Thursday 24 October 2013

Global Volume of Assets under Islamic Finance crossed US $ 1,460 Billion

Islamic finance assets world-wide continued a long run of growth to reach an estimated $1.45 trillion in 2012. UKIFS’s findings show that Islamic finance has shown resilience at a time when the global economy has slowed and conventional banking in Western countries has been under pressure. By contrast global assets of Islamic finance have doubled since the start of the economic downturn. 
The UK continues to maintain its position as the leading Western provider of Islamic finance with assets of USD$19bn. The UK also benefited from a globally buoyant sukuk market in 2012, with issuance up two-thirds to USD$139bn. This was reflected in 14 new sukuk listings on the London Stock Exchange since 2012. There are now 49 sukuk bonds with a combined value of $34bn listed on the London Stock Exchange. Additionally, seven exchange traded funds and two exchange traded products are also listed on the London market.

Islamic banks hold Basel III advantage

As banks prepare for the impact of Basel III regulations, many Islamic financial institutions are finding they already exceed the requirements.
With above-average Tier 1 capital, strong customer deposits and much lower levels of leverage and trading book risks, well-managed Islamic banks will not be looking for additional capital. So, does this mean that Basel III regulations will not affect Islamic banks in the same way they will conventional banks? Bankers are not so sure.
For a start there is the issue of liquidity. Despite apparent progress towards improving Islamic liquidity through increased sukuk issuance, for instance, there remains a lack of eligible liquidity instruments and adequate central bank facilities. This gap in the market would have to be filled to make Basel III compliance possible.

Monday 21 October 2013

Comparison of Leases IAS-17 Vs. Ijarah FAS-8

1-Introduction

Islamic finance is an emerging area in financial literature. Started with establishment of Islamic development bank in 193-74, it has shown a speedy growth and momentum in first decade of 21t century. Global volume of assets under Islamic finance has crossed the figure of US $ 1,289 billion by the end of December 2011. Islamic finance has shown resilience in global melt down and recorded average annual growth of 21% from 2007 to 2011 [IFSL-2012]. and according to an estimate of Islamic development bank ……………… Islamic banking was emerged as a reaction to Haram (prohibited by Islamic law) practices in financial sector including Riba (interest & usury), Gharar (excessive risk) Myser & Qimar (game of chance) and financing for Haram (prohibited) businesses [Examples of prohibited businesses include liquor, pork, pornography, promotion of adultery etc ]. In Pakistan Islamic finance has shown marvelous overall average annual growth of above 65% from 2004-12. At present June 2013, assets of Islamic banking has reached to PKR 903 Billion, deposits PKR 771 Billions and investment & financing PKR 700 Billions with a branch network of 1,115, covering 9% of market share. Accounting discipline has a deep rooted relationship with modern banking. We see due care and concentration of experts on this area of study. At present efforts are in the way to have a global set of accounting standards to make the accounting results relevant and comparable across the globe. Being a special type of finance based upon Islamic law [obligatory following by Muslims], Islamic finance needs accounting guidelines to execute day to day transactions and determine financial rights

Saturday 19 October 2013

One Day Workshop on Islamic Banking 26/10/2013


One Day Workshop
On
Islamic Banking
Dated: October 26, 2013
Venue:
Mehboob ul Haq Executive Development Centre
FAST School of Management National University of Computer & Emerging Sciences
Islamabad

Resource Person
Muhammad Hanif Fellow CMA
Assistant Professor ACC/FIN


For Registration and Inquiry, please contact
Muhammad Ali Accounts Officer
Ph: +92 51 111 128 128 Ex 179

