Advanced topics in Islamic banking Essentials of Islamic Banking and Finance IRSHAD AHMAD AIJAZ irshad 786@gmail. com Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 3
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 4
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 5
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 6
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 7
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) Essentials of Islamic stocks also; Slide # 8 apply on Finance – IU Gulshan Campus,
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 9
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; Essentials of Islamic Finance – IU Gulshan Campus, Slide # 10
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); Essentials of Islamic Finance – IU Gulshan Campus, Slide # 11
Relationship of Islamic bank with other banks Regulator (SBP or SECP) Other Islamic Financial Intermediary – Bank or Insurance Co. Depositors Other Non Islamic Financial Intermediary Mudarabah Musharakah Regulator; Ameen – Islamic banks deposit money without taking any profit – CRR and SLR requirements Other Islamic Financial Intermediary Customers Many types of funding are possible; Trade, Rental and Partnership; Can not invest with this bank; May have other transaction based relation – trading of goods. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 12
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