Essentials of Islamic Banking and Finance IQRA University Gulshan Campus IRSHAD AHMAD AIJAZ
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Transcript of Essentials of Islamic Banking and Finance IQRA University Gulshan Campus IRSHAD AHMAD AIJAZ
Essentials of Islamic Finance – IU Gulshan Campus, Essentials of Islamic Finance – IU Gulshan Campus, Slide # Slide # 11
Essentials of Islamic Banking and FinanceIQRA University Gulshan Campus
IRSHAD AHMAD AIJAZ [email protected]
Current banking and financial Current banking and financial systemsystem
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Contents of the lectureContents of the lecture
Current financial and Banking System:– Economic system;– Financial Markets;– Financial intermediation;– Banking system;
Possibility of Islamization of banking;
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ContentsContents
Introduction; Economic system;
– Sectors of economy; Financial Markets;
– Components of financial markets; Financial intermediation;
– Types of financial intermediaries; Banking system;
– Role of banks in economy;– Interest based banking;– Qualities of banking system;
Islamic bank – is it possible? Question and answers
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IntroductionIntroduction
Resources (natural or man-made) available to human being are limited but wants (desires) are not limited and everyone wants to achieve the best;
Every person in a society has different types of wants and demands;– If A wants a cup of milk at a time then B may wants a piece
of cloth at the same time and so on so forth; Management of these wants with in available
resources is the art which is called economics;– So economics is an art of management of unlimited wants
within limited resources. The system in which efforts are made to achieve these targets is called 'Economy';
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Economic systemsEconomic systems
Any economy deals with issue of changing resources into products;
The products either perform as mean to produce more products or a satisfactory mean to needs of human being;
Three types of experiments in economics are there:– Market economy:
An economy without almost any control on anything;
– Planned economy: An economy with some controls put by the government;
– Mixed economy: This economy is neither a full fledged free market nor it depends on pure
planned economy; Under this concept an economy has mixture of freedom and planning;
The first model of economy is famous with name of capitalism; The second one is known as socialism; The third one is known as mixed economy;
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Sectors of economySectors of economy
All types of economies focus on management of sectors of economy in different ways and methods;
There are many theories belong to sectors of economy; The famous description is of 'five sector model'; A sector may be defined as a part of the economy where the
participants are engaged in a similar type of economic activity;
The five-sector model describes the operation of the economy and the linkages between the main sectors in the economy:– Individuals (Consumers);– Businesses (production and manufacturing);– Financial institutions (supply of money and finance);– Government (as a regulator – taxation and controlling function);– International Trade (the rest of the World);
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Sectors of economySectors of economy
Individuals:– This sector consists of all individuals in the economy. These
individuals are the owners of productive resources, and the consumers in our economy.
– Individuals supply factors of production (inputs) such as labour and enterprise to businesses, which they use to produce goods and services. As a reward for supply resources such as labour and enterprise to firms, individuals receive incomes – rent, wages, interest and profit.
Businesses:– This sector consists of all the business firms engaged in the
production and distribution of goods and services (apart from financial services). It concerns all their activities involved with buying factors of production and using them to produce and sell goods and services;
– Individuals and businesses are interdependent.
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Sectors of economySectors of economy
Financial Institutions:– This sector consists of all those institutions that are engaged in
the borrowing and lending of money, acting as the intermediaries between those who save, and borrowers of money.
– Financial institutions are needed for individuals and firms to be able to undertake saving and investment. They perform the function of mobilizing savings for investment;
Government:– The management of national needs and wants on macro level;– It is involved in the satisfaction of collection (community) wants;– It obtains the resources to do this through imposing taxes on
the other sectors of the economy;
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Sectors of economySectors of economy
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Factors of economyFactors of economy
There are four factors of economy according to capitalist approach;
These are:– Land;
Fixed assets that produce something;
– Labour;Human capital;
– Capital;Money and other forms of capital;
– Entrepreneur;Owner and master;
These factors produce 'products and services'; Every factor gets what is due to it;
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Economic SystemEconomic System
ECONOMY
Goods Services
Products
Land CapitalLabor Enterprise
Factors of production
Product MarketFactor Market
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Economic SystemEconomic System
Market activities determine the price. Demand and supply are the decisive factors for pricing;
Both types of market have different norms and ways of operations;
Product market
Services
Cloth
Manufactured goods
Food
Shelter
Rental
Health
Education
Factor market
Capital Labor
Loan
Equity
Employment
Financial Market Non-financial enterprises
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Financial marketsFinancial markets
The market that deals in “financial assets” is called Financial Market;
Asset means “any possession that has value in exchange”;
So a Financial Market is a market where financial assets are exchanged;
Assets
Building
Land
Machinery
Loan
Bond
Share
Tangible Asset:Its value depends on particular
physical properties
Intangible Asset:It represent legal claims on some
future benefits.
