oman | wednesday, 13 january 2016 finance (13... · arsalan tariq buriro [email protected]...
TRANSCRIPT
Oman | Wednesday, 13th January 2016
Mr. Arsalan Tariq Buriro, Senior Associate
Banking and Finance
2Islamic Finance
Banking and Its Importance
● Banking is a very important sector of the modern day economy.
● It provides an opportunity to the household with surplus capital to select the best mix of investments in terms of return and tenors & security.
● It provides an opportunity to businesses and Governments to finance their activities through obtaining surplus funds.
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Issues in Banking
● Lending money and getting it back with compounding interest is the fundamental function of the conventional banks.
● Functions and operating modes of conventional banking are based on fully man made principles.
● The investor is assured of a predetermined rate of interest.
● It aims at maximizing profit without any restriction.
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Islamic Finance
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What is Islamic Finance
Islamic Finance means doing banking and finance transactions in accordance with Shariah Principles. No banking or financial institution can be called an Islamic bank or an Islamic financial institution if it does not adhere to or is not governed by the Shariah Principles.
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Islamic Banking In Oman
● Islamic Banking in Oman is governed by the Islamic BankingRegulatory Framework issued by the Central Bank of Oman.
● Islamic Banking Regulatory Framework provides for the rulesregulating the operations of Islamic banks and Islamic windowsoperating in Oman.
● In Particular one should note that Islamic Banking RegulatoryFramework prohibits Tawarruq transactions in Oman which areallowed in other jurisdictions e.g Malaysia and UAE. Tawaruk or ascommonly known as Commodity Murabaha is seen to have an elementof riba by some scholars and hence have been termed as unislamic.
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What are the key Principles of Islamic Finance
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Riba – Interest
Definition:
● The word “Riba” means excess, increase or addition which correctlyinterpreted according to Shariah terminology implies any excesscompensation without due consideration.
Some examples of transaction having an element of "Riba"
● Advancing a term loan with an increase over and above the principleamount and thereby earning interest which is Riba.
● Periodic payment of increase, principle payment at maturity or reschedulingwith new increase is other form of Riba transaction.
● Allowing additional time against additional amount in deferred paymentsale is another form of Riba transaction.
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Why Riba is Haram?
An Example:
"All that we had borrowed up to 1985 or 1986 was around $5
billion and we have paid about $16 billion yet we are still being
told that we owe about $28 billion. That $28 billion came about
because of the injustice in the foreign creditors' interest rates. If
you ask me what is the worst thing in the world, I will say it is
compound interest.“
President of Nigeria, G8 summit, Okinawa, 2000
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Gharar
● Lexical Meaning: Lexically it means delusion, risk or uncertainty. Ambiguous situationwhich has chance of non agreement or dispute upon disclosure of details.
Examples of Gharrar transaction:
Sale of Fish which is still in the Sea, Sale of Unborn Animals or Sale ofBirds in the Air.
● Maisir / Qimar (Gambling):
Gambling has been strictly prohibited due to the inherent element ofuncertainty and chance.
Prize bonds and lotteries are modern day examples that fall under the categoryof Qimar.
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Prohibited Sales
Incompetency of the parties involved
Incorrect form
Sale of something non-existing or weak existence
Sale of something which is not deliverable easily
Sale of debt to someone other than the debtor
Sale with Jahalah (subject matter or price or time is unknown)
Sale with two different prices
Contingent & future sale
Sale before taking possession
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Prohibited Sales
Sale with Haram money or consideration
Hording (sale containing harm to the society)
Sale of Haram or Najis subject matter
Sale of grabs to the producer of wine
Sale with wrong condition
Combining sale with loan
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What distinguishes Islamic Banking from Conventional Banking
• Transactions are mostly asset-based (Shariah Compliant).
• It is socially-responsible banking because it operates under Shariahrestrictions.
• Does not permit financing of prohibited goods / Industries.
• It starves evil out of the society.
• Ethics and moral values play a major role in investment decisions. Not achoice but a must.
• Unlike the principles of conventional banking and finance that look only at atransaction from its economic and financial perspective, the tenets of Islamicbanking and finance require further inquiry to ensure each transaction passesthe litmus test of morality, social well-being, and religious adherence orcompliance.
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What distinguishes Islamic Banking from Conventional Banking
Conventional Banking
Conventional banking prices money.
Is based on fixed return on both Sides of the balance sheet.
Islamic Banking
Islamic banking prices goods and services which creates real wealth in the society leading to economic well-being.
Is based on profit & loss sharing on deposits side, and on profit & loss sharing or profit on assets side.
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What distinguishes Islamic Banking from Conventional Banking
Conventional Banking
Does not involve itself in trade and business.
Depositors get a fixed rate regardless of the bank’s profitability, thus insulating them from the bank’s true performance.
