Products and
Procedures of
Emirates
Global Islamic
Bank Ltd
Submitted To: Mr. Shoaib
Ahmed Qureshi (HOD CED)
ABDUL BASIT NBSEM(2K9)S-201
Seminar In Finance
Date 10-Aug-10
ACKNOWLEDGEMENT
First of all, I am thankful to ALLAH, Who has opened some doors of knowledge upon me
through the course of Islamic Finance. I am thankful to the management and the staff of
“Emirates Global Islamic Bank Ltd”, who provided me time and valuable information during
my visit. I am especially thankful to Mr. Shoaib Qureshi Head of Dept, Centre for Executive
Development for his efforts upon us during the class of “Seminar In Finance”.
I am thankful to Mr. Raza Qureshi Senior Relationship Manager and Mr. Tahir Munir
Relationship Manager at Emirates Global Islamic Bank Ltd, for their time, patience and support
in teaching me and making me understand the working methodologies of Islamic Banks as
required for this project.
THANK YOU ALL
ENTRY OF THE BANK IN PAKISTAN
EGIBL, incorporated in December 2004, commenced its operations in February 2007. The bank
is a joint venture between Emirates Investment Group (EIG), UAE and Al Rajhi family,Saudi
Arabia. EIG, sponsored by members of ruling family of Sharjah, has interests in the property
development and financial services sectors in the Middle East and Asia Pacific regions. Al Rajhi
family is Saudi Arabia’s leading business group with a major stake in the world’s largest Islamic
bank, Al Rajhi Bank.
Created with a vision of becoming the Islamic bank of preference, EGIBL started operations as a
licensed Islamic Bank in February 2007 with sponsors from the United Arab Emirates and Saudi
Arabia, and a business model to deliver Shariah compliant financial instruments through an
urban/rural branch network, supported by quality customer service.
Through a professional management team comprising of reputed Shariah scholars, EGIBL has
quickly positioned itself as a quality Islamic Bank that adheres to the requirements of a
diversified customer base seeking salvation in Islamic financial instruments.
The network of the bank comprises of 60 on-line branches in 36 cities and towns.
BOARD OF DIRECTORS
The seven member BoD comprises representatives of sponsoring groups. The Chief Executive,
Mr. Tariq Husain, a Chartered Accountant, has over 30 years of local and international
experience.
Sheikh Tariq Bin Faisal Al Qassemi, Chairman
Syed Tariq Husain, President & Chief Executive Officer
Mr. Abdul Ghaffar Fancy, Director
Mr. Riyadh Muhammad Saeed Al Birdisi, Director
Mr. Raza Jafar Ali, Director
Mr. Ayham AL Yousuf, Director
Mr. Rudecindo Roca, Director
SHARIAH BOARD
Justice (R) Khalil-ur-Rehman Khan
Justice Khalil-Ur-Rehman Khan is the Shariah Advisor and the Chairman of the EGIBL Shariah
Committee. He is a world renowned Islamic Scholar of Pakistan and has held numerous
positions in various boards of prestigious Islamic institutions.
Justice (R) Khalil-ur-Rehman has served as Chairman on the Shariah Appellate Bench of the
Supreme Court of Pakistan and has been the Rector of the International Islamic University,
Islamabad. In addition, he is the former Chief Justice of the Lahore High Court. He has also been
the Chairman of the Religious Board for Mudarabas.
Justice Khalil ur Rehman has authored the landmark judgment on Riba in 1999 on the basis of
which new impetus has been provided to Islamic finance in the country.
Mufti Abdullah Najeebul Haq Siddiqi
Mufti Abdullah Najeebul Haq Siddiqi is the Deputy Shariah Advisor for EGIBL. He is
associated with Dar-ul-uloom, Karachi and has specialized in Islamic Fiqh and Fatawa. He
graduated from Darul uloom Karachi as Aalim-e-Deen and has obtained certification in Islamic
Banking Finance and Economics from the Centre for Islamic Economics.
