and other forms of lending.

Other Functions

Provide safe custody – Lockers

Issue letter of credits, guarantees

Issue demand drafts and pay orders

Provide foreign exchange

Provide reports on the creditworthiness of customers

New Concepts

Telephone Banking

Mobile Banking

Internet Banking

Branchless Banking

Rank Entity Score

1 Bank Of America Corporation 135,271 ($m)

2 Citigroup Inc 119,783 ($m)

3 JP Morgan Chase & Co. 115,790 ($m)

4 HSBC 114,928 ($m)

5 Mitsubishi UFJ Financial Group 81,940 ($m)

6 Royal Bank Of Scotland Group 78,730 ($m)

7 ING Groep NV 78,088 ($m)

8 Crédit Agricole 77,462 ($m)

9 Wachovia Corporation 69,716 ($m)

10 BNP Paribas 67,378 ($m)

Source: Euromoney Magazine

Conventional

Bank Client

money

money + money (interest)

Islamic

Bank ClientGoods & Services

money

• What is Islamic Banking?

• What prompted Islamic Banking?

• Islamic Finance Perspectives

“Islamic Banking is interest free Asset Backed banking governed by the principles of Islamic Shariah”

Islamic Banking distinguishes from Conventional Banking in four basic principles:

1. Interest Free Transactions.

2. Risk Sharing

3. Asset & Service Backing

4. Contractual Certainty( Gharar free contracts)

• Interest free banking?

• Profit and loss sharing?

• Ethical banking?

• Emergence of Arab nationalism and the search for identity

• Oil shocks and petrodollars (US$ 145 per barrel)

• Privatization and the individual‟s right to choose

More than 350 Islamic Banks/FI‟s in 50 countries

current market size US$ 700 billion

Estimated annual growth rate – 20% , total assets exceeding US$ 1 trillion by 2016.