Class
Lecture
Islamic
Financial System (Fin-5402)
Economic and Financial system, Financial markets and Islamic
applications
Economic system:
An economic system is a
collection of institutions set up by society to deal with the allocation of
resources, production and goods and services, and the distribution of the
resulting income and wealth.
Islamic Economic system:
A collection of institutions
(that is, formal and informal rules of conduct and their enforcement
characteristics) designed by the Law-Giver (that is, Allah (swt) through the rules
prescribed in the Qur’an,
operationalized by the sunnah of
the Prophet (pbuh) and extended to new situations by ijtihad) to deal with
allocation of scarce resources, production and the exchange of goods and
services and the distribution of the resulting income and wealth.
Types of economy:
1.
Market/Capitalist Economy: is
one in which individuals and private firms make the major decision about
production and consumption Market economy: an economy that allocates
resources through the decentralized decisions of many firms and
households as they interact in markets for goods and services. Example-UK (came
to close in 18th century).
2.
Laissez – faire economy: the
extreme case of a market economy, in which Governments keeps its hands off
economic decisions, is called a Laissez – faire economy.
3.
Command/Planned/Centralized/Communist/Socialist
Economy: is one in which the government makes all important decisions about
production and consumption. Example-ex-soviet union
4.
Islamic Economy: the
economy which runs according to the law of welfare, justice and Islamic
Shariah. Example-Medina state in 7th century, Iran (came to
close).
5.
Mixed Economy: it
includes the elements of both market and command economy. Example-almost all
economy of the world, Bangladesh, India etc
Comparative
analysis of different doctrines:
Figure-1: Economic Doctrines of life
Capitalism
|
Communism
|
Islam
|
Worldly
life & confused about Hereafter life
|
worldly
life is the only life & no Hereafter life
|
Worldly
life & Hereafter life
|
There
is a GOD but forget in daily life
|
There
is no GOD or creator
|
ALLAH
is the only creator and God
|
Self-satisfaction
|
Self-satisfaction
through state intervention
|
Satisfaction
of ALLAH
|
Self-interest
&Rationalism is the sole authority of decision making
|
Rationalism
and state is the sole authority of decision making
|
Individualism
&Rationalism through moral filtering is a part of decision making
|
Competitive
market: survival for the fittest
|
State
control the market
|
Combination
of competition and state intervention: Humanity & Philanthropy
|
No
value judgment
|
No
value judgment
|
Value
judgment, social, national, cultural values
|
Independent
of revealed religion, Religion is unreliable
|
No
religion
|
Religion
is key determinant
|
Earning
at any way
|
Earning
at any way
|
Earning
at honest way
|
Economic Laws are like
physical laws
|
Economic Laws are like
physical laws
|
Economic laws are like natural laws
|
Economics is a positive
science as like as biology, physics which have no value, value neutral
|
Economics is a positive
science as like as biology, physics which have no value, value neutral
|
Economics is value oriented. Permissible &
prohibition have to be observed
|
Little concern for poor
humanity
|
Theoretically, concern for
poor humanity but not practically
|
Major concern for poor. Poverty alleviation by
Zakat, Sadaqa & gives emphasis on economic progress
|
Figure-2: Stages of life and difference
in Visions of two consumers (Schematic chart)
Islamic man
|
Conventional man
|
Born (coming
from Heavenly life)
↕
Education life
(worldly+ Religious)
↕
Working/professional
life (earning an honest way directed by Religion)
↕
Family life
(Religious)
↕
Life Style
(Moderate/simple
life style)
↕
Worldly life
(Enjoy the worldly life & Prepare for Hereafter life)
↕
Retired life
(reading, travelling, Ibadah, etc.)
↕
Death (start
the journey for Hereafter life )
|
Born (Natural
Law of human life)
↕
Education life
(worldly)
↕
Working/professional
life (earning an any way)
↕
Family life
(Wealth)
↕
Life Style
(Luxurious
life style)
↕
Worldly life
(Enjoy the worldly life-Only place for success & rewards)
↕
Retired life
(reading, travelling, etc.)
↕
Death (Natural
departure)
|
Financial system:
A financial system consists of institutional
units and markets that interact, for the purpose of mobilizing funds for
investment and providing facilities, including payment systems, for the
financing of commercial activity.