RATING of EGIBL
PACRA has rated the Bank’s long-term entity “A-“ and the short term rating is “A2”.
These ratings denote a low expectation of credit risk emanating from a strong capacity for timely
payment of financial commitments.
Assessments by PACRA
EGIBL witnessed an increase of 21% in its finances portfolio during 2009. This expansion
coupled with higher asset yield resulted in significant YoY increase in interest revenue.
Meanwhile, non-fund based income witnessed an upsurge on account of higher commissions and
sizeable increase in the income from dealing in foreign currencies. However, the revenues were
still not sufficient to mask the operating cost, which were on rise due to expanding network and
considerable marketing expense to establish the bank’s franchise value. Nevertheless, the major
dent to profitability was substantial provisioning on account of hefty rise in NPLs. With volume
increment to operating revenues and in the absence of high marketing costs, there was certain
respite to the bank’s profitability in 1Q10. However, the provisioning drag was quiet significant,
leading to a sizeable loss.
The bank is exposed to a relatively higher level of credit risk, given high top twenty
concentration (Dec-09: 62%). EGIBL has experienced a significant rise in its classified portfolio
during 2009 (Mar10: PKR 1,536mln, Dec09: PKR 1,214mln, Dec08: PKR 14mln) on account of
deteriorated economic conditions and the management’s strategy to focus on high volume high
margin loan accounts. Meanwhile, elevated Net NPL/Equity ratio (Mar-10: 27.8%) signifies a
potential drag on EGIBL’s equity. The bank’s SAM department has increased its focus on
recoveries and the management expects to regularize 50% of its infected portfolio by 2011.
Given continuing depressed socio-economic environment, probability of fresh infections may not
be ruled out.
The Current Islamic Banking System
The balance sheet of Islamic banks is discussed in next paragraphs. How are they maintaining
their assets and liabilities side and how are they different from conventional banks.
Assets
These are the investments from which the bank expects positive future cash flows. Islamic banks
invest in products like house financing, car financing etc through Islamic models of Musharaka,
diminishing Musharaka and Ijarah. Banks also invest their money in businesses and industries.
Home Financing
1. The installment is calculated based on 1 year KIBOR. KIBOR is used as there is no other
benchmark rate available. The logical argument is that in a society if there is only one
merchant who sells prohibited products, and then he starts to sell one legitimate product,
he will use the profit rates on prohibited products for pricing and calculating profit
margin on the legitimate product.
2. Home financing is done using Diminishing Musharaka principles, in which units of the
house are paid for by customer to bank.
3. In the master Musharikah agreement, the floor rate and the ceiling rate is stated based on
which the installment amount can vary.
4. In a master Musharikah agreement, it is stated that if payment is made on time, the
transfer of ownership will take place accordingly but through a separate contract.
5. Reputable estate agencies are consulted for the valuation of assets.
6. The risk of damage to the property is borne by the bank and the customer, according to
the stake in the property at the time of disaster.
7. Just like in conventional mortgage, a penalty is charged if a customer withdraws from the
contract which is paid to charity. The logical argument presented for such a penalty is
that the contract involves a sale of property as well and if a customer withdraws from the
sale contract, he can be asked to pay a penalty.
8. Master Musharikah agreement contains details of the tenancy agreement as well as the
sale agreement. A contract is made when the customer signs the contract, which means
that he has agreed to the terms of the contract.
9. The seller of the property is paid by the bank and only the bank and the customer remain
in the scenario
Murabaha
1. Murabiha is just like a sale transaction. If a trader has the right to sell a good at a profit,
the bank should also have the right to sell an asset if he obtains constructive possession of
the asset and bears the risk of damage to the property until the sale is made to the
customer.
2. Murabiha is used in working capital financing and trade financing.
3. The customer is asked to buy the asset acting as an agent to the bank because he has more
knowledge about the product and better relationships with the supplier to obtain the
goods at a competitive price and in a timely and appropriate manner.