Deposits Management

1. Introduction

Banking is a business of intermediation between savers (depositors) and users (investors) of funds, and Islamic banking has no exception. However the nature of relationship between Islamic bank and its customers is entirely different from conventional banking. In previous chapters (2 to 8) I have discussed the nature of relationship between Islamic bank and users of funds along with financial impact and legal rights and liabilities. In this chapter I will present the mechanism of deposits management by Islamic Financial Institutions (IFIs). Like conventional banking IFIs are also offering the facility of current, savings and fixed deposits, however no risk free return is offered rather deposits are accepted either interest free loans (current deposits) or  under Musharaka and Mudaraba modes of financing.
Current deposits are accepted as loans from depositors which can be withdrawn on demand by depositors. Some of the Islamic banks are accepting these deposits as Ammanah.  If Ammanah deposits are lost without negligence of bank, making the loss of depositors good is not responsibility of the bank, hence, Ammanah deposits are not recommended to safeguard the interest of both bank and customers. Under loan current deposit scheme bank has the flexibility to use the funds and customer is protected from loss of amount in case of any miss-happening (burglary, fire, theft etc.) in any branch of bank.

Friday 18 October 2013

Islamic Banking: An Update

1. Introduction

Societies are building on the basis of certain ideologies and formation of Muslim society is based on Islamic ideology. In order to understand the institution building in any society understanding the ideology and philosophy of life (and death) is prerequisite. Muslims believe in oneness of Allah (God) the sole creator of this universe, prophet-hood (Messengers of Allah came to the world to reform the society), and Day of Judgment (everyone has to answerable for his deeds before Allah). According to religion of Islam life of every believer is regulated through the revelations (Qura’n & Sunnah). In order to extract legal order from Qura’n & Sunnah religious clerics conduct research and come up with a solution of existing problem keeping in view the objectives of Shari’a (Islamic law). Objectives of Shari’a include safety of faith (Hifz e Eimaan), life (Hifz e Jaan), wealth (Hifz e Maal), Conscious (Hifz e Aqal) and next generation (Hifz e Nasal) [Siddiqi, 2000]. While it is settled opinion of Muslim jurists that any sphere of life either directly regulated through revelations or juristic opinion by experts in Shari’a (if direct order is not found in revelations), hence, financial matters have no exception.
Capitalism is dominant economic system prevailing (complete or partial) in almost every society of the world including Muslim countries. According to capitalism factors of production include land, labor, capital and organization. Rewards for three of the production factors (i.e. land, labor and capital) are fixed while reward of entrepreneur is variable depending upon the outcome of the underlying project. Reward for three factors of production is risk free and cannot be negative however entrepreneur’s reward can be zero or even negative. Although underlying project is completed by participation of all factors of production however in case of reward, share of three of them (land, labor and capital) is fixed irrespective of outcome. If a huge profit is earned it belongs to entrepreneur (after servicing other factors of production) and if a heavy loss is suffered that also borne by entrepreneur.

Monday 14 October 2013

Economic Substence or Legal Form: An Evaluation of Islamic Finance Practice

Presented at Global Forum on Islamic Finance 2013, PC Hotel, Lahore
I-Introduction
Islamic banking was started in last quarter of 20th century and got momentum in first decade of 21st century. Global volume of assets under Islamic financial system has reached to US$ 1,289/- billion by the end of December 2011 (IFSL-2012) with above 300 institutions operating in more than 50 countries. Islamic banking was emerged as a reaction to Haram(prohibited by Islamic law) practices in financial sector including Riba (interest & usury),Gharar (excessive risk) Myser & Qimar (game of chance) and financing for Haram(prohibited) businesses [Examples of prohibited businesses include liquor, pork, pornography, promotion of adultery etc ]. In order to address these issues especially Riba (interest & usury) a modified model of banking was required. Riba is the foundation on which whole structure of modern conventional banking stands. Thus existing contracts (including overdraft, credit card, export financing, agricultural loans, short, medium and long term loans, leases and mortgages etc.) of conventional banking primarily based on Riba, was not suitable in their original form for Islamic banking. Hence, modified business contracts (between bank and customers) were introduced based on principles of Islamic financial system. Major