An institutional unit is an entity, such as a
household, corporation, or government agency, that is capable in its own right
of owning assets, incurring liabilities, and engaging in economic activities
and transactions with other entities.
The role of financial institutions within the
system is primarily to intermediate between those that provide funds and those
that need funds, and typically involves transforming and managing risk.
Particularly for a deposit taker, this risk arises from its role in maturity
transformation, where liabilities are typically short term (for example, demand
deposits), while its assets have a longer maturity and are often illiquid (for
example, loans). Financial markets provide a forum within which financial
claims can be traded under established rules of conduct and can facilitate the
management and transformation of risk. They also play an important role in
identifying market prices (“price discovery”).
Structure of Financial System: The
main constituents of financial system are:
1. Financial Institutions
2. Financial Instruments, and
3.
Financial
Markets.
1. Financial
Institutions
The
modern name of Financial Institution is Financial Intermediary (FI), because it
mediates or stands between ultimate borrowers and ultimate lenders and helps
transfer funds from one to another. The Financial system helps production,
capital-accumulation and growth by encouraging savings and allocating them
among the alternative uses and users.
Overview of Financial system of Bangladesh
The financial system of Bangladesh is comprised of three broad fragmented sectors:
The financial system of Bangladesh is comprised of three broad fragmented sectors:
1. Formal Sector
2. Semi-Formal Sector
3. Informal Sector
The sectors have
been categorized in accordance with their degree of regulation.
1.
The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions (FIs), Insurance
Companies, Capital Market Intermediaries like Brokerage Houses, Merchant Banks etc.; Micro Finance Institutions (MFIs).
2.
The semi-formal sector includes those institutions which are regulated
otherwise but do not fall under the jurisdiction of Central Bank, Insurance
Authority, Securities and Exchange Commission or any other enacted financial
regulator. This sector is mainly represented by Specialized Financial Institutions like House Building Finance Corporation (HBFC), Palli
Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank etc., Non Governmental Organizations (NGOs and discrete
government programs. According to
statistics of Bangladesh NGO Bureau, 2356 NGOs are working in Bangladesh (31th December, 2014)
3. The informal
sector includes private intermediaries
which are completely unregulated.
1.
Formal
Sector
A. Banks:
After the independence, banking industry in Bangladesh started its journey with 6 nationalized commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:
1. Scheduled Banks: The banks
which get license to operate under Bank Company Act, 1991 (Amended in 2003) are
termed as Scheduled Banks.
2.
Non-Scheduled
Banks: The
banks which are established for special and definite objective and operate
under the acts that are enacted for meeting up those objectives, are termed as
Non-Scheduled Banks. These banks cannot perform all functions of scheduled
banks.
1. Scheduled
banks:
There are 56 scheduled banks in
Bangladesh who operate under full control and supervision of Bangladesh Bank
which is empowered to do so through Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. Scheduled Banks are classified into following types:
State Owned Commercial Banks (SOCBs): There
are 5 SOCBs which are fully or majorly owned by the Government
of Bangladesh.
Specialized Banks (SDBs): 3 specialized banks are
now operating which were established for specific objectives like agricultural
or industrial development. These banks are also fully or majorly owned by the
Government of Bangladesh.
Private Commercial Banks (PCBs): There
are 39 private commercial banks which are majorly owned by the
private entities. PCBs can be categorized into two groups:
Conventional PCBs: 31 conventional PCBs are
now operating in the industry. They perform the banking functions in
conventional fashion i.e interest based operations.
Islami Shariah based PCBs: There are 8 Islami Shariah
based PCBs in Bangladesh and they execute banking activities according
to Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.
Foreign Commercial Banks (FCBs): 9 FCBs are
operating in Bangladesh as the branches of the banks which are incorporated in
abroad.
2. Non-Scheduled Banks: There are now 4
non-scheduled banks in Bangladesh which are:
Ansar VDP Unnayan Bank,
Karmashangosthan Bank,
Probashi Kollyan Bank,
Jubilee Bank
B.
Non-Bank Financial Institutions (FIs):
Non-Bank Financial Institutions (FIs) are those types of financial institutions which are regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 31 FIs are operating in Bangladesh while the maiden one was established in 1981. Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 13 were initiated by private domestic initiative and 15 were initiated by joint venture initiative. Major sources of funds of FIs are Term Deposit (at least six months tenure), Credit Facility from Banks and other FIs, Call Money as well as Bond and Securitization.
