PMU: Prince Mohammed University
Fall Semester 2012/2013
FINA 4351: Special Topics in Finance
Islamic Finance
Term Project: Islamic Banking
Student Name: Leena Al-Shibil
ID: 200900172
Section: 201
Submitted to: Dr. Dawood Ashraf (CFA)
December 15, 2012
1
Table of Contents
EXECUTIVE SUMMARY
3
OVERVIEW OF ISLAMIC BANKING
4
STATUS OF ISLAMIC BANKING - GLOBALLY
4
STATUS OF ISLAMIC BANKING – SAUDI ARABIA
5
ISLAMIC BANKING PRODUCTS
7
ISLAMIC BANKING PRODUCTS BY RIYADH BANK
8
MY ASSESSMENT
11
ARGUMENT (1)
ARGUMENT (2)
ARGUMENT (3)
11
11
12
REFERENCE
14
APPENDIX
15
CHART 1
CHART 2
TABLE 1
15
16
17
2
Executive Summary
Islamic banking is banking system that is based on the law of shari’a.
Which means that it should not involve Riba transactions, or Haram activities, or
uncertainty risk (Gherar).
The first appearance of Islamic banking system businesses was in Egypt
back in the 1960s. Since then, Islamic banking start expanding in Egypt and other
countries. By the years of 1980s Islamic banking came into existence in the
western and other non-Islamic countries. Today Islamic banking is worth US$1.1
trillions worldwide. Tops Islamic banks have recently a growth rate of 20%,
while conventional banks’ growth rate is about 9%.
Islamic banking is a strong sector in Saudi Arabia due to the level of
competition. Today in Saudi there are no fully commercial banks. All banks must
provide some products that complies Shari’a. In Saudi Arabia banks are divided
into 2 sections; Islamic banks, and mixed operations banks. Islamic banks are the
banks, which follow Shari’a law in all its operations. Mixed operations banks are
commercial banks that offer Islamic products, whether they have a fully Islamic
branches or only a small section within any branch.
Differences of faith and beliefs result in differences of views to accept or
reject a certain principle of Shari’a. Therefor, there are a lot of Islamic products
that are offered by different banks and institutions around the world. Some of
the most common products such as; Wadiah, Modharaba, Mosharka, Morabaha,
Bai’ Bethmn Ajil, Qard Hasan, Ijarah Thoma AlBai’, Bai’ AlAyynah, Sukok, will be
explained later on.
Riyadh bank is an old and one of the larges financial institutions in the
kingdom and the Middle East. Riyadh bank originally applies the normal
international system banking (Commercial). However, Riyadh bank has fully
Islamic branches that offer deposit, loan, and investment products. This report
will explain the commodity the bank uses for the Islamic transactions. Also, you
will find explanation and highlighted features of each of the bank’s Islamic
products.
3
Overview of Islamic Banking
First of all, Shari’a is the Islamic law. It is considered by two kinds of
sources. The first one is the major source, which is considered for introducing
products and services. The other one is minor source, which is considered for
solving arising issues. The major sources are Qura’an and Sonnah in addition to
Ijma’ which is the agreement of qualified people, and Qyas which is to decide on
something based on the similarity of something else’s decision. The minor
sources are Istehsan which is to prefer, Isteslah which can be valid, Ijtehad which
is diligent, and Orf which is a tradition. And all these minor sources are set and
known by the community, unlike the major sources that must be from a qualified
Islamic scholar.
Islamic banking is a banking system that is based on Islamic low – Shari’a.
It has three major rules. First, It should not involve activities that are prohibited
by Shari’a (Haram activities). Also, It should not involve any uncertainty risks
(Gherar). And, It should not involve any interests (Riba). Islamic banking offers
services for its customer just like any other conventional banking with taking
under consideration the previous three principles, such as: bonds, derivatives,
swaps, and many other investment accounts. Only, Islamic banking change all the
features in the mentioned products into a features that complies shari’a. For
example: Bonds are called Sukok and they are almost interest free. This paper
will discuss the status of Islamic banking globally and in Saudi Arabia, also will
explain all products that are offered under Islamic banking in details, and will
show and discuss the Islamic banking products that are offered by Riyadh Bank,
Saudi Arabia.
Status of Islamic Banking – Globally
Islamic Banking started back in 1963 in Egypt, by a man called Ahmad
AlNajjar, who converted his idea of profit sharing (non-interest) to an existing
business that complies Shari’a. In the years of 1970s, Islamic banking was
expanded. A lot of Isamic banks came into existence, not only in Egypt, but many
more Islamic countries, Arabs and non-Arabs as well.
4
However, Islamic banking was limited only in Islamic countries. By 1980
Islamic banks were opened in the Western countries. Since 1990, the Islamic
banking system has growth rate of 10% to 15% on annual basis. “The Islamic
banking market today is worth in excess of US$1.1 trillion worldwide. As a
measure of its success and the demand for it, the top 20 Islamic banks in the Gulf
region have grown by 20% in the last 18 months compared to an average of 9%
for conventional banks”-(Temenos, 2012).
Islamic banking have been growing in the globe. Today there are more
than 300 Islamic banks in the world, according to the international Islamic
institution. Also, most conventional banks are offering Islamic products and
services in all around the world.
The following chart shows the growth of Islamic banking globally.
Status of Islamic Banking – Saudi Arabia
Saudi Arabia’s banking sector is very strong and has a high competition.
However, there are about 10 banks within the kingdom. The competition does
not reach the point of attracting even more and more customers like the case of
monopolizing the market with the telecommunication companies in the
kingdom.
5
In Saudi there are three types of banks, the following will explain:

Fully Islamic Banks: Shari’a compliant banks, Islamic banking
system applied from A to Z with all the bank’s operations.

Mixed Operations Banks: originally, commercial banks. However,
they launch fully Islamic branches or Islamic windows within any
branch of the bank.

Commercial Banks: conventional banks follow the international
banking system. This type of banks exists only in the past. In Saudi
Arabia, any commercial bank must provide Islamic and Shari’a
based products. When that’s happens the bank launch an Islamic
sections and therefore it goes under mixed operations banks
division.
Islamic Banks
• AlRajhi Bank
• Alinma Bank
• AlBelad Bank
• Aljazeerah bank
Mixed Operations
Banks
• Riyadh Bank
• SABB
• SAMBA
• SHB
• NCB
• Saudi Fransi Bank
The following chart shows the banks in Saudi and the percentages of their
profitability.
6
Islamic Banking Products
Different banks with different Shari’a committees can come up with
different Islamic products. The following will explain Islamic banking products.
However none of the products are universally accepted as Halal. Our textbook
with addition to most web sources, have stated that differences in individuals
faith and believes differ to accept a certain Islamic product from one to another.
Here are the most common products:

Wadiah: Safekeeping agreement. Bank guarantees to safe the assets,
depositor is allowed to withdraw anytime. Bank may charge fee for saving
the assets, also may give Hibah; voluntarily gift as a reward to the
customer.

Modharabah:
Profit
sharing
agreement
between
investor
and
entrepreneur. Profit will be shared among the parties upon agreed ratios.
Losses will be born by the investor only (capital provider).

Mosharkah: Joint venture usually by business partners. All profits will be
shared upon agreed rations. Losses will be divided based on the equity
ratio of each party.

Morabaha: Known as cost plus. Bank sells a good to the customer at markup price. Customer pays payments over an agreed period of time.
7

Bai’ Bethaman Ajil: Known as deferred payment sale. Similar to Morabaha,
only it is a single installment from the customer to the bank.

Qard Hasan: Interest free loan for fixed period. The customer is required
to pay the borrowed amount.

