Principle of Islamic Business and Finance

Principle of Islamic Business and

Finance

Assignment -1

MCB ISLAMIC BANK

Submission
Detail
Date 24/9/2018
Day Monday
Submitted to: Miss Sadaf Bilal
Submitted from: M.Omer Aleem
Roll No: M3G 31 F17

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Principle of Islamic Business and Finance

MCB ISLAMICBANK

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Principle of Islamic Business and Finance
Question 1. It is sometimes argued the Islamic financial system that the
Islamic banks and financial institutions, working since last three decades, did
it bring any change in the economic system. Why?
Islamic banking is defined as the Banking system that is
based on the principles of Islamic law (also known shariah).

The two basic principles behind Islamic banking are:

1. The Sharing of Profit and loss.
2. Prohibition of the collection and payment of interest.

HISTORY OF BANKING IN PAKISTAN

At the time of independence there were 631 offices of scheduled banks in Pakistan of which 487
were located in West Pakistan alone.  As a new country without resources it was very difficult for
Pakistan to run its own banking system immediately. Therefore the expert committee recommended that
the Reserve Bank of India should continue to function in Pakistan until 30th September 1948 so that
problems of time and demand liability coinage currencies exchange etc. are settled between India and
Pakistan.  The non-Muslims started transferring their funds and accounts to India.  By the end of June
1948 the number of officers of scheduled banks in Pakistan declined from 631 to 225.  There were 19
foreign banks with the status of small branch offices that were engaged solely in export of crop from
Pakistan, while there were only two Pakistani institutions Habib Bank of Pakistan and the Australasia
Bank. The customers of the bank are not satisfied with the uncertain condition of banking. Similarly the
Reserve Bank of India was not in the favor of Govt. of Pakistan. The Govt. of Pakistan decided to
establish a full-fledge central bank. Consequently the Governor-general of Pakistan Quaid-E-Azam
inaugurated the State Bank of Pakistan on July 1, 1948. Thus a landmark was made in the history of
banking when the state bank of Pakistan assumed full control of banking and currency in Pakistan.
The banking structure in Pakistan comprises of the following types.
1) State Bank of Pakistan.
2) Commercial Bank of Pakistan.
3) Saving banks.
4) Co-operative banks
5) Specialized credit institutions.
Up to December 31, 1973, there were 14 Pakistan commercial banks that functioned all over the
country and in some foreign countries through a network of branches.  All these commercial banks were
nationalized in January 1, 1974, and were recognized and merged into the following five banks:
1) National Bank of Pakistan
2) Muslim commercial bank limited
3) Habib Bank Limited
4) United Bank Limited
5) Allied Bank of Pakistan
The state bank of Pakistan is the Central bank of the country and was established on July 1,
1948.  The separation of East Pakistan and its repercussion in the form of economic depression has
caused a lot of difficulties to the banking system in Pakistan.  The network of bank branches now covers
a very large segment of national economy.  The numbers of branches have increased appreciably and
there is now on branch of bank for every 3000 heads of population approximately.  There is done
reasonable growth in deposits from the establishment of Pakistan.  Besides this growth specialized credit
and financial institutions have also developed over the years.

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The Government of Pakistan in the late 90’s introducing the need for the
privatization of state owned banks and companies.  The private sector has accepted the challenge and
most of the banks are privatized today. The State Bank of Pakistan issues the shares of these
periodically.  Bank employees and other common peoples can also purchase these shares and earn profit.
What is Islamic Banking?
Islamic banking is defined as a banking system, which is in consonance with the spirit, ethos and
value system of Islam and governed by the principles laid down by the Shari’ah. Islamic banking, the
more general term, is based not only to avoid interest-based transactions prohibited in Shari’ah but also
to avoid unethical and un-social practices. In practical sense, Islamic Banking is the transformation of
conventional money lending into transactions based on tangible assets and real services. The model of
Islamic banking system leads towards the achievement of a system which helps achieve economic
prosperity.
What is Meant by Riba?
The word “Riba” means excess, increase or addition, which correctly interpreted according to
Shari’ah terminology, implies any excess compensation without due consideration (consideration does
not include time value of money). This definition of Riba is derived from the Quran and is unanimously
accepted by all Islamic scholars.
The Status of Riba has been clarified in the following verses of Quran (Surah Al Baqarah 2:278-9)
“O those who believe; fear Allah and give up what still remains of the Riba if you are believers. But if
you do not do so, then be warned of war from Allah and His Messenger. If you repent even now, you
have the right of the return of your principal; neither will you do wrong nor will you be wronged.”
What is the philosophy of Islamic banking?
The philosophy of Islamic banking takes the lead from Islamic Shari’ah. According to Islamic
Shari’ah, Islamic banking cannot deal in transactions involving interest/riba (an increase stipulated or
sought over the principal of a loan or debt). Further, they cannot deal in the transactions having the
element of Gharar1 or Maiser2. Moreover, they cannot deal in any transaction, the subject matter of
which is invalid (haram in the eyes of Islam). Islamic banks focus on generating returns through
investment tools which are Shari’ah compliant as well. Islamic Shari’ah links the gain on capital with its
performance.
Operating within the ambit of Shari’ah, the operations of Islamic banking are based on sharing
the risk which may arise through trading and investment activities using contracts of various Islamic
modes of finance. The prohibition of a risk free return and permission of trading, as enshrined in the
Verse 2:275 of the Holy Quran, makes the financial activities asset-backed in an Islamic set-up with
ability to cause ‘value addition