In the case of import/export, if the exporter does not know the buyer of the asset (importer or
bank), it does not matter. The logical argument presented here is that if person A takes a loan
from the bank and buys an asset from B, who has no concern from where the money is coming
from (the buyer’s own pocket or the bank). B’s only concern is getting the price he is selling for.
Liabilities
These are the deposits of the public which can demand their money at any time (depending
whether demand deposit or time deposit) and the bank is liable to pay it. This is generally the
front end of bank what is seen by the public.
Current Account
1. The money deposited in the current account is considered ‘Qard’ (Non-interest bearing
loan).
2. The money is invested in the funds by the bank.
3. The money is payable on demand.
Savings Account & Term Deposit
1. The money is invested in the fund.
2. The bank acts as ‘Mudarib’ i.e. 'Fund Manager' and the customer acts as ‘Rab-ul-maal’
i.e. 'investor'
3. The money is only invested in Shariah compliant assets.
4. The Weightage is assigned to each category of investment that is stated to the customer at
the outset.
5. It differs from conventional banking in the aspect that it does not promise a fixed return
every month, instead profit is calculated based upon previous months’ bank performance.
6. The assigned Weightage reflects the time value of money.
7. The profit is distributed as follows(weightage report for July 2010 issued Aug 02:2010)
Application of Time Value of Money
Time value of money is the basis of interest. Interest is said to be the charge on the use of money
for a particular time period. Islam prohibits interest which entails that no fixed amount can be
charged for the use of money for a particular time period.
The investment will have to go through the entire process of a business activity which involves
risk taking at each stage and any compensation on investment will be strictly dependent upon the
outcome of the business activity. Time value of money is the problem for the investor to avoid
keeping his money idle and to avoid forgoing the use of money that may bring positive value to
his investment. However, it does not mean that the investor can demand an arbitrary increase (or
is given as the case may be) as the cost of using money without taking the risk.
Assigning weightage to investment based on tenor of investment is another way of paying
interest based on time value of money. The profit rates are calculated through weightages which
when plotted on a graph will create somewhat the same yield curve as in the case of term
deposits. The situation where losses are incurred would have been very interesting, but the
money is invested in instruments in which the chance of loss is remote. Also, the arrangement is
such that the bank makes sure that it gets comparable returns taking KIBOR as the benchmark
rate.
A businessman facing the problem of time value of money will invest his money in a business
activity, bear all the risks especially the market risk and price risk and will eventually make a
profit or loss. The profit for the businessman strictly depends upon the actual profit realized after
taking market risk including price risk. It does not depend upon the time.
The use of weightages as a compensation for time value of money will be appropriate if the
business earns same level of profits and no loss in each period. This happens in the case of
Islamic savings account and term deposits because the pool of money collected in the fund is
invested in instruments in which chance of loss is remote. Now a discussion on those instruments
(assets of the bank) will clearly demonstrate that these instruments inherently involve interest
which enables the bank to provide compensation based on tenor.
Critical Analysis of Diminishing Musharikah in Home Financing
In ‘Diminishing Musharikah’, two contracts i.e. tenancy and sale are mixed. Both are made
contingent upon each other. The rent is calculated and charged on the basis of 1 year KIBOR.
The rent increases when the KIBOR increases. It is referred to as ‘Diminishing Musharikah’
because of the arrangement, the ownership stake of the tenant increases and that of the bank
decreases or diminishes with the passage of time. The rent decreases as the ownership stake of
tenant increases. Following table compares the conventional mortgage and ‘Diminishing
Musharikah'.