The major difference between banks
and FIs are as follows:
1. FIs cannot
issue cheques, pay-orders or demand drafts.
2. FIs cannot
receive demand deposits,
3. FIs cannot
be involved in foreign exchange financing,
4. FIs can
conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization
instruments, private placement of equity etc.
List of Non-Bank Financial
Institutions (FIs) in Bangladesh:
Uttara Finance and Investments Limited
United Leasing Company Limited (ULCL)
Union Capital Limited
The UAE-Bangladesh Investment Co. Ltd
Saudi-Bangladesh Industrial & Agricultural Investment Company Limited (SABINCO)
Reliance Finance Limited
Prime Finance & Investment Ltd
Premier Leasing & Finance Limited
Phoenix Finance and Investments Limited
People's Leasing and Financial Services Ltd
National Housing Finance and Investments Limited
National Finance Ltd
MIDAS Financing Ltd. (MFL)
LankaBangla Finance Ltd.
Islamic Finance and Investment Limited
International Leasing and Financial Services Limited
Infrastructure Development Company Limited (IDCOL)¿
Industrial Promotion and Development Company of Bangladesh Limited(IPDC)
Industrial and Infrastructure Development Finance Company (IIDFC) Limited
IDLC Finance Limited
Hajj Finance Company Limited
GSP Finance Company (Bangladesh) Limited (GSPB)
First Lease Finance & Investment Ltd.
FAS Finance & Investment Limited
Fareast Finance & Investment Limited
Delta Brac Housing Finance Corporation Ltd. (DBH)
Bay Leasing & Investment Limited
Bangladesh Industrial Finance Company Limited (BIFC)
Bangladesh Finance & Investment Co. Ltd.
Agrani SME Finance Co. Ltd.
C.
Insurance
sector in Bangladesh:
Insurance
sector in Bangladesh emerged after independence with 2 nationalized insurance
companies- 1 Life & 1 General; and 1 foreign insurance company. In mid 80s,
private sector insurance companies started to enter in the industry and it got
expanded. Now days, 62 companies are operating under Insurance Act 2010. Out of
them- 18 are Life Insurance Companies including 1 foreign company and 1 is
state-owned company, 44 General Insurance Companies including 1 state-owned
company.
Insurance companies in Bangladesh
provide following services:
Life
insurance,
General
Insurance,
Reinsurance,
Micro-insurance,
Takaful or
Islami insurance
LIST OF NON-LIFE INSURANCE COMPANIES
- Agrani
Insurance Company Ltd.
- Asia
Insurance Ltd.
- Asia
Pacific Gen Insurance Co. Ltd.
- Bangladesh
Co-operatives Ins. Ltd.
- Bangladesh
General Insurance Co. Ltd.
- Bangladesh
National Insurance Co.Ltd.
- Central
Insurance Company Ltd.
- City
Gen. Insurance Company Ltd.
- Continental
Insurance Ltd.
- Crystal
Insurance Company Ltd.
- Desh
Gen. Insurance Company Ltd.
- Eastern
Insurance Company Ltd.
- Eastland
Insurance Company Ltd.
- Express
Insurance Ltd.
- Federal
Insurance Company Ltd.
- Global
Insurance Ltd.
- Green
Delta Insurance Co. Ltd.
- Islami
Commercial Insurance Co. Ltd.
- Islami
Insurance Bangladesh Ltd.
- Janata
Insurance Company Ltd.
- Karnaphuli
Insurance Company Ltd.
- Meghna
Insurance Company Ltd.
- Mercantile
Insurance Company Ltd.
- Nitol
Insurance Company Ltd.
- Northern
Gen.Insurance Company Ltd.
- Peoples
Insurance Company Ltd.
- Phonix
Insurance Company Ltd.
- Pioneer
Insurance Company Ltd.
- Pragati
Insurance Ltd.
- Pramount
Insurance Company Ltd.
- Prime
Insurance Company Ltd.
- Provati
Insurance Company Ltd.
- Purabi
Gen Insurance Company Ltd.
- Reliance
Insurance Ltd
- Republic
Insurance Company Ltd.
- Rupali
Insurance Company Ltd.
- Sonar
Bangla Insurance Company Ltd.
- South
Asia Insurance Company Ltd.
- Standard
Insurance Ltd.
- Takaful
Islami Insurance Ltd.
- Dhaka
Insurance Ltd.