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MCB Islamic Bank Limited (the Bank) is the wholly owned subsidiary of MCB Bank Limited
and commenced its operations in 2015 with nation-wide network of branches.
The aim of MCB Islamic Bank Limited is to be the 1st choice Shari’ah Compliant Financial
Services Provider for the customers and to carry out business purely in accordance with the Shari’ah
rules with full conviction and devotion.
Alhamdulillah, the Bank currently operates to provide Shari’ah compliant value added and high
tech innovative banking solutions for customers under the supervision of Shari’ah Board which is being
headed by renowned Islamic Scholar Prof. Mufti Munib-Ur-Rehman.
The Bank focuses on building strong lasting relationships and delivering an experience that
satisfies all types of customers across Corporate, Commercial, SME, Consumer, Agriculture and Micro
sectors. The Bank offers wide range of Riba Free and Shari’ah compliant products for both the Personal
and Business needs.
The Bank is using world’s renowned and highly recognizable Oracle Flexcube as its Core
Banking Software. Different services and products offered by the bank are available to customers
through a branch network of 166 branches backed by over 167 On-Site and Off-Site ATMs network.
Bank operates EMV enabled Debit Card, iOS and Android based native Mobile and Internet Banking.
The Bank is committed to share the mutual benefits with the customers, staff and shareholders
who participate in our business success under the highly skilled seasoned Management with the prime
objective of Customers’ Satisfaction.
SHARI'AH BOARD
MIB conforms to Shariah compliance standards as approved by its Shariah Supervisory Board.
The profiles of members of its Shariah Supervisory Board are as follows
 Prof. Mufti Munib-Ur-Rehman- Chairman Shari’ah Board
 Mufti Syed Sabir Hussain- Resident Shari’ah Board Member/ Head-Shari’ah Compliance Department
 Mufti Mahmood Ahmad- Shari’ah Board Member

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BOARD OF DIRECTORS

MR. RAZA MANSHA

CHAIRMAN

 MR. AHMED EBRAHIM HASHAM DIRECTOR

 MR. MUA USMANI DIRECTOR
 MR. OMAIR SAFDAR DIRECTOR
 MR. IBRAHIM SHAMSI DIRECTOR
 MR. AFTAB AHMAD DIRECTOR
 MR. ALI MUHAMMAD MAHOON PRESIDENT & CEO

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MANAGEMENT PROFILE
MR. ALI MAHOON President and ceo
Country head business development &
MR. ABDUL AZIZ MEMON
strategic clients
Group head – corporate, investment
MR. OMER KHALID LASHARIE
banking & fi
MR. SYED IFTIKHAR HUSSAIN RIZVI Chief financial officer

MR. KHAWAJA KHALIL SHAH Chief risk officer

MR. KASHIF AHMED Group head – compliance and controls

Group head – human resource
MR. SALMAN QUTB
management
MR. SHAHID MAHMOOD Chief information officer

MR. MUHAMMAD SAEED Group head – operations

MR. SYED SALMAN ALI Group head – treasury & fxg

Group head – internal audit & risk
MR. MUHAMMAD TARIQ GONDAL
asset review
Group head – consumer, sme and
MR. MUHAMMAD HAMID YASIN
micro finance
MR. AZHAR NAZIR Group head – special projects
Head of shari’ah compliance
MUFTI SYED SABIR HUSSAIN
department
Group head – product management &
MR. USMAN AJMAL
shari’ah structuring
MS. MAIMOONA CHEEMA Company secretary & head of legal