Features Conventional Mortgage Diminishing Musharikah
Benchmark Rate KIBOR KIBOR
Basis of Installment KIBOR KIBOR
Nature of Installment Interest +Principal Rent + Principal
Prepayment Penalty Yes Yes
Tenancy + Sale contract Dependent Dependent
In subsequent years Interest payment decreases Rent payment decreases
In subsequent years Principal payment increases Principal payment increases
Changes in Installment Based on KIBOR Based on KIBOR
Price and Market Risk No No
Price of Asset Locked at initiation Locked at Initiation
Cost to the borrower Same in both cases Same in both cases
Profit to the bank Same in both cases Same in both cases
As can be seen from the table above that there is no difference between the two modes of
financing. The minor differences are procedural and do not change anything significantly. The
only noteworthy argument that people put forward regarding ‘Diminishing Musharikah’ is that
the bank bears risk which is also a myth and is discussed in next section below.
Risk Taking By Bank
There are several types of risks. The most relevant risk is the market risk including price risk i.e.
the risk that the goods will not be sold or will be sold at lower prices which may or may not
cover costs. This risk is only borne by the seller when the goods are ‘held for trade’. In
‘Murabaha’ and ‘Diminishing Musharakah’, operational risk is not taken by the bank. The only
risk taken is against ‘destruction of property’, the occurrence of which is highly unlikely and this
is also transferred to the insurance company. Had the tenancy and sale contract not been made
dependent, the bank would have had to bear the market risk which the bank cleverly avoids by
making both contracts dependent and locking the price at the outset.
Products at Emirates Global Islamic Bank
Albait (home financing)
About the Product
EGIBL offers home financing needs with Albait. Albait offers house financing options enabling
to buy, build or renovate the home.
How does Albait work?
Albait is based on the concept of Diminishing Musharaka. Under this concept you and EGIBL
enter into a partnership where you and the Bank have joint ownership in the property. As part of
the agreement, EGIBL will allow usage of the property to you and you in turn agree to make
monthly payments for the use of the property. You also make regular scheduled investments in
the partnership to increase your share in the property. Thus, with each payment your ownership
in the property grows. Once you have entirely purchased the Bank’s share in the property, you
become the free and clear title owner of the house of your dreams.
IJARAH
The term “Ijara” has been defined as a contract between two parties, the lessor and the lessee,
where the lessee enjoys or reaps a specific service or benefit against a specified consideration or
rent from the asset owned by the lessor. It is a lease agreement under which a certain asset is
leased out by the lessor to a lessee against specific rent or rental for a fixed period.
The first fundamental principle of Shariah is that as opposed to conventional financial dealing,
profit is generated when something having intrinsic utility is sold or offered for use. Money has
no intrinsic value. As such dealing in money cannot generate profit unless converted into real
assets.
The second basic element of Shariah is that one cannot claim a profit or fee for a
property/transaction, the risk of which was never borne by him.
In an “Ijara” contract the lessor maintains its ownership in the leased asset while transferring the
right to use the asset, or usufruct, to an enterprise as the lessee, for an agreed period at an agreed
consideration. All liabilities and risks pertaining to the leased asset are to be borne by the lessor
including obligations to restore any impairment and damage to the leased asset arising from wear
and tear and natural causes which are not due to the lessee’s misconduct or negligence.
“Ijara” is a contract of a known and proposed usufruct against a specified and lawful return or
consideration for the service or return for the benefit proposed to be taken, or for the effort or
work proposed to be expended.
Ijarah differs from Conventional leasing in the aspects of i) starting time of rental payments.
And ii) Sale and lease back as one transaction.
In Conventional Lease, The rental falls due from the date when the lessee accepted the goods.
While in Ijara, the rental falls due from the date of handing over the asset to “Mustajir”.
For transfer of ownership at the end of tenure in Conventional Lease, this transaction involves
the sale of the property by one company to another which in turn leases the same property back
to the original seller. While in Ijara, sale and lease back are allowed, but only as two separate
transactions.
Rent is determined by market given forces. In practice, the market rate of interest is used to
determine the rental rate, although this is not explicitly stated.
Auto Ijarah at EGIB
EGIB offers Car financing under the name of “Auto Ijarah” for which the rental payment is
calculated based upon KIBOR plus their spread (mentioned by bank staff as 3-4%).
