The Islamic Banking and Finance - Case Study Example

The Islamic Banking and Finance Name Institution Affiliation The Exchange Based Contracts The exchange contracts have diverse essence in the Islamic financial institutions, this exchange based contracts is classified into two major categories, this is the sales based contract and the lease based contract. The sales based contract is one type of contract which specifically deals with the sale of valuable items for others whereas the leased based contract only deals with issues concerning leases. The kind of leased based contracts are ijara, al-shakhau as well as ijarat al-khadamat. In major cases the lease based contract precisely labour, service or usufruct, this type of exchange is also referred to as commutative contract or aqd al-mua’awadhah as commonly referred to in Arabic. Exchange based contracts are in most case used as a financial instrument in Islamic finance institutions when there is exchange of currency with a particular country on a certain agreed date and at a given or an agreed date. Therefore through this it is able to provide protection against all forms of unfavourable rates of currency exchange. It also assists the business linked to activities in a foreign currency to be able to come up and set a kind of currency risk exposure. Furthermore a business can be able to safeguard against hostile currency flow at a future date when using foreign exchange hedging capability as a technique. The exchange based contract is also used as a measure or a financial instrument in the various Islamic banks through covering various payment transactions, foreign currency and also the fund transfers. All this do involve diverse currency and countries as well as the many transactions such as the travellers’ cheques, foreign currency drafts, foreign currency cash trade services and also foreign currency transfers and investments.it also plays a big role in eliminating the risks of fluctuations faced in exchange rates through fixing a date on the rate on the contract for the transaction expected to be dealt with in future transactions. There is also the currency arbitrage which mainly focuses on taking the advantages of disagreements in the exchange rates in the very many different markets dealing with money by simply purchasing currency in a particular market then thereafter sell the same currency in another market to the benefit of the different interest rates, therefore enabling the particular country make a much high interest as compared to the other countries venturing into the same kind of business. ISLAMIC BANK OF ABU DHABI The Islamic Bank of Abu Dhabi is a public kind of bank having its headquarters in the United Arab Emirates that was founded in the 20th May in the year 1997, it first stated as a joint public stock company via the Decree of Amiri of 1997 number 9. Abu Dhabi Islamic Bank started its profitable activities in the year 1998 on 11th November. It was then inaugurated by the UAE information and culture minister Mr Abdullah Bin Zayed Al Nahyan on April 18th 1999. All kind of transactions, processes as well as contracts stand fully approved in line per the Islamic Sharia ethics This bank actually began its processes with only a waged up capital kind of around dirhams a billion which was shared into a hundred shares million, therefore each share had a value of was ten dirhams. These stocks can be easily found since they are cited in the Securities Market of Abu Dhabi. The Islamic Abu Dhabi Bank founders hold a 21% of the shares whereas the residual being 71% is being hold by an approximate of a hundred thousand shareholders. The establishing shareholders are the ruling family members, the investment authority of Abu Dhabi (ADIA), and the popular UAE nationals as also Doctor Waseem Ahmed Khan Abu Dhabi Islamic Bank in Egypt was recognised as the most best financial institution as of the year 2016 by the Global Finance Magazine (Jamal& Naser, 2002), this magazine is an established reference all over the world in the banking and business community. The global finance award beneficiaries represent the particular firms with whom customers around the world would like to do business with. The winners are normally selected by a global finance editorial team after following various consultations with the industry experts. The selection conditions are normally based on quantitative measures such as growth in product innovation, profitability and assets and also qualitative measures such as industry perception and customer satisfaction. Abu Dhabi Islamic Bank has a concrete history of being recognised globally for its best performances, it won six international award awards in the year 2015, these awards are the best Islamic bank in North Africa, best commercial bank in Africa, best Islamic corporate bank in North Africa, most advanced Islam bank, top private Islamic bank as well as the best Islamic group of treasury management. The type of transaction in Islamic Bank of Abu Dhabi The Islamic bank of Abu Dhabi has been able to stand on its own in Egypt after being able to successfully complete aits long term process of restructuring following its acquisition of four percent sizable stake in the year 2007. Currently the Abu Dhabi Islamic Bank is ranked among the largest sharia compliant financial institution that is operating in Egypt National Bank for Development, it has actually employed a group of over two thousand experts responsible in providing a range of banking and finance services via a nation networks of seventy branches, sixty eight ATMs and thirty nine micro finance units. The bank is now claiming the crown of the group of the small number of the swiftly fully growing Sharia accommodating banks which are operating in the Egyptian market. The kind of transaction the Abu Dhabi Islamic Bank has been using over the past five years over the participation of Egyptian Gulf Bank, Baraka bank among others is referred to as mudarabah. This is a sharia compliant that was provided when the bank participated in the eighteen point five percentage of the total amount in financing which is equivalent to a hundred and ten US dollars Based on the banks strategy to enlarge into projects that are financial structure oriented which are also essential to the day to day growth of the country. The Abu Dhabi Islamic Bank in Egypt decided to organise and sign the very first ijara organisations worth a hundred and fifty million dollars Transactions in Islamic Banks Musharakah This is type of shirkah al-Amwal which simply means