BANKING AND FINANCIAL MARKETS- Week 1 (22 October 2022).pptx

BANKING AND FINANCIAL MARKETS- Week 1 (22 October 2022).pptx

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  BANKING AND FINANCIAL MARKETS DRAKHTARZAITE ABDUL AZIZ 22 OCTOBER 2022
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  OUTLINES Week 1 • Introductionto Banking and Financial Market • Functions of Islamic Banking • Underlying Principles Week 2 • Islamic Deposits and Investment Accounts • Islamic Financing Products
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  …OUTLINES Week 4 • Introductionto Financial Markets • Types and Functions • Underlying Principles • Islamic Equity Market • Islamic Debt Market (Sukuk)
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  Islamic Financial Services Islamic Banking Islamic Financial (Capital) Market Takaful Financing Deposit& Investment Equity Sukuk Takaful Retakaful ISLAMIC FINANCE: THE BIG PICTURE Funds & Unit Trust REITs Derivatives Private Equity & Venture Capital 4
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  • Banking andFinancial system- facilitate intermediation between savers and investors. Investors used funds to invest in productive businesses – add to the wealth of the economy. • Ensure flow of fund from surplus unit (SU) to the deficit unit (DU) –household, business firms and government • Mobilize fund from SU through deposits products- channel fund to the DU through financing products What is Banking and Finance?
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  …background Deposits Banks and Financial Institution Financing
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  o Islamic BankingAct 1983: “An Islamic banking business means banking business whose aims and operations do not involve any element which is not approved by the religion of Islam” o Definition by General Secretariat of OIC: “An Islamic Bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Shariah and to the banning of the receipt and payment of interest on any of its operation” Background: Def of IBF
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  …Background Shariah Parameters ofIBF Dzulm, Qimar… Riba Gharar
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  Conventional vs Islamic– Comparison • Business framework. While Islamic finance functions and operates based on Shariah principles, conventional financing is secular in nature and free from any religious principles. • Prohibition of Riba. Riba or interest taking or charging is strictly prohibited in Islamic financing; while in conventional system interest is the backbone for all banking transactions whether in deposit or financing products.
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  Conventional vs Islamic– Comparison • Equity financing and risk sharing. • Customer relation. Partners or the investors vs creditors and debtors. • Penalty on default. • Restrictions in business areas. • Islamic Finance instruments are based on innovations and potential number of products are unlimited. Rule of original permissibility.
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  MAIN FEATURES OFISLAMIC BANKING & FINANCE • Riba-free: money does nor create money – need trade/real economic activities • Gharar-free: contractual uncertainties must be avoided • No trading/investment in prohibited commodities – e.g. liquor, pork • Main contractual relationship is not lender-borrower – but trading, leasing or partner relationship • Trade profit or profit & loss sharing; not premium/interest imposed on principal loan/deposit 11
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  RIBA • Riba –prohibited in many Quranic verses and sayings of the Prophet s.a.w. • Meaning: riba is every excess in return of which no reward or equivalent counter value is paid, in short, every unjust enrichment is riba • In contemporary finance, riba normally occurs in: • All interest-based lending activities • Fixed return on deposits in conventional banking • Forward Forex, etc. 12
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  GHARAR • Meaning: hasa range of negative connotations, such as, uncertainty, deception, risk, hazard, ignorance etc. • If there is gharar, the contracting party/ies do not really understand the attributes / consequence of the contract • Under Islamic law, gharar is prohibited because its existence in the contract may deny the parties of equal bargaining power and they cannot make informed decisions; or if there is risks on deliverability of the object of the contract 13
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  MAIN CONTRACTUAL PRINCIPLES •General freedom of the parties to enter into contracts and make contractual terms, as long as: • the parties consented: and • they do not contravene any other Shari`ah provisions • This principle is known as freedom to contract, which is based on: • Surah al Nisa’:29, and; • Saying of Prophet: “Muslims are bound by their (contractual) stipulations except those that prohibit the permissible or permit the prohibited” 14
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  Cont’d… • Another importantcontractual principle is the binding nature of contracts once concluded: • Surah al Al Maidah(5:1) • In Islamic contracts, the certainty of performance of the contractual obligations (e.g. delivery of goods and payment of price), as well as elimination of any avoidable future disputes between the contracting parties are given high priority 15
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  KEY ISLAMIC COMMERCIALCONTRACTS Gratuitous Contracts Trading Contracts Investment Contracts Supporting Contracts Leasing Sale Bay` Bithaman Ajil (BBA) Operational Lease Financial Lease Murabahah Salam Waqf Loan Mudarabah Musharakah Kafalah Rahn Hiwalah Wadiah Wakalah Jualah Muqasah Ibra’ Gift Istisna’ etc. Forward Lease 16