Islamic Banking
Actively participates in trade and production.
Profit is shared with the depositors, higher the bank’s profit, higher the depositors income.
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What are the main types of Islamic finance instruments/vehicles (i.e., Murabaha, Sukuk, etc.)?
The following are some of the common and major types of Islamic banking products offered to various customers.
• Mudaraba (direct equity participation)
• Musharaka (partnerships/joint ventures)
• Murabaha (cost plus profit mark-up)
• Ijarah (leasing)
• Sukuk (islamic bonds)
• Istisna& Salam (long & short term project financing)
• Wakala
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Mudaraba Contract : -مضاربة
• It is an investment contract in which one party (Rab ul-Mal - المال رب )contributes capital while the other party (Mudarib ( - مضارب makesefforts for generation of profit.
• It is a contract in which the capital is provided by the depositor/fundprovider and the bank acts as Mudarib.
• The profit is shared in pre-agreed ratio and loss (if any) unless causedby negligence or violation of terms of the contract by the Mudarib, isborne by the depositor.
• Islamic banks use Mudaraba as the vehicle of offering savingsaccounts to its customers.
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Madarabah in Practice
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Musharaka مشاركة- :• Musharaka means commingling by two or more persons either their
money or work to earn a profit or appreciation in value and to share theprofit and loss.
• In case of a loss it shall only be shared according to the partnersproportionate share in the Musharaka.
• The profit can be shared in any ratio if the partners are active/workingpartners.
• However, a sleeping partner cannot have a profit sharing ratio higherthan his proportionate share of investment.
• The most common form of Musharaka being used by the financialinstitutions is Diminishing Musharaka: it is a form of partnership inwhich one of the partners promises to buy the equity share of the otherpartner in a Musharaka Asset, gradually until the title to the MusharakaAsset is completely transferred to the other Partner and untill such timethe Partner using the asset pays the rent on financial institutions share inthe Musharaka Asset.
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Musharaka in Practice
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Murabaha : -مرابحة
• It is a sale contract in which a seller sells his goods/asset at cost plusan agreed profit.
• The sale price could be paid on spot or deferred to be paid in lumpsum or in installments.
• In Islamic banking, normally the goods/asset is purchased after acustomer requests the bank to purchase the goods/asset in order tosell the same to the customer on Murabaha (cost plus profit) basis ondeferred payment.
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Murabaha is Practice
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Ijara -اجارة • Ijara is leasing of a property under which a specified permissible benefit, in
the form of a usufruct, is obtained for a specified period in return for a rentalpayment.
• Ijara Muntahiya Bit Tamleek –بالتمليك منتهية اجارة
• Islamic banks more commonly use Ijara MBT, Ijara MBT is a lease thatincludes a promise from the lessor to transfer the asset to the lessee.
• The asset be transafered at the end of the lease term or by stages during theterm of the contract.
• The asset can be transferred by way of gift or sale for an agreed price.
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Ijara in Practice
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SUKUK: صكو• An Islamic investment instrument that is asset-backed, structured in
accordance with Shariah, and registered in the name of the holders(Sukuk holders).
• A Sukuk certificate is proof of partial ownership or beneficial interestin an asset or enterprise. (It is always linked with an underlying asset(tangible or intangible).
• Sukuk can be either bought from the issuer (primary market) or fromits holders (secondary market), either directly or via intermediaries(brokers).
• Sukuk funds are raised based on the value of the underlying asset.
• Any increase /decrease in the value of the underlying asset would bereflected in the value of the Sukuk.
• The RETURN on Sukuk is directly proportionate to the performanceof the underlying asset/project.
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Sukuk in Practice
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Istisna’ سالم : and Salam : -استصناع • ISTISNA
Istisna is an advance sale of a specific commodity not yet manufacturedconstructed/processed. Although the buyer may make progress payments,no advance payment is required. An Istisna is only valid if 1) the price is fixedwith the consent of both parties, and 2) the to-be-manufacturedcommodity’s specifications are fully agreed upon by both buyer andseller/manufacturer.
• SALAM
Salam is an advance sale of specific goods which are to be supplied at a laterdate and for which advanced payment is required. In contrast to a Murabahasale where goods are delivered and payment is deferred at a price higher thanthe spot price, in a Salam transaction, the agreed-upon price is paid in full inadvance, and the delivery of the goods is deferred.
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Istisna and Salam in Practice
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Wakala: الوكالة
Wakalah is a contract whereby the principal, appoints the agent, to substitute himor perform on behalf of the principal. The principal is called “Aseel/Muwakkil”and the agent is called “Wakeel”.
● The profit/loss earned/sustained is solely of the principal and the agent maytake a fixed remuneration against its services.
● Wakala is commonly used by the Islamic bank for inter bank lending
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Wakala in Practice
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Thank you
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