FinancialAssets
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Classification of financial marketsClassification of financial markets
Classification by nature of claim:– Debt Market;– Equity Market;
Classification by maturity of claim:– Money market – less than one year life market;– Capital market – greater than 1 year life market;
Classification by seasoning of claim:– Primary market;– Secondary market;
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Financial intermediation;Financial intermediation;
Financial intermediation is an act of institution, firm or individual who mediates between two or more parties in a financial context;
Financial context means facilitating the channeling of funds between lenders and borrowers indirectly;
The savers (lenders) give funds (deposit) to an institution (such as a bank), and that institution gives those funds to spenders (borrowers);
Typically the first party is a provider of a product or service and the second party is a consumer or customer;
This may be in the form of loans or mortgages;
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Financial intermediationFinancial intermediation
Individuals
Companies
Trusts
1.Business2.Industry3.Individuals4.Governments5.Companies6.International trade7.etc. etc
Directly to these activities
1.Banks2.Insurance companies;3.Credit unions;4.Funds;5.Investment trust;
Supply of funds through Financial intermediaries
Fundssupply
Private Businesses
Organizations
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Financial intermediary and its typesFinancial intermediary and its types
A financial intermediary is an institution, firm or individual who mediates between two or more parties in a financial context which means channeling of funds between lenders and borrowers indirectly;
Following are its types:
Financial intermediaries
Depository institution Non-depository institution
1.Banks;2.Saving associations;3.Loan associations;4.Credit unions;5.Credit societies;
1.Development banks;2.State banks;3.Insurance companies;4.Investment banks;5.Brokerage houses;
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Role of banks in economyRole of banks in economy
Exchange of financial assets on behalf of customers; Exchange of financial assets of their own assets; Receive deposits and provide safety; Provide investment device for market participants; Provide platform for small savers; Channelize idle wealth of society; Assist in settlement of claims; Provide cash management services; A tool for government for minatory control;
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Qualities of banking systemQualities of banking system
Channelize idle wealth of society;– An individual can also participate in economy;
Assist in settlement of claims;– Provide services for members of society;– Check and payment instruments;– Ease in payments;
Provide cash management services;– No need for keeping books in home;
A tool for government for minatory control;– Hoarding and inflation control;
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Conventional banking systemConventional banking system
BANKDEPOSITORS CUSTOMERS
STRUCTURE OF CONVENTIONAL BANK
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Interest based bankingInterest based banking
BANKDEPOSITORS
LEND
CUSTOMERSINTEREST
LEND
INTEREST
Financial activities of a conventional bank
Receive deposit on interest; And give money on interest;
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Possibility of Islamization of banking system.Possibility of Islamization of banking system.
Banks receive money from one side and give to other side;
Any possibility for this in Islam? See nest slide:
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Possibility of Islamization of banking system.Possibility of Islamization of banking system.
ISLAMIC BANKDEPOSITORS
Participate in business•Mudarabah;•Musharakah
CUSTOMERS1.Profit in trade2.Rent in rental;3.Share in profit in participation;
STRUCTURE OF ISLAMIC BANK
1.Trade;2.Rental;3.Participation;4.Investment agency
Share in profit
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Problems and issues in existing financial system;Problems and issues in existing financial system;
Interest; Gambling; Excessive uncertainty; Non-Islamic business; No obedience to Islamic rules of business;
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Questions?Questions?