Islamic Banking Presentation

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•Islamic Banking refers to a system of banking or

banking activity that is consistent with Islamic law


(Sharia) principles and guided by
Islamic economics.
•In particular, Islamic law prohibits usury, the

collection and payment of interest, also commonly


called riba in Islamic discourse.
•In addition, Islamic law prohibits investing in

businesses that are considered unlawful,


or haraam (such as businesses that sell alcohol or pork, or
businesses that produce media such as gossip columns or
pornography, which are contrary to Islamic values).
The basic principle of Islamic banking is the sharing of profit

and loss and the prohibition of riba (usury).


Amongst the common Islamic concepts used in Islamic

banking are Profit Sharing (Mudharabah) , Safe keeping


(Wadiah) , Joint venture (Musharakah), Cost Plus (Murabaha)
and Leasing (Ijara).
ISLAMIC BANKING – MURABAHA.
• The Murabaha is the mortgage refinancing option that
meet the Islamic Sharia Law.
• In English, the Murabaha means Deferred Sale Finance

• Murabaha is a sales contract that fixes the price of certain


goods or items required by a customer, including a pre-
agreed profit margin. The principle can be applied to local
or imported goods, but no purchase is made unless the
customer identifies the product and the retailer.
• An Example is Housing Finance . First, the borrower shops for a
home like the conventional mortgage. Next, the borrower pays the
twenty percent down payment. Then, the financial institution
purchases the home for the borrower.
• In return, the financial institution sells the home to borrower on a
higher price. The higher price is determined by original price,
repayment period, and down payment. Finally, the borrower agrees
on the repayment amount and term agreement.
• The settlement term for Murabaha financing varies according to the
nature of the purchases and the working capital cycle of the
customers – typically from 90 to 180 days for raw materials and
finished goods, but up to five years for machinery and equipment.
Murabaha Work Flow
Customer applies for purchase of
asset or service through Murabaha
request along with quotation

Bank approves to initiate transaction

Bank receives a down payment from


the customer after he signs the PTPS

Bank purchases the Asset from the


market as the next stage of process

Customer signs the Murabaha


agreement with the bank at an
agreed fixed price

System automatically calculates


profit and the repayment frequency

System covers all the finanace


processing and also capture required
information for guarantor enq/rep.
MURABAHA PROCESSING
• Issue Purchase Order

The first stage in Murabaha Processing is to define an asset and the supplier from whom
the bank is buying it. The options available in Issue Purchase Order are:

Vehicle/Real Estate/ Equipment/Movable Equipment/Miscellaneous Asset.


• Asset Purchase

This is the second stage in Murabaha Processing is the Asset Purchase. The actions
carried out in Asset Purchase are:

– Murabaha Purchase (Pre-Approval)

– Murabaha Purchase (Received Goods)

– Murabaha Down Payment

– Miscellaneous Charges

– Payment to Vendor/Supplier

– Reverse Asset Purchase


SALE MURABAHA
The actions carried out in Sale Murabaha are:
• What If Analysis

• Sale Murabaha to Client

• Reduce/Increase Maturity Dates

• Partial Murabaha Payment

• Postponement Murabaha Contract

• Bulk Murabaha Postponement

• Murabaha Early Maturity

• Murabaha Amendment of Accounts

• Limit Creation
ISLAMIC BANKING – IJARA
Ijara is an agreement whereby the Bank leases moveable or

immovable property with an option to purchase the item at


the end of the lease period at a pre -agreed price.

In case the bank does not possess the required moveable or


immoveable property, it may purchase it, at the request of the
customer, and then lease it to him. Through this deal, the
bank becomes the Lessor, and the customer becomes Lessee.
Ijara is of two types:
IJARA FORWARD
IJARA FINANCIAL
Forward Ijara
The bank will acquire the asset over a period of time, Bank
may be responsible for the manufacturing of the asset,
building it or ordering it.
The bank will start making payments to the manufactures.
Bank may by mutual agreement receive advance lease rent
during construction , However, the actual lease to the
customer starts upon completion /delivery of the asset on a
future date.
The forward lease will contain the terms of the normal Ijara
lease contract, which will be applied after asset delivery
Ijara Financial
In this mode of leasing, the Lessee is offered the option of

ultimately purchasing and becoming the owner of the asset


including equipment / property.
The full cost of the asset is depreciated over the lease period,

and the owner is given the option of purchasing the asset at


the end of the lease period at a pre-agreed price.
 In most cases, the bank will, upon request from the

customer, purchase the asset from third party or the customer


itself.
Ijara Work Flow
Customer applies for leasing of asset
with specifications along with
quotation

Bank evaluates and approves to initiate


transaction

Customer signs the PTPS. Bank takes


Hamish Jiddiyah (will be refunded
after signing of lease contract) and
collect Admin Fee / DP

Bank purchases the Asset or order for


mnufacturing of asset as the next stage
of process

Customer signs lease agreement with


the bank as per agreed specifications.

