Islamic Finance and Banking - Essay Example

Islamic finance and banking Contents Executive summary 3 Introduction 3 History and background 3 People 4 Value 4 Islamic banking work in practice 4Function of Islamic bank 6 Operation structure of the Islamic bank 6 How the services or products work in practice 7 Analysis and evaluation of three products 9 Product 1 Takaful or insurance program 9 Product 2 Sukuk 10 Product 3 Personal Finance 11 Recommendation on product 1 12 Recommendation on Product 2 12 Recommendation on Product 3 13 Conclusion 14 References 15 Executive summary Bank: The company was formed in the year 1982 as the first Islamic bank in Qatar and is one of the largest banks in Qatar. The company has a paid up capital of QR 2.36 billion. The bank is a major player in the domestic market and has branches in 4 other countries in the world. The company is rated highly in terms of credit ratings by the credit rating agencies. Products: The bank offers different products that are compliant with the Shari’a principles. This particular essay analyzes three different products are analyzed. The three different products that are analyzed in this report are personal finance, Sukuk and insurance products. Recommendations: It has been found that these products are very good and attractive to the customers. However, the company can further improve the products and advertise about the products in order to increase the awareness about the products and increase the no. of customers. Lesson learned We were able to learn how Islamic banks functions and apply the principles for the banking to the particular essay. Introduction History and background Qatar International bank or QIB as it might be called was established in the year 1982 as the first Islamic bank to be opened in Qatar. Over the span of year the bank has emerged as the leading provider of financial services in the region. The bank is the pioneer in the field of Islamic banking in local and regional markets in Qatar. The bank plays a leading role in developing competitive and innovative products and services that are Shari’a Compliant. The bank is the first and largest Islamic bank in Qatar. The bank has strong capital adequacy ratio and a paid up capital of QR 2.36 billion. The bank is constantly rated as A or A+ by different international credit rating organizations. The bank has good presence in both the whole sale and the retrial markets to satisfy the needs of the customers. The bank has strong presence in the Qatar market and has established foot prints across the globe. The bank has international presence in countries such as United Kingdom, Malaysia, Sudan and Lebanon. There are several subsidiaries of the banks which act according to the principles of Shar’ia. People QIB accepts that people are its biggest assets. The aim of the QIB is to be a bank of the people and for the people. The bank aims and commits to enhance the level of customer service and thus aims to become a completely customer centric bank by adopting the latest technologies. Value The vision of the company is to form a leading innovative global Islamic bank that adheres to the highest principles of Shari’a and ethics. The company aims to meet the international banking standards, to partner with the developing of the global economy and participate in the socio economic growth (QIB, 2015). The bank stands for the values such as Integrity, Transparency, loyalty, Justice, excellence etc. Islamic banking work in practice By the term Islamic banking it is referred to as the system of banking or banking activity that is found to be consistent with the teaching of Shari’ah or Islamic rules and the practical application of the same through the development of Islamic economics (Kettell, B, 2011). Principles of Islamic Banking emphasize upon the moral and ethical values in all form of dealings and have a universal appeal. According to Shari’ah payment and acceptance of interest charges is prohibited for transactions that involve lending or accepting money. It also prohibits from entering into transactions that involves providing goods and services that are beyond the principles of Shari’ah. The principles of Shari’ah were the basis for transaction in earlier times and led to a flourishing economy (Kettell, 2011). In the recent years starting from the late part of the 20th century there has been resurgence of Islamic banks in order to provide for an alternative basis of banking for the Muslims. However, it must be noted that the services of the Islamic banks is not restricted for the Muslim population. As compared to the commercial banks Islamic banks have the same purpose (Kettell, 2011a). The point of difference that exists in between the Islamic banks and commercial banks is that the Islamic banks functions according to the rules that are laid down in Shari’ah which are known as Fiqh-al-Muamalat. For an Islamic bank it is required that it functions according to the principles that are laid down in Shari’ah and the practical application of the laws through the development of Islamic economics (Kettell, 2011a). The