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
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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
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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
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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!?