Islamic working principle – difference from similar conventional product
The Emirates Global Auto Ijarah is a Shariah compliant auto finance product based on the
principles of Ijarah, whereby the asset is owned by the bank and the customer pays rent for its
usage, just like paying rent for a house. The customer will make a 15% (minimum) security
deposit along with the rental contract spreading over a period of 3, 4 or 5 years. On completion
of the pre-agreed period the title of the asset maybe sold to the customer or the asset will be
returned to the bank.
Analysis of the Product
The product is very similar in nature to as car leasing done by the conventional banks. Instead of
down payment, “security deposit” is used, which is practically the same thing but near to Islamic
fatawa. However, at EGIB, the lessee has the right to pay installments from the day of contract or
from the day when he actually takes possession of the car. Paying installments from the day of
signing contract (delivery of car not done) is not allowed in Shariah. EGIB tries to make it
shariah compliant by saying that these installments actually reduce the time span of payment
schedule and are virtually same installments as if being paid after taking possession of the asset.
CRITICAL ANALYSIS OF MUDARBA
Mudaraba is said to be an Islamic mode of financing. At the age of 25, Prophet Muhammad
(Peace Be Upon Him) entered into a Mudaraba contract with Hazrat Khadija (May God be
Pleased With Her). This is a period before revelation. So Mudaraba as a mode of financing was
prevalent. Since Mudaraba financing did not contradict with the values of Islam, people even
after the beginning of revelation were allowed to enter into Mudaraba financing.
Secondly, in the example of Prophet Muhammad (Peace Be Upon Him), He entered into the
contract as Mudarib (Businessman, Fund Manager or Asset Manager). So the flow of money is
from a rich financial entity to a business entity in need of finance. In the case of currently
practiced Islamic banking, the flow of funds is from the small pool of investors to a large
financial entity. That large financial entity can not invest the funds in instruments other than the
financial instruments. Therefore, it has little productive effect on the economy and employment
and self-employment generation takes place at only lower scope. Mudarib is a person in need of
finance, bank as a reservoir of money acting as Mudarib is a senseless arrangement.
Thirdly, Muslim jurists have formulated certain rules regarding Mudaraba financing that are now
considered as ‘Islamic rules of Mudaraba financing.’ This is not the right place to highlight the
problems this practice has created over the centuries. However, it must be emphasized that
anything which does not contradict with any of the Islamic laws is permissible. The work of
Muslim jurists can only serve as guidelines and should be open for debate and can never ever
become a law which can not be modified.
Fourthly, it is argued that profit and loss sharing is the only alternative of interest. The work of
Javed Ahmed Ghamidi on ‘Islamic Economic Framework’ has argued that profit and loss sharing
is not the only alternative of interest. He argues that an investor can opt to become a partner only
in profits. This is a common practice in limited liability partnership of professionals like lawyers
and doctors where the other partners do not make good of any loss if the loss was solely caused
by the actions of a particular partner.
This arrangement of partnering only in profits is very different from interest. An investor
investing to earn interest gets the fixed amount irrespective of profit or loss of the borrowing
entity. When a partner in a Mudaraba contract opts for partnering only in profits, he will only get
a profit if the borrower gets a profit. Therefore, this does not result in any exploitation of the
borrower and does not contradict with any of the Islamic laws.
Moreover, in the conventional Mudaraba arrangement, Mudarib (Fund manager) bears no loss
while he is the only reason of loss. The Rab-ul-maal (investor) is not allowed to interfere in the
affairs of the business. When a loss occurs, the Mudarib acts like an employee of the business
and when the profit occurs, he shares in the profit as if he was the only reason behind the profits.
Current Accounts (QARZ Account) at EGIB
EGIBL offers two types of current accounts, discussed below.
Current Account
EGIBL offers Current account for day to day business and personal banking needs. Withdrawl
and deposit for unlimited time is allowed. This product basically works on Islamic principle of
Qarz. Whereby lender puts his money in safe custody of bank and bank acts as borrower, invests
in any business and returns the amount claimed by lender at any time lender wishes to.