sources from which the principles of Shari’ah have been derived are the Qur’an and Hadith. If solutions to the problems cannot be found in the Qur’an or Hadith then the rulings that are made are based on the consultation of a group of learned scholars. However in giving the rulings the scholars must ensure the fact that their rulings do not deviate from the fundamental teachings of Qur’an (Hassan and Lewis, 2007). The way in which products are implemented is totally different from the commercial banks as the banks get rules from AAOFI/IFSB as compared to the commercial banks which develop their own set of rules. Function of Islamic bank The function of the Islamic banks can be categorized into mainly two broad groups that are generic banking services and Investment and investment management. In providing the function and services to the customers the bank must comply with the guidelines that are issued by the Shari’ah (Hassan and Lewis, 2007). In the investment functions when the Islamic banks give loan for a project it would not charge interest but would instead be based on profit sharing as stated by the Shari’ah principles. In order for the bank to invest in an investment project the project must be compliant with the principles laid in the Shari’ah. In addition to the above two functionalities an Islamic bank is required to indulge in the development of the staffs of the banks and the local communities in which the bank operates (Hassan and Lewis, 2007). Operation structure of the Islamic bank In case of the conventional commercial banks they can provide Islamic based financial services to the customers of the bank but through a separate division which is referred to as Window model, branches or subsidiaries. In the window model same delivery and same branch network of the commercial banks are used (Hassan and Lewis, 2007). In branches the delivery channel will not be same. In case of branches there will be a special channel through the dedicated branch. The subsidiaries on the other hand are separate legal entities and are free to either use the same delivery channel or can establish a new delivery channel. On the other hand the Islamic banks can also offer conventional services in a new division and the new division is referred to as the “Fully Fledged Banks”. The new division will have its own service delivery channel and different business policy and strategy from the parent (Hassan and Lewis, 2007). How the services or products work in practice The services that are offered by QIB are mainly in two broad domains. One of the areas in which services are offered by the bank is Personal banking and other area is the area of corporate banking. Personal Banking- QIB has a long history in providing banking services to its customers that are characterized by knowledge and expertise in banking and comes with a high level of Islamic financial culture. The features of Personal banking are: Accounts: The bank provides all types of accounts that are offered in general by any other commercial banks. Credit cards: These include various types of cards like the Visa debit card, credit card, Visa infinity, Master Card, Prepaid travel card, Internet cards etc. Personal Finance: QIB offers a personal finance that is Shari’a compliant. The personal finance program helps the clients to have the things that they need or desire (QIB, 2015). The needs of the clients may vary from the need to refurnish personal homes, to get married etc. The financial program by QIB helps the clients in meeting their financial requirements. The payment program of the company known as “Sadad” helps the clients think about how they would want to repay the loan. Mobile banking: QIB was the first Islamic bank in Qatar to introduce mobile banking app for the customers of the bank. Through the use of the app the customers can access their accounts anytime and anywhere. This feature of being able to access all the financial information when on the move is very attractive to the customers of the bank. Tamayuz: The Tamayuz is a service that the bank offers to the retail customers of the bank. Through this particular product the bank provides some exceptional services that make the banking experience exceptional for the customers of the bank. As a customer having this particular facility QIB offers to the customers accounts that are for all purposes. The credit and debit cards that the banks offer to the customers are added with exceptional benefits and the bank also offers preferential financing schemes (QIB, 2015). Private Banking: The bank as part of the private banking initiative provides customized solutions to HNI clients. The services that are offered by the banks includes investment opportunities, provision of access to the well experienced group of relationship manager along with a high level of expertise in the Islamic financial culture. Takaful: QIB has also launched insurance products that are underwritten by the Damaan Islamic Insurance Company that is known as Beema (QIB, 2015). The programs which are Shari’a compliant look after security and protection about the