Outline of Presentation n n n Introduction and

Outline of Presentation n n n Introduction and Brief Perspective of 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 – Al. Huda : Centre of Islamic Banking & Economics Regional Head – Takaful Pakistan Limited.

Industry Progress in Pakistan Year 2001 2 • Meezan Bank • Al Baraka n n n 2002 3 • Meezan Bank • Al Baraka • MCB 2003 4 • Meezan Bank • Al Baraka • MCB • Alfalah 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 2004 - 05 10 • Meezan Bank • Al Baraka • MCB • Alfalah • SCB • Bank Al. Habib • Habib AG Zur. • Metropolitan • Bank of Khyber • Soneri Bank 2006 - 07 18 • Meezan Bank (100) • Al Baraka (18) • MCB (8) • Alfalah(32) • SCB (8) • Bank Al. Habib(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)

Industry Progress in Pakistan

City - Wise Breakup

City - Wise Breakup

Industry Progress in Pakistan

Industry Progress in Pakistan

Industry Progress in Pakistan

Industry Progress in Pakistan

Islamic products and services offered by 300+ Financial Institutions around the world n. Germany: 4 13 Bank Sepah n- Dubai Islamic Bank n- Commerz nn. Bahrain: 26 Abu Dhabi Islamic Bank 9 n. Kuwait: Bank n- HSBC Amanah n. United States: 20 n- Bahrain Islamic Bank n- Kuwait Finance n- Deutsche n- Al Manzil Financial Services n- Al Baraka House n. UK: 26 n. Qatar: 4 Bank n- American Finance House n- ABC Islamic Bank n- HSBC Amanah n- Qatar Islamic Bank n- Failaka Investments n- Citi. Islamic Investment Finance n. Switzerlan n- Qatar International Islamic n- HSBC Bank d: n- Al Baraka 6 n- Ameen Housing n. Iran: 8 Pakistan: International Ltd n Cooperative n- Takafol UK Ltd 21 n- The Halal Mutual n. India: 3 n. Turkey: 7 Investment Company n. Bangladesh n- Faisal Finance n. Egypt: 12 n- J Aron & Co Ltd : 9 Institution n- Alwatany Bank of Egypt (Goldman Sachs) n. Malaysia: 49 n- Ihlas Finance n- Egyptian Saudi Finance n 2 - Pure Islamic Banks Arabia: 17 n. Sudan: 9 n. Saudi House (Bank Islam, Bank n- Al Rajhi Muamalat) n- SAMBA n. Rest - conventional n- Saudi Hollandi n. Indonesia: 4 banks n- Riyadh Bank . n- n. UAE: n. Yemen: 5

International Overview n The size of Islamic Financial Industry has reached US$ 300 Bln. and its growing annually @ 15% per anum. n 51 countries have Islamic Banking Institutions n 27 Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia, Brunei and Pakistan n 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 n 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 n 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 n Governments of Bahrain , Malaysia and now Pakistan have issued Islamic Bonds (Sukuk) in order to facilitate Islamic Banks in managing their liquidity. n Issuance of these bonds has also paved the way for Shariah compliant Government borrowings

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

Islamic Banking

Important Elements of Islamic Economics n n n n 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 §Musharaka §Mudaraba Trade Based Modes §Murabaha §Musawama §Salam §Istisna Rental Based Modes §Ijarah §Diminishing Musharaka

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

Mudarabah n n 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 % SERVICES CAPITAL RABBUL MAL VENTURE ALL MONETORY LOSS MUDARIB LOSS OF SERVICES LOSS

Bai (Buying & Selling) Bai Buying & Selling

Basic Rules of Bai n Existence of Product/Commodity n Ownership of Product/Commodity n Possession of Product/Commodity Unconditional basis n Product have value/Price. n

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

Kinds of Bai n n n Bai Bai Bai Musawamah Murabaha Surf Salam Istisna’ Urboon

Basic Kinds of Bai n n Bai Bai Eenna Touliya Wadhia Tawaruq

Type of Bai according to Quality n n n n Bai Bai Salah Fasid Batil Maqoof Majool Muqayaddah 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 ? n n n 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) n

From the Hadiths n 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)”

What wrong with practice ? The contract between the insurer & the insured is technically wrong from the sharia perspective because of n Gharar (Uncertainty)) n Gambling (Qamar & Maisir) n Interest (Riba)

Riba in Insurance n Direct Riba Excess on one side in case of exchange between the amount of premium. n Indirect Riba The interest earned on interest based investments

Gharar n Lexically it means uncertainty and technically it means the uncertainty of the counteract or the subject matter.

