Outline of Presentation

2. Outline of Presentation • International Overview of Islamic Finance. • Product Tree of Islamic Microfinance • Partnership Based Modes in Islamic Microfinance • Trade Based Modes in Islamic Microfinance • Rental Based Modes in Islamic Microfinance • MicroTakaful • MicroTakaful Products for Islamic Microfinance Institutions. Presented by : Prof. Dr. Khawaja Amjad Saeed Principal: Hailey Collage of Banking & Finance The University of Punjab. Director Research: AlHuda: Centre of Islamic Banking & Economics

3. International Overview of Islamic Finance

4. Germany:4 • - Bank Sepah • - Commerz Bank • - Deutsche Bank • Switzerland: 6 • UAE: 13 • - Dubai Islamic Bank • - Abu Dhabi Islamic Bank • - HSBC Amanah • Bahrain: 26 • - Bahrain Islamic Bank • - Al Baraka • - ABC Islamic Bank • - CitiIslamic Investment Bank • Kuwait: 9 • - Kuwait Finance House • United States: 20 • - Al Manzil Financial Services • - American Finance House • - Failaka Investments • - HSBC • - Ameen Housing Cooperative • UK: 26 • - HSBC Amanah Finance • - Al Baraka International Ltd • - Takafol UK Ltd • - The Halal Mutual Investment Company • - J Aron & Co Ltd (Goldman Sachs) • Qatar: 4 • - Qatar Islamic Bank • - Qatar International Islamic • Iran: 8 • Pakistan: 21 • India: 3 • Bangladesh:9 • Turkey: 7 • - Faisal Finance Institution • - Ihlas Finance House • Egypt: 12 • - Alwatany Bank of Egypt • - Egyptian Saudi Finance • Malaysia: 49 • 2 - Pure Islamic Banks (Bank Islam, Bank Muamalat) • Rest - conventional banks • Sudan: 9 • Saudi Arabia: 17 • - Al Rajhi • - SAMBA • - Saudi Hollandi • - Riyadh Bank • Yemen: 5 • Indonesia: 4 Islamic products and services offered by Financial Institutions around the world .

5. International Overview • The size of Islamic Financial Industry has reached US$ 300 Bln. and its growing annually @ 15% per anum. • 51 countries have Islamic Banking Institutions • 27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan • 24 non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia

6. International Overview Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as: • Standard Chartered Bank • Citibank • HSBC • ABN AMRO • UBS

7. International Overview • In Feb 1999, Dow Jones introduced the Dow Jones Islamic Market Index (DJIM) of 600 companies world wide whose business complies with Islamic Shariah laws • At present there are more than 105 Islamic Funds operational through out the world with a total fund base of over USD 3.50 billion

8. International Overview • Governments of Bahrain ,Malaysia and now Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks in managing their liquidity. • Issuance of these bonds has also paved the way for Shariah compliant Government borrowings

9. International Overview • Institutions like Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Finance Services Board (IFSB) have been formed. • These institutions are playing a key role in setting up and standardizing Shariah , Financial and Accounting standards for Islamic Financial Institutions. • Due to these collective efforts Islamic banking is now recognized by IMF, World Bank and Basel Committee.

10. Takaful Operators • The number of Takaful operators worldwide is now estimated at: • 108 Takaful companies • 6 Retakaful companies • In 35 Countries. • Average growth rate higher than conventional insurance companies (around 25%). • Non–Muslims increasingly opting for Takaful products for commercial benefits.

11. Takaful Geographical Spread • South& East Asia : 51% • Middle East : 32% • Africa: 12% • Europe, USA & Others: 5%

13. Islamic Microfinance

14. PRODUCT TREE Islamic Modes of Microfinance Partnership Based Modes Trade Based Modes Rental Based Modes • Musharaka • Mudaraba • Murabaha • Salam • Istisna • Ijarah • Diminishing Musharaka

15. Partnership Based Modes

16. MUSHARAKA • Characteristics • All parties share in the capital • All parties share profits as well as losses • Profits are distributed as per agreed ratio • Loss is borne by the parties as per capital ratio • Every partner is agent of other

17. MUSHARAKA May be in any agreed ratio PROFIT Rs. 100 Rs. 40 Rs. 60 PARTNER A PARTNER B VENTURE Rs.1000 Rs.1000 Rs. 50 Rs. 50 LOSS Rs.100 Must be according to capital ratio

18. MUSHARAKA May be in any agreed ratio PROFIT Rs. 100 Rs. 50 Rs. 50 PARTNER A PARTNER B VENTURE Rs.2000 Rs.3000 Rs. 40 Rs. 60 LOSS Rs.100 Must be according to capital ratio

19. MUDARABA • One partner (Rab al Mal) contributes capital and the other (Mudarib) contributes his skills or services to the venture • Venture may for a fixed period or purpose • Both share profit in pre-agreed ratio • Loss is borne by Rab al Mal only, Mudarib loses his services

20. MUDARABA PROFIT 50 % 50 % VENTURE SERVICES CAPITAL RABBUL MAL MUDARIB ALL MONETORY LOSS LOSS OF SERVICES LOSS

21. MUDARABA PROFIT 60 % 40 % VENTURE SERVICES CAPITAL RABBUL MAL MUDARIB ALL MONETORY LOSS LOSS OF SERVICES LOSS

22. Trade Based Modes

23. Basic Rules of Bai (Trade Base Mode ) • Existence of Product/Commodity • Ownership of Product/Commodity • Possession of Product/Commodity • Unconditional basis • Product have value/Price.