future of the clients and looks after the family members of the client in case anything happens to the clients. There are various types of insurance that is offered under Takaful. Internet Banking: QIB offers internet banking facilities to the clients which is a simple convenient and easy way for the clients to access their accounts. Portfolio: There are mainly two types of portfolio that are offered to the clients. These are “Shiraa Funds” and “International Sukuk Portfolio”. Corporate Banking Being the first Islamic Bank in the region QIB has a long standing experience in the area of providing best financial solutions for corporate financing (QIB, 2015). The financing is provided in the Qatari market keeping in mind the principles of banking that is to say speed security and accuracy. The bank benefits through the experience in serving customers from all sectors of the national economy. The bank provides its services in different area under the broad wings of corporate banking. These areas are: Corporate Financing, Trade Services, SME financing, contracting and real estate financing, Treasury services, Internet banking for corporate, and Operations sector services. Analysis and evaluation of three products Product 1 Takaful or insurance program Takaful was launched by QIB in order to meet the expectation of the clients and fulfill their needs. The Takaful programs are underwritten by Demaan Islamic Insurance company namely Beema. The programs are Shari’a compliant and offer protection and security to the client’s future and looks after the wellbeing of the family members of the client in case something happens to the client. There are three different forms of Takaful policies that are offered by the bank. These are: Family Shield: This is a policy that is designed to provide relief in times of distress. The policy is simple, convenient and affordable policy which provides benefits that are attractive to the clients (QIB, 2015). Savings plan: The product is designed on three different lines that are investment, wealth accumulation and saving. This Shari’s compliant program offers security and protection to the future plan of the Client. The program is used to combine saving plan which generates good return and Takaful Coverage to protect the return. Travel Takaful: This is a multi trip Takaful policy that is used to protect the clients when they are travelling outside Qatar. This competitively priced travel policy provides in case of accidents, medical expense incurred while travelling and any inconvenience incurred during the travel (QIB, 2015). Product 2 Sukuk For the companies which seek finance through the issuance of Sukuk the bank provides services such as securitization, placement arranging and financial services. According to QIB there exists great opportunities in this area of Islamic Finance and Islamic financial markets in the area. New Sukuk issues are traded in the primary market and the existing ones are traded in the security market (QIB, 2015a). The bank acts as a facilitator over here. The bank offers to the customers an opportunity to invest in Sukuk portfolio. It collects those funds and invests them to the companies which require the finance. Sukuk can be considered as the Islamic equivalent of the bonds. The company can raise long term finance in the capital market. Sukuk is the security which complies with the laws in Islam and the investment principles that are laid in Islam. They provide access for both the investors and the companies who seek to have Shari’a complying financing in the capital market (QIB, 2015a). The concept of Sukuk is based on the principle of monetization of Asset. They can be issued on assets that either exists or the assets that will be available in the future. The concept of Can be looked at as a form of Islamic securitization. In Sukuk the company moves the asset of the company into a special purpose vehicle which acquires the assets through the proceeds of the issuance of securities (QIB, 2015a). Product 3 Personal Finance There are several Shari’a compliant personal finance programmes that are offered by QIB and help the customers of the company in getting what is needed by the customers of the company. The payment program of the company that goes by the name of Sadad gives various different types of payment options that the customers can used to pay back their loans. There are various types of personal finance that are offered by the company (QIB, 2015a). These are: Musawama Sale, Murabaha Sale, Mudaraba Investment, Musharaka Investment and Ijarah. The two products which mainly differentiate the functions of Islamic bank from any other commercial banks are Mudaraba Investment, Musharaka Investment. In these two types instead of the bank charging interest for the loan, it becomes party to the business and has a part of the profit and loss that the business generates (QIB, 2015a). Recommendation on product 1 The bank provides very good services in the form of variety of insurance products that it offers under the Shari’a law. The products are offered by the bank in various departments such as family plan, savings plan and travel insurance. The people’s life has become quite uncertain now a days and every people wants to be sure about their future. In this era of uncertainty the insurance products is highly likely to be accepted by the customers of the bank. The bank can work on the following recommendations to make these products more attractive to the customers of the bank. 1. Advertise the importance of insurance products to the customers 2. Offer other forms of insurance to the customers. 