- Union
Insurance Company Ltd.
- United
Insurance Company Ltd.
LIST OF
LIFE INSURANCE COMPANIES
- American
Life Insurance Company (Foreign Company)
- Baira
Life Insurance Company Ltd.
- Delta
Life Insurance Company Ltd.
- Farest
Islami Life Insurance Co. Ltd.
- Golden
Life Insurance Ltd.
- Homeland
Life Insurance Company Ltd.
- Meghna
Life Insurance Company Ltd.
- National
Life Insurance Company Ltd.
- Padma
Islami Life Insurance Company Ltd.
- Popular
Life Insurance Company Ltd.
- Pragati
Life Insurance Ltd.
- Prime
Islami Life Insurance Company Ltd.
- Progressive
Life Insurance Company Ltd.
- Rupali
Life Insurance Company Ltd.
- Sandhani
Life Insurance Company Ltd.
- Sunflower
Life Insurance Company Ltd.
- Sunlife
Insurance Company Ltd
LIST OF THE INSURANCE COMPANIES IN
PUBLIC SECTOR
- Sadharan
Bima Corporation(Gen. Ins)
- Jiban
Bima Corporation (Life Ins.)
D.
Microfinance
Institutions (MFIs):
The
member-based Microfinance Institutions (MFIs) constitute a rapidly growing
segment of the Rural Financial Market (RFM) in Bangladesh. Microcredit programs
(MCP) in Bangladesh are implemented by various formal financial institutions
(nationalized commercial banks and specialized banks), specialized government
organizations and Non-Government Organizations (NGOs). The growth in the MFI
sector, in terms of the number of MFI as well as total membership, was
phenomenal during the 1990s and continues till today.
Despite the fact that more than a thousand of institutions are operating microcredit programs, but only 10 large Microcredit Institutions (MFIs) and Grameen Bank represent 87% of total savings of the sector and 81% of total outstanding loan of the sector. Through the financial services of microcredit, the poor people are engaging themselves in various income generating activities and around 30 million poor people are directly benefited from microcredit programs.
Credit services of this sector can be categorized into six broad groups: i) general microcredit for small-scale self employment based activities, ii) microenterprise loans, iii) loans for ultra poor, iv) agricultural loans, v) seasonal loans, and vi) loans for disaster management.
Despite the fact that more than a thousand of institutions are operating microcredit programs, but only 10 large Microcredit Institutions (MFIs) and Grameen Bank represent 87% of total savings of the sector and 81% of total outstanding loan of the sector. Through the financial services of microcredit, the poor people are engaging themselves in various income generating activities and around 30 million poor people are directly benefited from microcredit programs.
Credit services of this sector can be categorized into six broad groups: i) general microcredit for small-scale self employment based activities, ii) microenterprise loans, iii) loans for ultra poor, iv) agricultural loans, v) seasonal loans, and vi) loans for disaster management.
Currently,
599 institutions (as of October 10, 2011) have been licensed by MRA to operate
Micro Credit Programs. But, Grameen Bank is out of the jurisdiction of MRA as
it is operated under a distinct legislation- Grameen Bank Ordinance, 1983.
2.
Financial market:
Financial market in Bangladesh: The financial market in Bangladesh is
mainly of following types:
1.
Money
Market: The primary money market is comprised of banks,
FIs and primary dealers as intermediaries and savings & lending
instruments, treasury bills as instruments. There are currently 15 primary
dealers (12 banks and 3 FIs) in Bangladesh. The only active secondary market is
overnight call money market which is participated by the scheduled banks and
FIs. The money market in Bangladesh is regulated by Bangladesh Bank (BB), the
Central Bank of Bangladesh.
2.
Capital
market: The
primary segment of capital market is operated through private and public
offering of equity and bond instruments. The secondary segment of capital
market is institutionalized by two (02) stock exchanges-Dhaka Stock Exchange
and Chittagong Stock Exchange. The instruments in these exchanges are equity
securities (shares), debentures, corporate bonds and treasury bonds. The
capital market in Bangladesh is governed by Securities and Commission (SEC).
3.