24. Basic Rules of Bai (Trade Base Mode ) • Bai on Such product which is permissible in Islam. • Product Must be Identify, clear with all demanding Qualities. • Not based on any incident, struggle etc • Price must be clearly identified.

25. Bai There are many type of Bai’s but usually following are using in Islamic Microfinance. • Murabahah • Salam • Istisna’

26. Murabahah • Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon. • The price in this sale can be both on spot and deferred.

27. Murabahah It is a contract wherein the institution, upon request by the customer, purchases a asset from the third party usually a supplier/vendor and resells the same to the customer either against immediate payment or on a deferred payment basis.

28. Murabahah • Basically, it’s not a mode of financing but a source to avoid interest Dealing • It’s not a type of loan, but a deal (Bai) • Murabahah can be used as source of financing when client needs funds to purchase any product/Machinery etc.

29. Murabahah • Product Must be bought from third party for avoid buy back transaction • Roll over is not Valid in Murabahah • If actual cost can not be identified then Murabahah deal not possible.

30. Salam • Pay 100% amount in Advance. • Product must be quantified, identified and Measured with quality. • Date of delivery, Time, Place must be mentioned clearly in advance. • Salam is not valid for a specific farm/land/garden.

31. Istisna’ • Not necessary to pay the 100% amount in advance Like Bai salam. • Price must be decided on beginning of the contract. • Qualities, features of that product must be clearly identified.

32. Rental Based Modes

33. IJARAH (LEASING) Ijarah is to offer for a consideration the usufruct of a thing of value from which benefit can be derived without consumption, while retaining the ownership of the leased assets and assuming risks pertaining thereto.

34. IJARAH (LEASING) - The leased commodity remains in the ownership of the lessor and only its usufruct is transferred to the lessee. - Any thing which cannot be used without consuming the same cannot be leased out like money, edibles, fuel, etc. - Only such assets which are owned by the lessor can be leased out except that a sub-lease is effected by the lessee with the express permission of the lessor.

35. IJARAH (LEASING) - During the entire term of the lease, the lessor must retain title to the assets, and bear all risks and rewards pertaining to ownership. - If any damage or loss is caused to the leased assets due to the fault or negligence of the lessee, the consequences thereof shall be borne by the lessee.

36. IJARAH (LEASING) - The lessee is also responsible for all risks and consequences in relation to third party liability, arising from or incidental to operation or use of the leased assets. - The insurance of the leased asset should be in the name of lessor and the cost of such insurance borne by him. - A lease can be terminated before expiry of the term of the lease but only with the mutual consent of the parties.

37. IJARAH (LEASING) - Either party can make a unilateral promise to buy/sell the assets upon expiry of the term of lease. - Alternatively, the lessor may make a promise to gift the asset to the lessee upon termination of the lease.

38. IJARAH (LEASING) - The amount of rental must be agreed in advance - Contract of lease will be considered terminated if the leased asset ceases to give the service for which it was rented. However, if the leased asset is damaged during the period of the contract but is capable of being repaired, the contract will remain valid.

39. IJARAH (LEASING) - Late Payment Plenty - The banks can also approach competent courts for award of damages. - Also, security or collateral can be sold by the bank (purchaser) without intervention of the court.

40. Transfer of Title Transfer of Title CUSTOMER VENDOR ISLAMIC BANK Payment of Purchase Price Payment of Rental Fees Agreement . . Ijarah GENERAL MECHANICS • The Bank leases the asset to the customer • The customer makes periodic payments as per the contract • The asset title transfers to the customer based on the method disclosed in the agreement

41. MicroTakaful

42. Introduction “Takaful” is the Sharia Compliant brand name for the Islamic alternative to conventional insurance. Its based on the principle of Ta’awan or mutual assistance. It provides mutual protection and joint risk sharing in the event of a loss by one of its member

43. Origins of Takaful In the event of death caused by someone from another tribe, the member of the offender’s tribe would share the “ blood money” (Khoon Baha) to provide for the family of the victim.

44. Operating Model in Pakistan Share Holder S H A R E H O L D E R S’ F U N D (S.H.F.) Wakalah Fee Mudarib’s Share of PTF’s Investment Income Management Expense of the Company Profit/Loss Takaful Operator Investment by the Company WAQF Claims & Reserves Surplus (Balance) Operational Cost of Takaful / ReTakaful Investment Income Participant P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.)

45. . MicroTakaful Products for IMF’s Institutions Partnership Based Modes Trade Based Modes Rental Based Modes • Musharaka • Mudaraba • Murabaha • Musawama • Salam • Istisna • Ijarah • Diminishing Musharaka

46. Thank You.