Different Models of Takaful n n n 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 Share Holder Wakalah Fee H O L D E R S’ Investmen t Income F U N D (S. H. F. ) Mudarib’s Share of PTF’s Investment Income Management Expense of the Company Profit/Loss Takaful Operator Investment by the Company WAQF Participant Operational Cost of Takaful / Re. Takaful Investment Income Claims & Reserves Surplus (Balance) 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 n n n 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 n General Takaful – offers all kinds of non-life risk coverage. It is normally divided into following classes: n n Property Takaful Marine Takaful Motor Takaful Miscellaneous Takaful

Types of Family Takaful n Term Life Takaful n Whole Life Takaful n Endowment Takaful n Universal Takaful n n Marriage Plan Education Plan

BANCATAKAFUL n n Background Range of Products n Savings → Personal Accident, Homeowners’ Comprehensive, Credit Cards, etc. n Financing, Individuals → Car Ijarah, Housing Musharika, Mortgage Takaful. n Financing, SMEs → Trade Credit Takaful, Business, Office, Equipment, Assets. n E-Commerce

BANCATAKAFUL (…Cont’d. ) Advantages of Banca. Takaful: n Facilitation Desk / Equipment. n Fast Turnaround Time. n One-Stop shop for Clients. n Concept of Islamic Financial Supermarket. n Value Added Services. n Law of Large Numbers. n Lower Contribution Rates. n Attraction for Depositors.

Re. Takaful n Currently few Re. Takaful companies worldwide offering a relatively small capacity: n n n n Sudan (1979) National Reinsurance. Sudan (1983) Sheikhan Takaful Company. Bahamas (1983) Saudi Islamic Takaful and Re. Takaful Company. Bahrain/Saudi Arabia (1985) Islamic Insurance and Reinsurance Company. Tunisia (1985) B. E. S. T. Re Malaysia (1997) ASEAN Re. Takaful International. Dubai (2005) Takaful. Re by ARIG. Lloyds of London to have a Re. Takaful Syndicate in 2007.

Takaful Pioneers n Takaful started some 27 years ago in the Middle East with the launching of two companies: n n n 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 n n 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 n n n 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 n n 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$ 3 billions, of which: n n 60% General Takaful 40% Family Takaful

Takaful Geographical Spread n n South& East Asia : Middle East : Africa: Europe, USA & Others: 56% 36% 7% 1%

TAKAFUL - TARGET MARKET n n n People who do not insure due to religious reasons. People who insure and are insensitive to religious reasons. People who currently do not insure at all.

Main Markets n n n n Malaysia Indonesia Iran GCC countries Other Arab countries Other Asia Pacific Pakistan ( Emerging Market )

Challenges n n Business Model Dilemma Could create an uneven / unfair business environment to operate Need to reach a consensus internationally on a common and standard Takaful business model Poor Insurance penetration in the Muslim countries (<1% of GDP).

Takaful Best Practices n Regional Takaful institutions and organisations need to come together internationally in order to promote and standardise best practices within the industry: n n Islamic Financial Services Board (IFSB) ASEAN Takaful Group (ATG) International Takaful Association (ITA) Accounting and Auditing Organization of Islamic Financial institutions (AAOIFI)

Growth Outlook n n World Muslim population is estimated at 1. 5 billions, of which around 97% are based in Asia and Africa. A two-digit growth in the range of 15% to 20% can be reasonably sustained for at least the next 10 years in the existing markets (Far and Middle East).

Takaful Prospects in Pakistan n n 97% Muslim population. Demand for insurance increasing with increase in per capita income. Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other conventional classes. Islamic banking on sound footing with support of the Govt.

. Takaful Products Partnership Based Modes §Musharaka §Mudaraba Trade Based Modes §Murabaha §Musawama §Salam §Istisna Rental Based Modes §Ijarah §Diminishing Musharaka

Thank You.