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ISLAMIC BANKING SYSTEM IN INDIA

Comprehensive Project Report On

Submitted to Institute Code: 734 Institute Name Marwadi Education Foundations’ Group of Institutions

Under the Guidance of ()

In partial Fulfilment of the Requirement of the award of the degree of Master of Business Administration (MBA)

Offered By Gujarat Technological University Ahmedabad

Prepared by: (< Enrolment No.1>) (< Enrolment No.2>)

MBA (Semester - IV)

Month & Year April 2019

ISLAMIC BANKING SYSTEM IN INDIA

STUDENT DECLARATION

I/We

hereby

declare

that

the

Comprehensive

Project

Report

titled

“<_____________ __________________________________________________>”is a result of my/our own work and my/our indebtedness to other work publications, references, if any, has/have been duly acknowledged. If I/we am/are found guilty of copying from any other report or published information and showing as my/our original work, or extending plagiarism limit, I/we understand that I/we shall be liable and punishable by the university, which may include ‘Fail’ in examination or any other punishment that university may decide.

Enrollment No.

Place: Rajkot

Name

Signature

Date: _____/_____/2019

i

ISLAMIC BANKING SYSTEM IN INDIA

CERTIFICATE OF EXAMINER

This is to certify that project work embodied in this report

entitled

_________________ ____________________________________________________________was carried out by Student Name: ________________________________________ Enrollment no. ________________________of Marwadi Education Foundation’s Group of Institutions (Faculty of Management) (734).

The report is approved / not approved.

Comments of External Examiner:

This report is for the partial fulfilment of the requirement of the award of the degree ofMaster of Business Administration offered by Gujarat Technological University.

---------------------------------(Examiner’s Sign) Name of Examiner: Institute Name: Institute Code:

ii

ISLAMIC BANKING SYSTEM IN INDIA

Date: ____/____/2019 Place: Note: Separate certificate is required for each students in group Project (Remove this line from Final Report)

iii

ISLAMIC BANKING SYSTEM IN INDIA

INSTITUTE CERTIFICATE



Put this page blank (One page per student)



Guide will issue it once he/she will approve your project



Guide will provide you hard copy of certificate. At the time of binding, insert that certificate and remove this blank page.

iv

ISLAMIC BANKING SYSTEM IN INDIA

PLAGIARISM REPORT: DIGITAL RECEIPT



Guide will give you pdf file of 1 page which you have to insert in pdf copy of report as well as hard copy of report.

v

ISLAMIC BANKING SYSTEM IN INDIA

PLAGIARISM REPORT: SIMILARITY PERCENTAGE PAGE

Guide will give you pdf file of 1 or 2 page(s) which you have to insert in pdf copy of report as well as hard copy of report.

vi

ISLAMIC BANKING SYSTEM IN INDIA

PREFACE

vii

ISLAMIC BANKING SYSTEM IN INDIA

ACKNOWLEDGEMENT

You must thank at least below mentioned person in acknowledgement as they are signing your report and guiding you. 

Name of Dean: Dr. Sunil Kumar Jakhoria



Name of Program Coordinator : Prof. Viral Tolia



Name of Your guide and his/her designation

You are free to thank other faculty members, your parents, your classmate, company officials etc….

viii

ISLAMIC BANKING SYSTEM IN INDIA

SUBJECT INDEX

Sr. No.

Particular

Page No.

ix

ISLAMIC BANKING SYSTEM IN INDIA

INTRODUCTION

1

ISLAMIC BANKING SYSTEM IN INDIA What is Islamic Banking? Banking is a concept that has been used in our society in different form and shapes. The history of banking is as old as 2000 BC when there were trading system and the gold coins. There are different banking systems in the world but the most famous ones are conventional banking and the Islamic banking. The main function of conventional bank can be summed up in one sentence: The banks borrow to lend. They borrow in the form of deposits and lend this money to earn interest. In contrary, Islamic banking system is based on the principle of partnership. In Islamic banking, the shareholders, the depositors and the borrowers-all would participate on profit-loss sharing basis. Here you will get the complete information about what is Islamic banking and is it really Islamic? Introduction to Islamic Banking Islamic banking is a finance management system that is based on the Islamic rules of Sharia. The main concept of the Islamic banking is the prohibition on collection of interest and its utilization for the business purposes. Banking in Islam is a saving money framework that depends on the standards of Islamic law, additionally known as Shariah law, and guided by Islamic financial matters. Two fundamental standards behind Islamic banking concepts are the sharing of benefit and misfortune. Gathering interest or Riga isn't allowed under Islamic law. Islamic banking concepts have an indistinguishable reason from traditional managing an account aside from that it works as per the guidelines of Shari'ah, known as Fiqh al-Muamalat. Banking in Islam as an account exercises must be polished reliable with the Shari'ah and its pragmatic application through the improvement of Islamic financial aspects. A significant number of these standards whereupon banking in Islam is based are regularly acknowledged everywhere throughout the world, for quite a long time as opposed to decades. These standards are not new but rather their unique state has been changed throughout the hundreds of years.

