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Advanced topics in Islamic banking. Essentials of Islamic Banking and Finance IRSHAD AHMAD AIJAZ irshad786@gmail.com. Contents. Treasury Operations; Capital market opearations; Money market operations; FX market operations; Stock market in Islamic finance;

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slide1

Advanced topics in Islamic banking

Essentials of Islamic Banking and Finance

IRSHAD AHMAD AIJAZ

irshad786@gmail.com

contents
Contents
  • Treasury Operations;
    • Capital market opearations;
    • Money market operations;
    • FX market operations;
  • Stock market in Islamic finance;
  • Relation of Islamic bank with banks;
  • International trade and finance and Islamic banking;
  • Interest rate benchmarking in Islamic banking;
treasury operations
Treasury Operations
  • Treasury operation are important for every financial institution;
  • Treasury is concerned about management of liquidity – cash;
  • Treasury department takes care of bank's short or long positioning;
  • Treasury operations comprise of main three functions:
    • Capital market operations;
      • Financial instruments of >1 year life are dealt under the umbrella of this market;
      • Investment in stock and bonds are done through this department;;
    • Money market operations;
      • Financial instruments of <1 year life are dealt trough this market;
      • Treasury bills and other short term arrangements are done through this market;
treasury operations1
Treasury Operations
    • FX market operations:
      • These operations belong to trade in all sorts of currencies;
      • Bank manage their requirement of foreign currencies through this department;
      • Local and international payments are made through this department;
  • These three functions of treasury departments are usually done in overlapping ways;
  • One department may take care of other operations;
treasury operations capital market operations
Treasury Operations – capital market operations
  • Islamic banks do not deal in bonds and other fixed income securities as they are non permissible instruments;
  • Islamic banks deals in Sukuk which are Islamic bands;
  • Details will be presented by group # ;
  • All stock are not eligible for investment as many of them are of banks, insurance companies and of those companies which are not acceptable in Islam;
  • There is criteria for selection of stocks;
  • This criterion is called Stock Selection Criteria;
slide6

Treasury Operations – capital market operations

  • T bills and other ways of short term liquidity management are not acceptable to Shari'ah;
  • There is almost no any practicable alternative for Islamic money market;
  • Repo and Reverse repo are buy back arrangements;
  • Many other ways of liquidity provisioning are not Shari'ah accepted ways;
slide7

Treasury Operations – FX operations

  • Trade of currencies is a special kind of sale which has different rules;
  • According to a view of some Fuqahaa’ currencies are substitute to gold and silver and thus must be exchanged on two basis:
    • Spot basis,
      • Immediate payment of both ends;
    • Equality of both side if the exchanged currencies are same;
      • Any additional amount is not allowed;
      • More payment for new currencies is an example of it hence not allowed;
      • Different currencies could be exchanged for higher and lower price;
      • 1 $ could be exchanged with Rs. for higher price;
stock market and equity investment in islamic finance
Stock market and equity investment in Islamic finance
  • Stock market is part of capital market;
  • It deals in share of companies;
  • Stocks are classified in Shari'ah as a 'proof of undivided ownership in a partnership';
  • The stock holder is owner of the partnership up to the value the share reflects (face value, book value or market value);
  • The profit a partnership earns and distribute (dividend) or increase / decrease in value of share (capital gain / loss) both go the stock holder because of his right of ownership;
  • A stock will be Shari’ah compliant if it does not fall under the four prohibitions we studies earlier;
  • Since a stock is an undivided portion in a partnership, rules of partnership (Shirkah / Musharakah) apply on stocks also;
slide9

Stock market and equity investment in Islamic finance

  • Three major issues are there in current financial system:
    • No concept of non-Shari’ah compliance in general prohibitions;
      • Majority of corporate bodies do not discriminate between Halal or Haram activities;
    • Involvement in Riba;
      • Major part of financial system is interest-based;
      • Companies pay interest and earn it;
    • No attention to laws of contract in Islam;
      • Partnerships do not pay attention to rules set out by Shari’ah for partnerships;
slide10

Stock market and equity investment in Islamic finance

  • Now, three possible status of business activities of a firm are there:
    • Purely Haram business activities;
      • Film making, pornography, liquor making/ trading, gambling companies, conventional financing companies, banks and conventional insurance are example of this type;
      • Some scholar include unethical businesses in this type like weapon industry and tobacco companies in this category as well;
  • Purely Halal business activities;
    • Almost all manufacturing and general business activities are example of this kind;
  • Mixed business activities;
    • The companies that are involved primarily in Halal business but they have some involvement in non-Shari’ah compliant activities;
    • The structure of big companies is generally of this nature;
slide11

Stock market and equity investment in Islamic finance

  • Fatwas about these companies:
    • The first category is absolutely Haram with no ambiguity;
    • The second category is Halal completely;
    • The third category is a point of discussion;
    • Majority of companies involve in interest based activities;
    • Fuqaha have explained some flexibilities in state of need;
    • Therefore Ulema have set two criteria:
      • If a firm is leveraged (from interest bearing loans) then this should not be more than majority
      • If a firm is earning interest then this income:
        • Must not be in considerable size;
        • Must be subtracted from total income (purification process);
relationship of islamic bank with other banks

Regulator (SBP or SECP)

Other

Islamic Financial

Intermediary

Other

Non Islamic Financial

Intermediary

Other

Islamic Financial

Intermediary

Other

Islamic Financial

Intermediary

Islamic Financial

Intermediary – Bank

or Insurance Co.

Depositors

Customers

  • Mudarabah
  • Musharakah
  • Many types of funding are possible;
  • Trade, Rental and Partnership;
  • Regulator;
  • Ameen – Islamic banks deposit money without taking any profit – CRR and SLR requirements
  • Regulator;
  • Ameen – Islamic banks deposit money without taking any profit – CRR and SLR requirements
  • Can not invest with this bank;
  • May have other transaction based relation – trading of goods.
Relationship of Islamic bank with other banks