MISSION, VISION & VALUES

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MISSION STATEMENT
 To provide innovative Shari’ah compliant financial solutions and quality services to our customers.
 To maximize Halal returns for our shareholders.
 To nurture an internal environment of qualified professionals and cutting-edge technology.
VISION STATEMENT
To be the leading provider of Shari’ah Compliant Innovative financial products with a focus on service quality
and providing superior value for our customers, shareholders, employees and the community.
OUR VALUES
We are Shari’ah driven
 Following the Shari’ah we will conduct our activity in a fair, ethical and socially responsible manner.
Dedicated and Dependable
 We will build strong, enduring relationships, delivering an experience that delights our customers.
Aspirational
 We will be professional and fulfil our commitments, delivering high quality products and services.
Corporate Strategy
The Bank’s strategy has three pillars, which will be pursued concurrently and focused in chronological order:
A. Build market leadership within Pakistan
 Grow network
 Financial Inclusion
 Product Development
 Customer Satisfaction
 Technological Innovation
B. Create a Shari’ah compliant integrated financial services group
 Create a model that offers customers access to a diversified Shari’ah compliant financial services.
C. Pursue international growth opportunities
With the growing acceptance of Islamic Banking worldwide, MCBIBL will turn its attention to replicating its
business model through systemic geographic expansion.

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PROS & CONS OF ISLAMIC BANKING
Pros
1. Pure halal savings and profit
2. Follow the Islamic shariah so there is fixed rules
3. Muslim Islamic Bank has the ability to bring innovative products and services.
4. Mostly branches are newly opend there is batter facilites.
5. No restrictions imposed by the state bank of Pakistan. Has to follow Shariah
6. Profit and loss share not risk
7. Qadar card
Cons
1. Peoples are less aware in Pakistan
2. Few branches as compare to commercial banks.
3. Higher risk
4. Competition with commercial banks that offer high interest rate.
5. Limited scope.
6. Less trained employees.
7. Different scholars has different opinions

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Major modes of Islamic finance
1) Participatory modes of Finance
a) Mudarabah
b) Musharakah

2) Non Participatory modes of Finance

a) Murabaha
b) Musawamah
c) Salam
d) Istisna
e) Ijarah
f) Ijarah wa Iqtina

 Recommendations for the visible in the Economic setup and in the field of financing:

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Question 2. Select any Islamic and commercial banks and make it differentiate
between conventional lease & Ijarah.

DIFFERENCE BETWEEN IJARAH AND LEASE

Ijarah inmib Lease in MCB

Ownership
Leasing can provide financing for movable
(industrial, transport and agricultural plant and
“Muajjir” (lessor) is the owner of the leased equipment) or real estate assets, while at the same
property. time allowing the creditor institution to retain
ownership of the asset throughout the term of the
contracts.
Risk bearer:
The risk and liabilities of ownership lie with the
“Muajjir”. The leased asset shall remain the risk of
the “Muajjir” throughout the lease period. Any loss The lessor assumes and manages the risk of the
Or harm caused by factors beyond the control of asset.
the “Mustajir” lessee shall be borne by the
“Muajjir”.
Starting time for rental obligation
The rental falls due from the date of handing over The rental falls due from the date when the lessee
the asset to “Mustajir accepted the goods .
Penalty
Penalty can be charged to the lessee for delayed the
amount recovered is only to be used for charitable Penalty can be charged to the lessee for delayed
purposes by the lessor. payment.

Starting time for rental obligation

The rental falls due from the date of handing over The rental falls due from the date when the lessee
the asset to “Mustajir”. accepted the goods.

Usefulness of property

It is a condition that the asset to be leased must be

The leased equipment must not be “limited use”
a non-fungible one which can be utilized more than
property
once

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Premature termination

From the time of termination, the lessee is not On termination of lease contract, all obligations
obliged for rental payment. that are still executory on both sides are discharged

Sale and lease back as one transaction

This transaction involves the sale of the property

Sale and lease back are allowed, but only as two
by one company to another which in turn leases the
separate transactions.
same property back to the original seller.

Equivalent to a sale

Leasing differs from sale in the way that it does not A manufacturer or dealer doesn’t recognize any
transfer the corpus or ownership of the property, selling profit on entering into an operating lease
which remains with the transferor. because it is not the equivalent of a sale
Nature of Transaction
In Ijarah Transaction everything is disclose in front In conventional leasing, some profit is hidden that
of the customer not show to the customer
Period

1 to 5 years 2to 4 years

Insurance
In case of conventional leasing insurance expenses
In case the leased asset insured the expenses of paid by the lessor but finally receive from the
insurance bear by the Islamic bank. This is the customer. In case of conventional leasing insurance
Islamic Mode of Insurance known as Takaful. expenses paid by the lessor but finally receive from
the customer.

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