Foreign
Exchange Market: Towards liberalization of foreign exchange
transactions, a number of measures were adopted since 1990s. Bangladeshi
currency, the taka, was declared convertible on current account transactions
(as on 24 March 1994), in terms of Article VIII of IMF Article of Agreement
(1994). As Taka is not convertible in capital account, resident owned capital
is not freely transferable abroad. Repatriation of profits or disinvestment
proceeds on non-resident FDI and portfolio investment inflows are permitted
freely. Direct investments of non-residents in the industrial sector and
portfolio investments of non-residents through stock exchanges are repatriable
abroad, as also are capital gains and profits/dividends thereon. Investment
abroad of resident-owned capital is subject to prior Bangladesh Bank approval,
which is allowed only sparingly.
Bangladesh adopted Floating Exchange Rate regime since
31 May 2003. Under the regime, BB does not interfere in the determination of
exchange rate, but operates the monetary policy prudently for minimizing
extreme swings in exchange rate to avoid adverse repercussion on the domestic
economy. The exchange rate is being determined in the market on the basis of
market demand and supply forces of the respective currencies.
In the forex market, banks are free to buy and sale
foreign currency in the spot and also in the forward markets. However, to avoid
any unusual volatility in the exchange rate, Bangladesh Bank, the regulator of
foreign exchange market remains vigilant over the developments in the foreign
exchange market and intervenes by buying and selling foreign currencies
whenever it deems necessary to maintain stability in the foreign exchange
market.
3.
Financial
instruments:
Money
Market Instruments: Money market claim
mature in less than one year. Because of their short-term maturity, money
market instruments undergo the least price fluctuations and so are the risky
investments.
The common types of money market securities traded
in Bangladesh are given below:
2. Repurchase
Agreements ( Repo or Reverse Repo)
3. Commercial
Papers
4. Certificate
of Deposit
5. Banker's
Acceptance
6. Call
money
Money
market participants
Banks, Non-bank, Financial Institutions
(takaful companies), business corporations, government and central bank
Capital market instruments:
Debt
and equity instruments wit maturity of over one year called capital market
instruments. They have far wider price fluctuations than money market
instruments and are considered to fairly risky instruments.
1. Common
stocks/Equity
2. Bonds
3. Mortgages
4. Futures
5. Options
Difference
between money market and capital market:
|
Money Market
|
Capital Market
|
Definition
|
Is
a component of the financial markets where short-term borrowing takes place
|
Is
a component of financial markets where long-term borrowing takes place
|
Maturity
Period
|
Lasts
anywhere from 1 hour to 90 days.
|
Lasts
for more than one year and can also include life-time of a company.
|
Credit
Instruments
|
Certificate
of deposit, Repurchase agreements, Commercial paper, Eurodollar deposit,
Federal funds, Municipal notes, Treasury bills, Money funds, Foreign Exchange
Swaps, short-lived mortgage and asset-backed securities.
|
Stocks,
Shares, Debentures, bonds, Securities of the Government.
|
Nature
of Credit Instruments
|
Homogenous.
A lot of variety causes problems for investors.
|
Heterogeneous.
A lot of varieties are required.
|
Purpose
of Loan
|
Short-term
credit required for small investments.
|
Long-term
credit required to establish business, expand business or purchase fixed
assets.
|
Basic
Role
|
Liquidity
adjustment
|
Putting
capital to work
|
Institutions
|
Central
banks, Commercial banks, Acceptance houses, Nonbank financial institutions,
Bill brokers, etc.
|
Stock
exchanges, Commercial banks and Nonbank institutions, such as Insurance
Companies, Mortgage Banks, Building Societies, etc.
|
Risk
|
Risk
is small
|
Risk
is greater
|
Market
Regulation
|
Commercial
banks are closely regulated to prevent occurrence of a liquidity crisis.
|
Institutions
are regulated to keep them from defrauding customers.
|
Relation
with Central Bank
|
Closely
related to the central banks of the country.
|
Indirectly
related with central banks and feels fluctuations depending on the policies
of central banks.
|
Islamic Financial system:
1. A
financial system that is based on Islamic principles and values, which
eliminates Riba and ensure a profit sharing mechanism in the financial system,
may be called IFS.
2. It
may be characterized by the absence' of interest based financial institution
& transactions, doubtful transactions or Gharar, Stocks of companies
dealing in unlawful activities, unethical or immoral transactions such as
market manipulation, insider trading short-selling etc.