Ijarah Thomma AlBai’: Leasing contract then purchase contract. The bank
buys a good and leases it to the customer. At the end of the leasing period,
the customer purchases the good at agreed sale price.

Bai’ AlAiynah: Known as sell and buy back contract. The bank sell the good
to customer on deferred payments, then repurchase it at discount rate.
The customer will have immediate cash.

Sukok: Bonds must be backed with assets. No fixed returns but, linked to
the returns of the assets.
Islamic Banking Products Offered by Riyadh Bank
Riyadh bank is one of the oldest and largest financial institutions in the
kingdom of Saudi Arabia. It has more than 246 branches, with 73 ladies section,
and 14 self-service electronic branches. “Our remote banking package
(RiyadNet) uses the latest electronic technologies to address the banking needs
of our customers. The bank has also kept its lead in the ATMs network, as the
number of multi-functional ATM's exceeded 2,600 machine distributed in
strategic & carefully selected locations” - (Riyadh Bank, 2012). It also supports
the international needs of its clients by locating international offices globally,
such as London, Huston, and Singapore.
Riyadh bank’s board of directors consists of 10 members, Rashed AlRashed is the chairman of the board of directors. Talal Al-Qudaibi is the CEO of
the bank. The audit committee of the bank consists of 5 members, two of them
are board directors, while the other three are external members. Refer to
appendix for board of directors and audit committee charts.
According to one of the employees of the bank1, Riyadh is considered
semi-Islamic bank. Meaning the bank has conventional branches and full Islamic
branches as well. In addition, some of the Islamic products are offered in both
1
Riyadh Bank Islamic Branch - Dhahran
8
kinds of branches. So Islamic banking is a big portion of Riyadh Bank. The bank
regulates a special committee to ensure the products that are offered under the
Islamic banking, it is called Riyadh Bank’s Shari’a committee. It is consist of
Islamic scholars who supervise the work of Islamic banking of the bank. The
committee states judgments whether the products or services comply Shari’a or
not. The committee consists of three members:

Shaikh Abdullah Al-Manaea – head of the committee

Shaikh Dr. Abdullah Al-Mutlq

Shaikh Dr. Mohammed Al-Qari
According to the employee, Riyadh bank today only deals with A/C
conditioners from Al-Babtain Company as the commodity in which the buy and
sell for all their Islamic deposit products and Islamic loans as well. The employee
also explained their Islamic investments products in which he said that they
invest in the stock market, but they only trade with companies that 100%
complies shari’a, and have an actual returns.
The following chart lists all the product of Islamic Banking by Riyadh
bank. For more information, see Table1 in the appendix for more details.
9
10
Judgment/Assessment/Argument
Argument (1): The principles’ the banks uses.
Riyadh bank uses Tawrroq principle in most of its products. As the
employee stated that over than 75% of Islamic banks in Saudi uses Tawarroq
principle. Most Islamic big scholars including Shaikh Al Islam Ibn Taymyah have
Fatwas that says that Tawarroq has more than one type. They stated the type of
Tawrroq that the banks are using is a Haram activity, which is not acceptable to
deal with in an Islamic view.
The principle that Islamic banking should apply is Risk Sharing between
the bank and the client. Risk sharing is clear and obvious for both parties; the
bank and the clients. In my point of view Islamic banks in Saudi are not following
evidence of Shari’a, but they are following the principle of Mohayalah on Shari’a.
Meaning, they find what they want by looking at the Daleel in indirect way,
instead of taking the meaning of Daleel as it is. However, neither Riyadh bank,
nor other banks in Saudi are applying risk-sharing principle today. Therefore, I
do not believe that Riyadh bank Islamic branches are considered Islamic banks,
or other Islamic banks in Saudi.
Argument (2): Dealing with non-Islamic banks.
Dealing with institutions who operates in Halal activities, is one of the
conditions in Shari’a law for money transactions. This means that banks that
operate with interests and non-Islamic stocks will gain profit from Haram
activities. According to Shari’a it is Haram to deal with such institutions.
In this case, Riyadh bank is known as commercial bank that has launched
Islamic branches. Regardless to the principles of Shari’a they use, dealing with
the bank is considered Haram in this argument.
11
Argument (3): Riba and the current currency.
First of all, I do not see myself in a position to judge the previous
transactions in a way to decide if they are Haram or Halal. Most of Islamic
scholars, and also Islamic scholars with finance and Shari’a degrees, still struggle
to make clear judgments that identify a Haram or Halal transaction.
I came up with an argument after searching and conducting some
scholars and professors’ opinions. Regardless of the cash transactions by the
bank in which they come up with based on one of the shari’a’s principles, the
argument was actually stating if Riba can be Halal or Not. Meaning that Riba is
forbidden in Islam in the use of some kinds of commodity, such as gold. But Riba
can be a Halal transaction in the use of something else. Remember that the word
Riba means increase. So to have more of some commodity can be Halal, in the
same time, other commodity can be Haram.
Prophet Mohammed peace be upon him once said: “Gold is to be paid for
by gold, silver by silver, wheat by wheat, barely by barely, dates by dates, salt by
salt, like for like, and equal for equal, payment being made hand to hand. If these
classes differ, then sell as you wish is payment is made hand to hand”. Prophet
Mohammed once sold a camel by two camels in the future. Riba is applied on
both scenarios. However, the first one forbid the raise in the commodity, and
emphasize on equality and evenness. The second part allows the increment of
the commodity, which was the camel.
Now I come to my argument in which I seek the judgment of Riba on the
current currency (Riyals). In the past fluctuation of Saudi Riyals were bond to
gold. For this reason, Riba was surly forbidden according to Shari’a. Today,
fluctuation of Saudi Riyals is bonded with US Dollars, which makes it considered
as a commodity. Islamic scholars have all agreed on the sale of a curtain of
commodity to get more of it after a period of time as a Halal transaction. For
example, Al Shaikh Ibn Othaimeen has stated Fatwa in which to sell 40 sheep and
get 80 sheep next year. Also, Al Shaikh Dr. Ibn Ibrahim have stated the same
Fatwa but in cloth or fabric meters.
