Welcome to class of Islamic Banking in Emerging Markets Dr. Satyendra Singh University of Winnipeg Canada www.uwinnipeg.ca/~ssingh5 Why Study This Topic? • ↑ Market size ↑ demand for the product 2nd largest religion 1.6 billion cannot ignore this market segment Islamic Banking –The Concept • • • • • • • • • • Concept principles no deception and no riba (interest) It is not new 7th Century Money is a medium of exchange Interest can lead to injustice/exploitation in society Zulm No real 'lending' as all 'lenders' obtain interests To earn $ for banks, they must obtain an equity / ownership Requires banks to participate, share risk profit varies Profit share is distributed instead of interest earned Leads to more ethical society (Unlike West you must pay interest) This concept encourages better resource management Terms • Shari’ah Islamic law • Riba Interest • Hiba profit • Ta'widh Compensation • Ujrah Payment in exchange for services, benefits and privileges offered to the customers Islamic Modes of Finances • Rental-based – Ijara Lease • Trade-based – Murabaha buy ↓, sell ↑ • Partnership-based – Musharaka Partnership time,$ share profit • Risk is shared b/w 2 person loss or profit is shared – Mudharabah Partnership one $, other effort • If profit, it is shared with the customer; bank takes its fee • If loss, customer loses; bank does not take its fee Ijara Mortgages – Lease to Own Very Popular • Find a house to purchase and agree a sale price • Bank will then purchase the property outright • You then enter into 2 agreements with the bank – Pay back the purchase price fixed monthly instalments over 25 years – Pay agreed $ as rent each month bank’s profit • • • • Rent is set annually, ↓ yearly in % of payment When fully paid ownership is transferred to you Borrow up to 90% of the purchase price Legitimate under Sharia law Murabaha Mortgages – Bank Resells House to You • • • • Find a house and agree a purchase price with the seller You then agree the loan required with your bank Typically, you will need to deposit 20% now Bank will then buy the house and immediately resell it to you for a higher price • You pay back the bank the resale price in fixed instalments until you own the house < 15 years • The difference between the original purchase price and the higher price at which the house is resold to you provides the bank with a profit Sharia compliant The Mortgages • Slightly more expensive than interest mortgages – Banks have to pay slightly ↑ rates for halal (permitted) funding – Few Islamic mortgages providers, so competition is not as intense as for interest mortgages – Arrangements are complex and banks take ↑ risk – Ijara bank owns house for 25 yrs before transferring ownership to you – Sharia Advisory Board consists of experts on Sharia Islamic Credit Cards • Ujrah Concept Payment in exchange for services, benefits and privileges offered to the cardholders • Mudharabah Partnership bank $, customer benefit • Minimum age 21, With parents 18 • Yearly Facility Charges RM 2400/7200/48000 • Payable Facility Charges varies monthly; 0 if full payment paid on or < due date • Ta'widh (compensation) 1% of outstanding RM Banks with Islamic Portfolios • England – HSBC, Lloyds TSB • Malaysia, Cambodia, Singapore – CIMB • Canada – Royal Bank of Canada!?