Differences and Similarities in Conventional and Islamic Banking

Earlier Version published in International Journal of Business and Social Sciences, USA
I. Introduction
In the second half of 20th century liberation of Muslim world from colonial powers almost completed and widespread renaissance of Islamic ideology took its path in Muslim societies whereby the masses started looking at the existing social systems through Islamic lenses and proposed modifications and developments. The Muslim thinkers and philosophers challenged the world’s ruling economic and social systems and uncovered their weaknesses. Capitalism was examined and criticized in detail due to its magnitude and general acceptability in majority of leading societies of the world.[i]
Out of the four factors of production (as described in Capitalism) reward of three is fixed and all risk is born by the entrepreneur alone. In capitalism, capital is a factor of production, hence, deserves the fixed reward in the form of interest --- a risk free reward. As the bank is dealer of money; and reward for using money is interest according to capitalist system; so the prime source of revenue and cost of funds to conventional banks is charging interest through lending and accepting deposits for interest respectively. Interest is the major driver of operations of conventional banks although other valuable services including guarantees, funds transfers, safety of wealth, facilitation in international trade etc. are also provided for reward and form substantial part of income of modern conventional banks.
As the conventional banks are established under the principles of capitalism and transect business by

Islamic House Financing: A Critical Analysis and Comparison with Conventional Mortgages

An earlier version of this Article was published in
Middle Eastern Finance & Economics
Issue 6, 2010.
Islamic House financing
A Critical Analysis and Comparison with Conventional Mortgage


Abstract
Housing is considered the basic necessity of human being and its shortage is a major problem worldwide especially in less developed countries including Pakistan. Recently the commercial banks in Pakistan have started looking for house financing. In addition to conventional banks Islamic banks are also providing house financing. This paper is focusing on house financing needs in Pakistan and critically analyzes the existing model of Islamic house financing (in practice) along with comparison of conventional mortgage. As per findings of this study huge potential for financing exists in local market. Current model of Islamic house financing (in practice) is not matched with the principles of Diminishing Musharaka however it suits in competing with conventional banks. The major difference (risk and reward sharing) between Islamic and conventional finance is lacking in operations of IFIs. At final pages of

Sunday 13 October 2013

Cash Financing Under Islamic Banking

11.1. Introduction

Islamic financial system is based on Shari’a (Islamic law) whereby interest charging in a loan transaction is Haram (unlawful). In order to adhere this Shari’a constraint Islamic Financial Institutions (IFIs)  do not provide finance in cash for a charge rather transect business by using trading, rental and equity based modes of financing. Trading and rental modes of financing are used excessively by IFIs in provision of financing as compared to equity financing due to lesser/zero uncertainty about the outcome of investment, however deposit collection is fully based on equity modes of financing. Generally Islamic banks provide financing through Murabaha (deferred sale of a commodity on profit), Salam (spot payment with deferred delivery of subject matter), Istisna’a (order to manufacture a product, payment may or may not made on spot), Ijarah (leasing or renting an asset for use ending in transfer of ownership), Musharaka (participation in profit and loss of a project or a business for a particular period), Diminishing Musharaka (a mortgage transaction whereby stake of bank decreases and that of customer increases over the period  ending in transfer of ownership to customer) and Mudaraba (partnership of skill and capital). Three of the modes are based on sale/purchase of an asset, one on renting an asset, two on partnership and one is mixture of partnership and leasing. Any customer who needs bank loan for any of its need can opt one or other mode of financing to transect business with Islamic banks. Deposits are collected under any of three

Friday 11 October 2013

Islamic Capital Market

10.1. Introduction

Liquidity is the ability to meet obligations as and when due. Banking is a business of financial intermediary whereby money is collected from depositors and provided to business and industry to meet short and long term requirements. Deposits are collected under any of the three forms of accounts including current account, profit and loss sharing account and profit and loss fixed deposits. Except profit and loss fixed account depositors are free to deposit and withdraw the amount according to their preferences and financial plans, which creates uncertainty as for cash requirements of a bank are concerned to return the money of depositors. This uncertainty of cash requirements make the job of modern banker challenging because of required skill in funds management to utilize the funds prudently keeping in view the liquidity requirements as well as to earn normal rate of return for depositors and share holders.
Liquidity risk management is a challenging task for any bank including Islamic banks. Conventional banking has numerous opportunities to mitigate and manage liquidity risk including investment in short term interest based instruments issued by government and corporate sector. The most secured form of short term investment is treasury bills and other money market instruments. Likewise for medium to long term investments interest based bonds are available to conventional banks with a ready market for disposal