Some scholars believe that the use of Riba is Halal unless it was applied
on one of the six types of commodity that was stated in the previous Hadeeth
12
(gold, silver, salt…etc.). Other scholars have different belief on the previous
Hadeeth. They assume some kinds of commodities have the same judgment of
the commodities that were mention in the Hadeeth. For this reason, they believe
that our current currency (Saudi Riyals) is treated like one of those types. That is
why they judged the use of Riba on the current currency as Haram.
At the end, I will sum up with prophet Mohammed’s Hadeeth where he
said “Consult your soul, consult your heart, O Wabisa2. Righteousness is what is
satisfying to your soul and your heart. Sin is what wavers in your soul and causes
hesitancy in your chest, even if the people give you a judgment, and again give you
a judgment”. It depends on the judgment of current currency. If it is considered
some kind of commodity, then it can be treated like the prophet’s camel, where
he sold it for more after a period of time, which is a Halal Riba. But prophet
Mohammed also said, “Leave what makes you doubt to what does not make you
doubt”, which means do not deal with issues that confuse you. So if the judgment
of the use of Riba on current currency is confusing, maybe it is better to not
participate in these kinds of transactions.
2
Wabisa; Woman name who asked the question to prophet Mohammed
13
Reference:
Bradily, J. (2011). “Islamic Banking Growing in Europe”.
TheWesternExperince.com. Retrieved from:
http://thewesternexperience.com/2011/05/22/islamic-bankinggrowing-in-europe/
Chapra, M.U(2009), “Global Islamic Financial Crisis, Can Islamic Finance Help?”,
New Horizon, Issue No.170, http://www.newhorizonislamicbanking.com/index.cfm?section=archive&action=view&id=81
Ernst&Young. (2011-2012) “World Competiveness Report” Retrieved from: PMU
Blackboard.
Islamic Finance Info. (2011). “Know Your Islamic Banking Products”. Retrieved
from: http://www.islamicfinanceinfo.com.my/discover-islamicbanking/know-your-islamic-banking-products
MBC1. (2011) Respond to Islamic and Commercial Banks Episode “Not Brothers”.
Retrieved from: http://www.youtube.com/watch?v=4ToHZd9X8KA
Qumma. (2008) “‫”اال س الم ية ال ب نوك‬. AlZakat.wordpress.com. Retrieved from:
http://alzakat.wordpress.com/2008/01/12/‫ال ب نوك‬-‫اإل س الم ية‬-‫من‬-‫األل ف‬‫إل ى‬-‫ال ياء‬/
Riyadh Bank. Official Webpage: http://www.riyadbank.com/index_en.html
Shahid. (2011) “Zaid Akho Obbid” Banks Episode. Retrieved from:
http://shahid.mbc.net/media/video/22660/‫_ال ح ل قة_طاش‬10
Shanmugam, B & Zahari, Z (2009). A Primer on Islamic Finance. Virginia: CFA
institution.
Uab Arab laws. (). “Islamic Products Terminology”. Retrieved from:
http://www.uabarablaws.org/islamic-banking-terminology
14
Appendix:
Chart1: Board of Directors.
Board of
Directors
Dr. Khaled Nuhas
Abdulrahman
Sharbatly
Dr. Abdulaziz AlJurboo
Abdullah Al-Aydhi
Rashed Al-Rashed
(Chairman)
Abdullah Al-Issa
Dr. Faisal Abalkhail
Mohammed AlAfaliq
Nader Al-Wehaibi
Waleed Al-Issa
15
Chart2: Audit Committee.
Audit
Committee
Dr. Khaled
Nuhas
Dr. Ibrahim AlKhudhair
Abdullah Al-Issa
Dr. Abdullah
Abdulqader
Eng. Abdullah
Al-Saif
16
Table1: Riyadh Bank Islamic Products.
Islamic Banking
Who does it
Features
Conditions
complies Shari’a?
Mortgage
Housing Finance
Morabaha
Up to SR5 m
Minimum salary:
Mortgage
or
Up to 30 yrs
SR4,000
Ijarah
Property: no more
than 25 yrs old
Land Finance
Up to SR3 m
Minimum salary:
Up to15 yrs
SR4,000
Land shall not be
charged
Personal Finance
Finance w/o
Morabaha
Up to SR300,000
Minimum salary:
Salary Transfer
or
Up to 4 yrs
SR5,000
Tawarruq
Available to
Saudis and nonSaudis
Tawarrug
Finance
Twarruq: buying
Competitive
Minimum salary:
installments in
margin rates
SR2,000
good owned by
the bank.
Up to SR1.5 m
Customer sells the
shares of the good
Murabaha
Up to 5 yrs
Morabaha
Finance
Finance Against
Tawarrug or
Securities
Morabaha
Auto Leasing
Ijarah
Up to SR3 m
Has banking
Up to 5 yrs
deposits or shares
Profit margin start Minimum
from: 2.69%
transferred salary:
Up to SR500,000
SR2,500
Up to 5 yrs
Minimum non17
transferred salary:
SR4,000
Corporate Customers
Financing
Morabaha
Tawarruq
Istisna’
Ijarah Finance (with promise of ownership)
Short-term Islamic Finance
Compound Finance
Lease Based on Financial Liabilities
Investment
Islamic Return Account
Solutions
With out risk
Limited time
International Morabaha
Medium-short period
Islamic Precaution
Precaution from exchange
fluctuation
Riyadh Capital Funds
High-low risk
Long-short period
Riyadh Portfolios
Medium-low risk
18