Principles/features
of an Islamic financial system:
The basic framework for
an Islamic financial system is a set of rules and laws, collectively referred
to as Shariah, governing economic, social, political and cultural aspects of Islamic
societies. Shariah originates from the rules dictated by the Quran and its
practices, and explanations rendered (more commonly known as Sunnah) by the
Prophet Muhammad. Further elaboration of the rules is provided by scholars in
Islamic jurisprudence within the framework of the Quran and Sunnah. The basic
principles of an Islamic financial system can be summarized as follows:
1. Prohibition of interest: Prohibition of Riba, a
term literally meaning "an excess" and interpreted as "any
unjustifiable increase of capital whether in loans or sales" is the
central tenet of the system. More precisely, any positive, fixed, predetermined
rate tied to the maturity and the amount of principal (i.e.) guaranteed
regardless of the performance of the investment) is considered Riba and is
prohibited. The general consensus among Islamic scholars is that Riba covers
not only usury but also the charging of "interest" as widely
practiced.
2. This prohibition is based on arguments of social justice,
equality, and property rights. Islam encourages the earning of profits but
forbids the charging of interest because profits, determined ex post, symbolize
successful entrepreneurship and creation of additional wealth whereas interest,
determined ex ante, is a cost that is accrued irrespective off the outcome of
business operations and may not create wealth if there are business losses.
Social justice demands that borrowers and lenders share rewards s well as
losses in an equitable fashion and that the process of wealth accumulation and
distribution in the economy be fair and representative of true productivity.
3. Risk sharing: Because interest is prohibited, suppliers of
funds become investors instead of creditors. The provider of financial capital
and the entrepreneur share business risks in return for shares of the profits.
4. Money as "Potential" Capital: Money is treated as
"Potential" capital -that is, it becomes actual capital only when it
joins hands with other resources to undertake a productive activity. Islam
recognizes the time value of money, but only when it acts as capital, not when
it is "Potential" capital.
5. Prohibition of speculative behavior: An Islamic financial
system discourages hoarding and prohibits transactions featuring extreme uncertainties,
gambling, and risks
6. Sanctity of contracts: Islam upholds contractual obligations and the
disclosure of information as a sacred duty. This feature is intended to reduce
the risk of asymmetric information and moral hazard.
7. Shariah approved activities: Only those business activities
that do not violate the rules of Shariah qualify for investment. For example,
any investment in businesses dealing with alcohol, gambling, and casinos would
be prohibited.
Differences
between CFS & IFS:
The
conventional financial system consists of Socialistic financial system and
Capitalistic financial system. Both
systems have been proved inefficient to establish economic balance in the
society.
Basis
of Difference
|
CFS
|
IFS
|
Religious Belief
|
Secular & separates Religion from other Parts human life
|
Belief in unity of God & relates this belief to economic Life of a man
|
Freedom of Economic
Activity
|
In socialism govt. enjoys economic freedom but in capitalism Individuals enjoys freedom.
|
Restrictive freedom is allowed in the light of
Shariah both by the govt. &/or individuals
|
Ownership of means
|
Socialism-state ownership, Capitalism-individual ownership
|
Allah is the exclusive owner. Man is the caretaker of the property
|
Goals of financial System
|
Socialism-profit of the society
Capitalism-Individual’s profit
|
Welfare of both here and hereafter.
|
Competition
|
Socialism-No competition
Capitalism- Logical & unethical competition
|
Logical Competition and financial co-operation
|
Wealth distribution
|
Socialism-Equal
Capitalism – Unequal
|
Equitable
|
Basis of Economic
System
|
Riba or Interest
|
Interest Free; PLS,
Zakat & Compensation based
|
Sources of the System
|
Intellects brain
storming of the economic problems of men’s life
|
Devine book “Al-Quran”
& Prophets(SM) speeches
|
Result
|
Capitalism concentration
of income & economic power in few hands. Inefficiency
|
Maximum & equitable
Distribution of economic opportunities and higher production in the society
|
Social &
environmental welfare
|
Do not consider the
social & environmental welfare
|
Ensure social &
environmental welfare
|
Owners exception in
respect of respect of investment
|
Dividend or part of
profit in case of equity financing
|
Part of Profit or Loss
|
Lender or Bank’s
expectation in terms of dept financing
|
Interest
|
Profit or Loss Sharing
|
Modes of Investment
|
Loan, Overdraft & Cash Credit
|
Mudarabah, Musharaka, Murabaha etc.
|
Need
for Islamic Money Market
Islamic bank also faced also exposed to
liquidity risk. Like conventional, Islamic bank hold illiquid assets while
liability relatively liquid. Bank with surplus funds can either lend by placing
deposit system with other banks in interbank deposit system or lend by
purchasing money market instruments.
