Islamic Banking

Islamic Banking

A Guide for Small and Medium-Sized Enterprises You do not have access to this content

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12 May 2010
9789213615058 (PDF)

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This guide is part of International Trade Centre’s (ITC) Trade Finance programme, which provides assistance to help small firms in developing countries develop their capacities to link to global markets through exports. It is intended primarily for trade support institutions of developing countries, and owners or finance managers of small firms. The aim is to help these firms decide whether Islamic banking options are feasible for them, and how to use them. This guide intends to help the non-specialist reader understand and use Islamic finance. Part I – Understanding Islamic Finance – covers the key principles and perspectives of Islamic banking relevant to small firms. Part II – Using Islamic Finance – consists of a “how to” guide to use Islamic banking instruments for specific transactions.

Also available in French
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  • Acknowledgements

    This guide to Islamic Banking was prepared by the International Trade Centre, with the support of the REDmoney Group, a Malaysia-based company focusing on the global market in Islamic finance.

  • Introduction

    The 2008 financial crisis and subsequent drying up of credit had a particularly severe impact on small and medium-sized enterprises, especially in developing economies.

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  • Expand / Collapse Hide / Show all Abstracts Understanding Islamic finance

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    • Basic principles of Islamic banking

      Islamic banking can be simply defined as a banking operation that abides by sharia (Islamic law), under which a key tenet is the prohibition of interest or riba. Generally, Islamic banking is understood to mean interest-free banking.

    • Islamic banking for SMEs

      Within Islamic finance there is a wide range of financial instruments, each with a specific purpose. When considering Islamic finance, it is important to ensure that the instrument used is suitable for the economic purpose that a company seeks to achieve.

    • Islamic microfinance: An emerging market niche

      An estimated 72% of people living in Muslim-majority countries do not use formal financial services. Even when financial services are available, some people view conventional products as incompatible with the financial principles set forth in Islamic law. In recent years, some microfinance institutions (MFIs) have stepped in to service low-income Muslims who demand products consistent with Islamic financial principles – leading to the emergence of Islamic microfinance as a new market niche.

    • Islamic banking for women: A case study

      More than half of the Malaysian population is made up of women and statistics show that female university graduates outnumber males in various sectors. Women are also increasingly found in professional and managerial jobs, particularly in the public sector. Government policies, programmes and strategies for gender mainstreaming make it likely that these trends will continue.

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    • Using Islamic finance: Introduction

      Islamic banking, although still small in size and offerings, is evolving and growing at a rapid rate. The market for Islamic financial products grew by more than 20% a year in 2007 and 2008. The total size of Islamic banking assets at the end of 2007 was estimated at about US$ 580 billion;3 another US$ 300 billion was invested in Islamic mutual funds; and the Sukuk or Islamic bond market represented over US$ 100 billion of assets.

    • Islamic finance: What it is and where it is available to SMEs

      Policymakers and bankers worldwide are increasingly focussing on micro-, small and medium-sized enterprises. Within the Islamic sector, the Islamic Development Bank (IDB) is making important efforts to nurture the microenterprise and SME sector and its export activities. These efforts expand knowledge through the promotion of seminars, training and expert missions with the goal of building capacity in the sector. They also finance guarantees and export insurance. IDB has three important subsidiaries serving the sector: the International Islamic Trade Finance Corporation (ITFC), Islamic Corporation for the Development of the Private Sector (ICD) and the Islamic Corporation for Insurance of Investments and Export Credit (ICIEC). Each of the IDB subsidiaries has programmes that operate throughout IDB member States.

    • Key products and how they compare

      The common methods used in Islamic financing include sales contracts such as Murabahah (cost-plus sale), leasing (Ijarah), Salam (forward sale) and Istisna (construction or manufacturing sale). They also include Wakalah (agency), Musharakah (joint venture or partnership), and Mudarabah (managed partnership). These contracts are used to manage credit and investment processes. They are frequently joined with some form of undertaking or promise to synthesize a bias towards credit risk as compared to asset risk. This chapter examines each of these methods by way of concrete examples, presented both textually and in illustrations, and shows how they fit in an Islamic bank. All the methods have been tested in micro-enterprise and SME markets and all may be used to support trade finance activities.

    • Providers of Islamic financing

      Islamic banks have been expanding rapidly. There are now three distinct approaches to providing customers with Islamic financial services: fully fledged Islamic financial institutions; Islamic windows at conventional banks; and limited Islamic service offers by conventional banks. Each model has enjoyed success depending on the market in which it operates, the degree to which regulators are prepared to allow full-fledged Islamic banking and the shareholders are prepared to take up the Islamic banking business proposition.

    • Accessing Islamic finance

      On the one hand, the method of accessing Islamic finance is similar to that of conventional finance, given that an Islamic bank will require the same types of basic credit and collateral evaluation procedures as a conventional bank. On the other hand, the process may differ regarding a number of important details. Most notably, as Islamic finance follows the values defined in the Koran, an Islamic bank will not be able to participate in certain business activities, even indirectly.

    • The role of a sharia adviser

      An important aspect of the rapidly growing and evolving Islamic banking industry is that financial institutions offering Islamic financial products are advised by sharia scholars. The knowledge and ability of these scholars to provide advice is improving. Modern scholars may undergo specialized training at a number of institutions, participate in a variety of scholarly and regulatory colloquia and pursue specialized designations in sharia audit, such as that offered by AAOIFI. This increasingly sophisticated body of scholars is able to advise clients, banks and regulators in a way that is business friendly. These scholars and advisers help bankers and customers to develop new products as well as to confirm that business activities and transactions are carried out in a sharia-compliant manner.

    • Regulations, tax implications and jurisdictional guidelines

      The merchant character and profit-sharing activities of Islamic banks mean that regulation and governance of these institutions and their deal structures differ from those of conventional banks. There are also tax-related issues in countries that have value added taxes, stamp duties and asset transfer taxes. In addition, regions and countries have taken vastly different approaches to authorizing and enabling Islamic banking and finance. As a result, the manager of a micro-enterprise or SME and his banker can face higher operational costs. In addition, the manager may not be able to access as many services from the Islamic bank as from a conventional bank.

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