Repayment frequency will be fixed. Cust signs Debit Mandate or PDCs. All
external expenses will be booked in Ijara Expense. No cancellation
/amendment without mutual agreement. System calculates penalty charges
if defaulted and will not be debited, only for infm.

If default is more then the specified days, Profit accruals/ amortization/depreciation


will be stopped. If bank incurs loss, it will be adjusted with security deposit (if taken)
or as per the agreement. Bank will have the option of outright sale of the asset.
Asset/Goods Definitions

The first stage in ijara Processing is to define an asset and the


supplier from whom the bank is buying it.

During Processing an automatic ID is generated for the


contract (IAR contract). The ID has the format IAR- Julian
Date - Unique serial number.

The options available are:

Vehicle / Real Estate / Equipment /Movable Equipment


/Miscellaneous Assets.
Asset Acquisition
The second stage in Ijara Processing is the Asset Purchase.

The actions carried out in Asset Acquisition are:

Asset Purchase Pre-Approval / Asset Purchase / Reverse


Asset Purchase / Miscellaneous Charge

Forward Lease Payments


The forward lease option mainly handles the payments to

the contractor. After the asset acquisition, the bank will


enter into forward lease with the contractor.
T24 will provide new LD version to cover payments to

contractors during Asset building or manufacture and also


to support any repayments from customer to cover
construction / manufacture period.
The actions carried out in Forward Ijara are:

FWL Lease – Input Contract / Additional Payment to


Contractor / Payment to Third Party / Customer
Payment

Amendment of Contract / Forward Early Mature Contract.


Financial Ijara

The actions carried out in Financial Ijara are:

Limit Creation / Input New Contract / Modify Contract /


Early Mature Ijara Contract

Repossess Operations:

The actions carried out in Repossess of Ijara Contract are


Bank Settle PD Payments / Re-Possess Lease Contract

Sell Re-Possessed Asset / Re-Purchase Pre-Approval


Past Due Operations

Customer’s PD repayments

During the ijara Contract, the customer can settle the PD


amounts if any.

Charity Operations

Payment of Overdue charity Amount

The calculations of penalty charges for the over dues will


happen only after the Penalty grace in the Ijara contract have
been crossed.
FINANCIAL ACCOUNTING AND REPORTING
All transactions / contracts creates accounting entries across

client account and for the banks internal own records.


Accounting entries are classified as STMT.ENTRY,

CATEG.ENTRY and RE.COSOL.SPEC.ENTRY

STMT.ENTRY

Account related entries are raised ON-LINE or OFF-LINE for


all movements over Customer and Internal Accounts - these
entries are recorded in the STMT.ENTRY file.
CATEG.ENTRY
Profit and Loss entries are raised ON-LINE or OFF-LINE and

are recorded in the CATEG.ENTRY file.


All entries hitting Category codes over 50000 are held in this

file.

RE.CONSOL.SPEC.ENTRY
The RE.CONSOL.SPEC.ENTRY file is so named as it contains

the special entries used to update the balances on the


consolidation files.
These entries are comprised of entries that are not passed
through the CATEG.ENTRY or STMT.ENTRY files. The
nature of entries held in this file would include,
Accounting entries raised for contracts

Accrual/suspense entries raised for Accounts or Contracts

Capitalisation entries for such Accruals

Contingent entries raised by the system for FX, LC etc.

Static Changes

Entries raised for revaluation during End of Day


Accounting Parameter Tables
The Parameter tables to be set up for Accounting is Category ,
Ac.Consolidate.cond.

CATEGORY
Category codes used to classify financial transactions according to

the type of business operation or product


The first two digits of the Category code represent the highest level

of classification and the next three digits represent a sub-


classification which provides a clear definition of the profit and loss
or product type.
CUTOMER ACCOUNTS 1000 – 9999
Client C/A 1000- 1999
Vostro 2000-2999
Other client a/c types 3000-3999
Nostro 5000-5999
Client S/A 6000-6999
Provision Account 7000-7999
Client contingent Account 9000-9999
INTERNAL ACCOUNTS 10000-19999
Cash A/c 10000-10999
Suspense, Fix Assets, Capital etc., 1 1000-1 1999
FOREX 20000-20999
LD and MM 21000-2 1999
SECURITIES 22000-22999
OTHER APPLICATIONS 23000-49999
P&L PRD.RELATED 50000-59999
Interest Paid 50000-50999
Interest Received 51000- 51999
Commission 52000- 52999
Exchange Profit 53000-53999
Others 54000-54999
P&L NON PRD.RELATED 60000-69999
Salaries 60000-60999
Premises and Buildings 61999-61999
Operating Expenses 62000-62999
Taxes 63000-63999
Others 64000-64999
PL Close Out 69999
AC.CONSOLIDATE.COND.
To set rules for consolidating entries Account wise or
category wise.

To net entries together and store details in Detail file.

Consolidation done online in a cumulative manner


-STMT ENTRY for the Account
-CATEG ENTRY for the Category

This can be created and attached to Account table>Field


Name “CONSOLIDATE.ENT” and the same in Category
table to consolidate only for a particular account or for a
particular category.

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