Different
between Islamic and Conventional Money Market
|
Conventional
|
Islamic
|
1) Interbank
Market
|
Issues debt contract for placement of fund
|
Apply Shariah contracts i.e mudharabah, murabahah
and wakalah
|
2)
Instruments Issuance process
|
Approved by respective regulators
|
Approved by Shariah Committee and respective
regulators.
|
Structure
|
Structured based on debt only
|
Structure based on assets, equity and debt based.
|
Investors
|
Conventional
investors only.
|
Conventional
and Islamic investors.
|
Islamic
Money market instruments:
Islamic Inter-bank Fund Market (IIFM) – Bangladesh, the separate call money
market for Islamic banks in Bangladesh
Islamic Inter-bank
Fund Market (IIFM) -- for sharia-based banks started its journey on June 3,
2012. In such a market, transactions are based on profit instead of interest. Bangladesh
Bank Governor Atiur Rahman inaugurated the IIFM at the central bank.
On the first day,
Islami Bank Bangladesh Ltd offered funds worth Tk 100 crore, while four banks
applied for taking Tk 60 crore from the funds.
The BB governor said
the IIFM has been formed in the model of the traditional call money market to
remove the temporary and short-term liquidity crisis of the Islamic banks. The
Islamic Bond Fund of the central bank will act as the custodian of the IIFM and
will not charge any fees for the fund.
According to rules,
if any bank has excess fund, it will invest the amount in the IIFM for one day.
Another Islamic bank requiring fund will borrow the money from the IIFM for one
day. The rate of profit in the Islamic bank call money market will be
determined on the basis of the profit the bank gives to its depositors on a
three months' deposit.
Foreign
exchange market in Islam:
The rule of trade in
currencies:
Currency trading may be permissible on one condition that the
payment should occur on the same in the contract’s council, if the currency is
equal The evidence narrated by Abada Ben Al-Samit may Allah be pleased with him
said: The Messenger of Allah peace be upon him: (gold for gold, silver for
silver, wheat for wheat, barley for barley, dates for dates, salt for salt,
like for like, hand in hand, if these types are different the sell as you like,
hand in hand) Narrated by Muslim (1587).
The “Total Fataawa Ibn Baaz”
(19/171- 174):
Transactions, buying
and selling in currencies are permissible, but only if the exchange be hand in
hand if the currencies were different, Example selling the currency of the
Libyan currency exchange for the U.S. Dollars or Egypt the transaction
should be done hand in hand within the council, but if the payment was
delayed or differed then it’s not permissible, because that case it is
considered a form of usury-based (Riba) transaction, it must be the same
sitting of the Council hand in hand if the currency is different, but if they
are of one type must be two conditions: symmetry and same sitting of the
Council, as per the Prophet saying peace be upon him: (gold for gold , and
silver with silver… Then he mentioned the Hadith).
And currencies as
before if it was different then it is permissible with the differentiation and
payment may be in the same sitting of the Council, and if one type such as
dollars, dollars, or dinars, dinars must be in the same sitting of the Council,
and uniformity.
Islamic financial instruments:
IDC, IIC and MB
Three potential instruments proposed in the Seminar on Developing a
System of Financial Instruments, jointly sponsored by the Islamic Development
Bank and the Government of Malaysia, held in Kuala Lumpur 1986, were
Islamic
Deposit Certificates (IDCs),
Islamic Investment Certificates (IICs) and
Muqarada Bonds (MBs).
These appeared promising the IDC proceeds are meant to be
used by the issuing bank for general purposes, while IIC proceeds are meant for
investment in a specific project or activity by the issuing bank. The MBs
proceeds are meant to be used for income-yielding public utility projects, such
as electricity and telecommunications, and infrastructure development projects
such as construction of roads and bridges.
The common denominator for all the above three instruments is that they
are all based on the principle of profit sharing. The holders of IDC and IIC
will also share in the losses, if any, but not the holders of MBs, as the
nominal value of MBs would be guaranteed by the Government, which is a third
party independent from the other two. It is of interest to note that Muqarada
Bonds have already been adopted as a financial instrument in Jordan, though
with a limited scope.
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