to share. In business context it actually refers to a form of joint enterprise which its parties is obliged to share the profit and loss of the firm.it plays an important role of financing business operations that are only based on the Islamic principles which do not support making of profit on interests acquired from loans.it may also include formation of joint services in Shirkah al-Amal where services are rendered without necessarily requiring any capital investments (Jamal& Naser,2002). Mudarabah is a technique which provides a basis of re-organisation of all Islamic commercial banking sectors. This kind of contract is mostly translated as the profit and loss sharing but in the contrary there is no loss sharing as in the musharakah contract.Murabahah (cost plus financing) is an Islamic financial structure where an intermediary buys a given property with free and a clear total. Murabahah is not a loan that bears interest considered as riba (excess) and is an acceptable kind of credit sale b allow Sharia (Islamic religious law) Ijarah (lease) is an exchange transaction where known benefits from specified assets are made available in a payment return but where the ownership of the asset is not transferred. This kind of a contract is of the same design as the agreement of instalment leasing.Istisna’ (manufacturing contract) is a long term contract whereby a certain company agrees to manufacture construct or build assets, with a responsibility from the producer or manufacturer to deliver them to various customers upon their completion Bay mu’ajja (deferred sales contract) is a deferred sales payment contract whereby the parties agree to the payment of the given price at a particular time in the future. Deferred payments sales contract is only legal if the date of payment is set unmistakably, once the sales contract is made the price cannot be changed. Murabaha (mark up) is an origin of an Arabic word Ribh which means profit.in this case the bank gains the commodity then sell it to the client. Murabaha is a commonly used by the Islamic banks to satisfy their diverse financial requirements Bay dayn (sales of debt) in simple terms it can be defined as the sale and purchase of transactions based on debts of quality.Tawriq ( securitisation) it a situation whereby the issuer comes up with a financial instrument by just combining other assets of finance and then market the different ranks of the instruments that have been repackaged to various investors.Sarf (the exchange of currency)it is a kind of practise which involves taking anything that serves as a media of exchange or property for another property of the same kind unequally, this can only take place in a trade transaction, salam (advance forward buying or sales) or loan Tawarruq (cash financing) is a financial product or instrument in Islam which allows its clients to easily and quickly be able to raise money in theory form without without breaking the Muslim bar on interest. Here a client is forced to a buy assets from the Islamic Bank that can easily sold at a marked up price and also quickly sell the asset to realise cash. Bay inah (sales with immediate purchase) it is actually the transaction and buying back of a given asset at an upper price than what the trader had initially retailed it. This is also viewed as a lend in arrangement of the sale Salam (forward sale contract) this is a kind of transaction where a certain financial institution always makes payments in advance for buying particular assets which the seller is expected to supply on the pre- agreed date. This form of transaction is being used in Abu Dhabi Islamic Bank specifically in the sector of agricultural. This bank spreads some amount of cash for diverse ideas to receive acquire share in of the crop, it in turns trades to diverse clients in the country (Muhammada& Chonga,2007). The general terms and conditions for the Salam contract is cover commencement which states that the entire principal shareholder is covered under the scheme just from the date it started operating. Each payment of the takaful benefit is another term which allows the takaful provider to pay the takaful benefits to the bank then the bank shall apply all means to be able to clear the outstanding balance.Erol and El-Bdour and Kaynak carried out the first study on the consumers attitude towards the Islamic type of banking, it was found that clients find the bank to have efficient and fast services. The reputation of the bank was also viewed being the most essential aspect in the services offered by the bank. Growth rate of Islamic Abu Dhabi Company when using the Salam kind of contract has actually led to the advancement of the Islamic finance sector and in turn this growth has made the finance sector gain the attention of Islamic fund hedge managers Ranking of the World Islam Banks by Assets The above charts shows the foue islamic banks, they are the leading industry resource that are ranked and fully fledged islamic banks based on assets. Dubai Islamic bank holds the largest asset share of about forty billion dollars followed by the Abu Dhabi Islamic Bank holding around thirty two billion dollars then the emirates having twenty billion dollars and lastly Noor bank with the least share of about ten billion dollars The executives of the islamic finance institution who are the sales comission operators confirmed that it is their responsibility to verify ,investigate and also analyse the root cause and resolve issues in the sales agent and sales partners. During the talk they confirmed that the forwad sales contract is the best and safest mode of transactions since it enhances goods and cash security. To conclude the Abi Dhabi Islamic Bank is on the forehead as seen in the chart shown by its asset share, therefore it is able to offer services that fully fulfills its clients desires and wish. The forward sale contract has highly been accepted the bank clients and many are making use of it Reference Hassan Al-Tamimi, H. A., & Mohammed Al-Mazrooei, F. (2007). Banks' risk management: a comparison study of UAE national and foreign banks. The Journal of Risk Finance, 8(4), 394-409. Jamal, A., & Naser, K. (2002). Customer satisfaction and retail banking: an assessment of some of the key antecedents of customer satisfaction in retail banking. international journal of bank marketing, 20(4), 146-160. Muhammada, M. Z., & Chonga, R. (2007). The Contract of Bay’Al-Salam and Istisna’in Islamic Commercial Law: A comparative analysis. Labuan e-Journal of Muamalat and Society, 1, 21-28. Read More