Welcome to class of

Islamic Bankingin Emerging Markets

Dr. Satyendra SinghUniversity of Winnipeg

Canadawww.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!?