Basic banking Account
In compliance with BPD Circular No. 30 of November 29, 2005, EGIBL also offers the Basic
Banking Account to its depositors. This facility is targeted towards providing an affordable
banking service to customers who are unable to maintain a high balance requirement.
Islamic working principle – difference from similar conventional product
Emirates Global current account is based on Islamic principles of Qarz (loan) whereby the
customer is the lender and the bank is the borrower. These funds are invested with utmost care in
halal business ventures only (bank’s statement). The funds are payable to the customer on
demand as and when required with neither any addition nor penalty.
Saving Accounts/Time Deposits at EGIB
Savings Account
Savings account Mudarabah comprises of all facets of an investment namely income, security
and growth. Profit is calculated on monthly average basis and distributed on a monthly basis.
Mudarabah Premium Account
EGIB also offers accounts whose profits are calculated on daily basis and distributed on monthly
basis. This account also works on Mudarabah principle.
Islamic Term Deposit
EGIBL Mudarabah Term Deposit can be used to deposit money for a fixed term and earn profits
through EGIB as per agreed terms and conditions. (profit ratio is determined at end of every
month)
Islamic working principle – difference from similar conventional product
The Emirates Global saving account is based on the Islamic concept of Mudarabah (Partnership).
Under this arrangement the customer is the Rab-ul-maal (Investor) and the bank is the Mudarib
(Fund manager). The deposit will be invested in profitable business ventures which are legal and
Shariah compliant. The profit/loss will be shared as per a pre determined ratio. As fund manager
the bank will be entitled to a part of the profit, whereas profit distribution amongst the depositors
and the shareholders will be made according to the weightages assigned at the beginning of each
month to their investments.
CONCLUDING REMARKS
The bank operates at two fronts, one towards public that is you and me. Some people like to
either place their money in safe custody of bank while others want to have positive returns. The
other front of the bank is where it invests the deposited money in different businesses in order to
earn profit.
In the first front, many futawas are easily available for showing that the profit being given is
shariah compliant. The way in which these Islamic banks offer profit is some what different than
that offered by conventional banks. The major difference being that profit ratio is calculated
every month, instead of fixing a specific percentage of the deposited capital.
However, on the second front the bank sources were reluctant to give information on how and
what transactions have been taken place between the bank and the clients. Even the names of the
clients were not disclosed. In the general meeting, it was discussed however that there is not
much difference between Islamic Financing and conventional Financing methodologies, when it
comes to lending to business sector. Whenever offering their services to firms requiring capital,
all they do is offer a competitive interest rate calculated based on KIBOR.
The bank sources clarified that their shariah board has prohibited the bank to invest in industries
such as entertainment. Although the bank retained its confidentiality but agreed that some how
these transactions are amended in a way that Shariah board agrees to it.
A third front of the bank also arises in the form of Consumer Banking. Here EGIB offers Auto
Ijarah, Albait for home financing and Umrah on basics of “Khidmat” (serving). In order to make
these products they differ from conventional banking in terms of nomenclature and to very little
aspect in terms of working methodologies. Instead of naming “interest payment”, word “rental
payment” is used.
The current Islamic modes of financing are different than conventional system in a limited ways.
Nothing can be charged on consumables including money but rent can be charged on tangibles
like property or any asset. The technique is to convert the money into asset and then sell the asset
on a profit or give the asset on rental basis to earn profit. This article has highlighted the defects
of these instruments. However products like auto ijarah and Albait home financing show more
maturity than conventional banking as viewed from public point of view.
The concept of Islamic banking may not be truly Islamic in nature
but they definitely present a step towards a society where the
principles laid down by Allah are followed.
During the discussions with bank staff and news available over the
internet, it has come to knowledge that EGIB is in process of a
merger with Al-Baraka Islamic Bank.