3. Lower the premium of the insurance products and introduce flexible payment options. 4. Introduce new insurance products for the lower income households. 5. Issue insurance products in other innovative areas. 6. Increase the awareness about insurance products amongst prospective client base. 7. Advertise to the customers about the type of insurance products that are available with the banks. 8. Recruit third party agents to sell the insurance products to the customers. Recommendation on Product 2 The Sukuk is a very good product that is being offered by the QIB to the customers of the bank. The bank offers the companies loans so that they can restructure the company. This is an innovative product that is being offered by the company. The products is innovative for both the customers and the company as it provides a new source where the customers can invest and a new source from which the company can borrow funds. The recommendations for the bank on this issue are: 1. The bank can improve awareness about Sukuk with the customers of the bank. 2. The Sukuk is the product that can provide the company with the loan that is used for financing the company. However, the awareness of the products needs to be increased amongst the companies which can use the Sukuk financing. 3. It offers a new area for the customers of the bank who can invest in Sukuk but the customers are needed to be made aware of the risks that are associated with this type of financing activities and the benefits that exist with such form of financing activities. Recommendation on Product 3 There are various types of personal finance that are offered by the QIB. The personal finance offered by the banks is required to meet the various needs of the customers. This is done so that the customers can achieve their needs and aspirations. The various products that are offered by the bank are in accordance with the Shari’a. Thus the bank offers the customers whatever they want in addition to serving the principles of banking and Islamic fi9nance as laid down by the Shari’a and derived from the Quran and Hadith. However there still areas in which the bank can improve its service offerings. 1. The profit rate that the bank keeps should not be different with different categories of product but should be similar. 2. The bank should focus on more advertisements to attract the attention of the customers. 3. The profit rates should be clearly described on the site for each type of finance. Conclusion The above essay focuses on the Islamic banking from the perspective of a bank in Qatar. The essay focuses in particular to three different products of the said bank and recommends how the bank can improve these three products. The objective of the essay is to study in detail the intricacies of Islamic Banking and how the bank follows this features and how the same can be improved. In the course of the essay it is found that Islamic banking in general differs from the normal commercial bank in several aspects. The banks function according to the Shari’a principles that are derived from the teachings of the Quran and Hadith. The banks have a committee that examines whether the bank is following the principles of Shari’a or not. The Shari’a in details talks about the principles of banking and finance as stated and applicable by the Islamic banking laws. If in some cases the solution to the problem is not found in the law then the committee decides about the solution subject to the fact that the solution given by the scholars does not deviate the main principles of the Shari’a law. The three main products that are offered by the bank are personal finance, Sukuk or securitization and insurance services. It is found the three services that the offered by the bank in this field encompass the uniqueness of the services and attractiveness of the services to the customers of the bank. However, it is found that there are still areas in which these services can be improved in order to improve the services and attract more customers to these services. References Hassan, K. and Lewis, M., (2007). Handbook of Islamic Banking. Cheltenhan: Edward Elgar Publishing. Kettell, B., (2011). Introduction to Islamic Banking and Finance. West Sussex: John Wiley & Sons. Kettell, B., (2011a). Case Studies in Islamic Banking and Finance. West Sussex: John Wiley & Sons. QIB., (2015). Corporate Profile. Retrieved from: http://www.qib.com.qa/en/images/QIB-Profile-2015.pdf. QIB., (2015a). Islamic banking tools. Retrieved from: http://www.qib.com.qa/en/footer/islamic-banking/islamic-banking-tools.aspx. Read More