Outline of Presentation • Introduction and Brief Perspective of Islamic Banking • Islamic Banking Products World Wide • Mechanism of Islamic Banking • Mode of Financing in Islam ( Musharakah & Modarabah ) • Bai ( Buying & Selling ) • Takaful • Product of Takaful Presented by : Zubair Mughal CEO – AlHuda : Centre of Islamic Banking & Economics Regional Head – Takaful Pakistan Limited.
Year 2001 2002 2003 2004 - 05 2006 - 07 2 3 4 10 18 • Meezan Bank (100) • Al Baraka (18) • MCB (8) • Alfalah(32) • SCB (8) • Bank AlHabib(4 ) • HMB(4) • Bank of Khyber(17) • Soneri Bank ( 4) • HBL(1) • Bank Islami(36) • DIB (17) • EGIBL (10) • Dawood(5) • NBP(3) • ABN AMRO (3) • Askari(14) • UBL (5) • Meezan Bank • Al Baraka • Meezan Bank • Al Baraka • MCB • Meezan Bank • Al Baraka • MCB • Alfalah • Meezan Bank • Al Baraka • MCB • Alfalah • SCB • Bank AlHabib • Habib AG Zur. • Metropolitan • Bank of Khyber • Soneri Bank Industry Progress in Pakistan • Currently there are 6 full fledged Islamic Banks, while • 6 Full fledge Banks having 186 and 12 Conventional Banks have 103 SAIBBS • Total IB Branches = 289
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 300+ Financial Institutions around the world .
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
International Overview Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as: • Standard Chartered Bank • Citibank • HSBC • ABN AMRO • UBS
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
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
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.
Important Elements of Islamic Economics • Bai ( Sale & Purchase ) • Ijarah ( Islamic Leasing ) • Basic Mode of Financing ( Musharkah & Modarabah) • Takaful ( Islamic Insurance ) • Sukuk ( Islamic Bonds ) • Qard • Zakat & Ushar
PRODUCT TREE Islamic Modes Partnership Based Modes Trade Based Modes Rental Based Modes • Musharaka • Mudaraba • Murabaha • Musawama • Salam • Istisna • Ijarah • Diminishing Musharaka
Musharakah • 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
MUSHARAKAH 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
Mudarabah • 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
MUDARABAH PROFIT 60 % 40 % VENTURE SERVICES CAPITAL RABBUL MAL MUDARIB ALL MONETORY LOSS LOSS OF SERVICES LOSS
Bai (Buying & Selling) Bai Buying & Selling
Basic Rules of Bai • Existence of Product/Commodity • Ownership of Product/Commodity • Possession of Product/Commodity • Unconditional basis • Product have value/Price.
Basic Rules of Bai • 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.
Kinds of Bai • Bai Musawamah • Bai Murabaha • Bai Surf • Bai Salam • Bai Istisna’ • Bai Urboon
Basic Kinds of Bai • Bai Eenna • Bai Touliya • Bai Wadhia • Bai Tawaruq
Type of Bai according to Quality • Bai Salah • Bai Fasid • Bai Batil • Bai Maqoof • Bai Majool • Bai Muqayaddah • Bai Mu’ajal
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
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.
Why Insurance ? Is Some thing wrong with Concept ? • Risk Aversion • Assuring others • Risk sharing
From the Holly Quran • The need for insurance is shown in the following verse of The Quran. “ Those of you who die and leave widows should bequeath for their widows a year’s maintenance and residence” (2.240)
From the Hadiths • By Anas-bin-Malik, One day Prophet Muhammad(PBUH) notced a bedouin leaving his Camel without tying it. He asked the bedouin, “Why don’t you tie down your camel”? The Bedouin answered, “ I put my trust in Allah (SWT)”. The Prophet (PBUH) then said,” Tie your camel first, then put your trust in Allah(SWT)” <Tirmidhi>
What wrong with practice ? The contract between the insurer & the insured is technically wrong from the sharia perspective because of • Gharar (Uncertainty)) • Gambling (Qamar & Maisir) • Interest (Riba)
Riba in Insurance • Direct Riba Excess on one side in case of exchange between the amount of premium. • Indirect Riba The interest earned on interest based investments
Gharar • Lexically it means uncertainty and technically it means the uncertainty of the counteract or the subject matter.
Different Models of Takaful • Pure Mudarabah Model : The participants and operator enter into modarabah Contract. • Wakalah Model : An Agency Agreement is made between participants and Operators on the basis of Wakalah ( Agency agreements) • Wakalah Based on Waqf Model : The participant's donate the fund and operator charge an agency fee.
Wakala-Waqf Model Share Holder S H A R E H O L D E R S’ F U N D (S.H.F.) Wakalah Fee Investment Income 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.)
Shariah Compliance • Shariah compliance is an essential element in Takaful . • It is ensured through a Shariah Supervisory/ Advisory Board at the level of each Takaful company. • The role of the Shariah Board is vital in meeting the specific demand of a public who would not insure otherwise.
General Takaful Types • General Takaful – offers all kinds of non-life risk coverage. It is normally divided into following classes: • Property Takaful • Marine Takaful • Motor Takaful • Miscellaneous Takaful
Types of Family Takaful • Term Life Takaful • Whole Life Takaful • Endowment Takaful • Universal Takaful • Marriage Plan • Education Plan
BANCATAKAFUL • Background • Range of Products • Savings → Personal Accident, Homeowners’ Comprehensive, Credit Cards, etc. • Financing, Individuals → Car Ijarah, Housing Musharika, Mortgage Takaful. • Financing, SMEs → Trade Credit Takaful, Business, Office, Equipment, Assets. • E-Commerce
BANCATAKAFUL (…Cont’d.) Advantages of BancaTakaful: • Facilitation Desk / Equipment. • Fast Turnaround Time. • One-Stop shop for Clients. • Concept of Islamic Financial Supermarket. • Value Added Services. • Law of Large Numbers. • Lower Contribution Rates. • Attraction for Depositors.
ReTakaful • Currently few ReTakaful companies worldwide offering a relatively small capacity: • Sudan (1979) National Reinsurance. • Sudan (1983) Sheikhan Takaful Company. • Bahamas (1983) Saudi Islamic Takaful and ReTakaful Company. • Bahrain/Saudi Arabia (1985) Islamic Insurance and Reinsurance Company. • Tunisia (1985) B.E.S.T. Re • Malaysia (1997) ASEAN ReTakaful International. • Dubai (2005) TakafulRe by ARIG. • Lloyds of London to have a ReTakaful Syndicate in 2007.
Takaful Pioneers • Takaful started some 27 years ago in the Middle East with the launching of two companies: • The Islamic Arab Insurance Co. (IAIC) in the UAE and • The Islamic Insurance Co. of Sudan • But it took some time for the movement to take shape.
Takaful Pioneers • Later in 1984, Malaysia played a pioneering role in setting the first Legal framework specific to Takaful (Takaful Act). • This was instrumental in the successful launching of the Takaful movement in Malaysia and in other countries of South East Asia.
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.
Takaful Premium • Takaful is one of the fastest growing segments in insurance (at around 20% pa. on average) • World Takaful contributions are conservatively estimated at around US$ 3billions, of which: • 60% General Takaful • 40% Family Takaful
Takaful Geographical Spread • South& East Asia : 56% • Middle East : 36% • Africa: 7% • Europe, USA & Others: 1%