2

ISLAMIC BANKING SYSTEM IN INDIA How Does Islamic Banking Work? It is important that you understand the rules to know how does Islamic banking work. There is consensus among the Shariah scholars that credit price of a commodity can genuinely be more than its cash price. The Islamic Fiqh Academy of OIC and Sharia Boards of all Islamic banks, approve the legality of this difference. However, no addition to price once mutually agreed. Keeping in mind the end goal to procure cash without charging premium, Islamic banks utilize value support frameworks. This implies if a bank credits cash to a business, the business pays back the advance without premium, yet it gives the bank an offer in its benefits. In the event that the business defaults on the advance or do not win any benefits, the bank does not get any benefit either. Detailed study of Islamic banking services is covered in mba Islamic finance and Islamic finance course offered by AIMS.

Islamic Banking Concepts in Early Ages of Islam the origins of Islamic banking & financisl system The history of banking in Islam goes back to the earliest reference point of Islam in the 7th century. The first spouse of prophet Muhammad's, Khadija, was a dealer, and he went about as a specialist for her business, utilizing a significant number of similar standards utilized as a part of contemporary concepts of Islamic banking. In the Middle Ages, exchange and business activity in the Muslim world depended on Islamic rules as account standards, and these thoughts spread all through Spain, Baltic States, and Mediterranean, giving a portion of the premise to western standards. From the 1960s to 1970s, the modern world accepted the Islamic banking system.

3

ISLAMIC BANKING SYSTEM IN INDIA

HISTORY OF ISLAMIC BANKING

4

ISLAMIC BANKING SYSTEM IN INDIA

1960s

• pioneering efforts in experimenting application of islamic finance; • . mit gharam, a savings bank in egypt • tabung haji, islamic savings bank established by Msia government.

• pioneering islamic banking literatures : • prof. mohammad nejatullah siddiqi dr. mohhamad umer chapra, qureshi.

1970s

• establishment of islamic financial institutions • IDB, development bank owned by OIC countries. • Establishment of 1st islamic bank, dubai islamic bank. • subsequent establishment of islamic banks in jordan, bahrain and egypt.

1980s

• move by iran, sudan and pakistan to transform their islam • rapid establishment of islamic bamk & takaful companies in OIC countries( jordan, egypt, qatar, bahrain) • establishment of 1st islamic bank takaful companies in south east asia (bank islam malasiya, 1983 & takaful malaisiya, 1985)

5

ISLAMIC BANKING SYSTEM IN INDIA

LITERATURE REVIEW

6

ISLAMIC BANKING SYSTEM IN INDIA

Abedifar ., 2015(musa) The industry of Islamic banking represents around an 80% of the 2 trillion dollars in assets of Islamic finance, which have grown around a 10% over the last decade. During the financial crisis, the industry of Islamic banking has grown faster than commercial banking.

Sherin, 2012(Malaysia) The central bank of Malaysia’s website, Islamic banking asset has reched USD65.6 billion, with an average growth rate of 18-20% annually. Islamic banking system is defined as a banking system whose principles underlying its operations an activities are founded on Islamic or shariah rules.

Muhammad jaffer and irfan manarvi, 2011 (Pakistan) The study examined and compared the performance of Islamic and conventional banks operating inside Pakistan during 2005 to 2009 by analyzing CAMEL test standard factors such as capital adequacy, asset quality, management quality, earning ability and liquidity position. The financial data for the study was mined from the bank’s financial statements existing on state bank of Pakistan website. Asset quality for both modes of banking was almost the same, conventional banks recorded slightly smaller loans loss ratio showing improved loan recovery policy whereas, UNCOL ratio analysis showed nominal better performance for Islamic banking.

Dusuki and Abdullah, 2006 Explained that Islamic bankers can no longer depend on promoting the Islamic factor but also have to improve service quality. Their survey among 750 respondents found the three most important factors were competence, friendliness and customer service quality.

Thambiah (2008) Non-Muslim students viewed Islamic finance as inherently appealing to Muslims, and did not perceive Islamic finance as provider of superior products. Overall, studies related to Islamic banking in Malaysia have largely focused on patronage factors. 7

ISLAMIC BANKING SYSTEM IN INDIA

Dar & Presley (1999) The old testament was the key influence on jewish and christen opposition to interest, and may have been the original reason for the Qur’an’s dismissal of usury since the three religions share the same belief in the god of Abraham.

Gerrard and cunningham’s (1997) Study in Singapore found 41.4% of Muslim respondents would deposit an unexpectedly acquired substantial sum of money in Islamic banks, but half of them would withdraw and transfer all deposits to another bank if no profits is announced, much like non-Muslims who deposits with banks that guarantee a return.

AL-Harn’s (1995) Studies indicate a deeper need to investigate the importance of marketing Islamic banking, reinforcement Proposition for market research to determine a viable Islamic economic systems. Islamic banking should no longer be regarded as a business entity striving to fulfill the religion obligation but as a viable business that can win over customers.

8

ISLAMIC BANKING SYSTEM IN INDIA

RESEARCH METHODOLOGY

9

ISLAMIC BANKING SYSTEM IN INDIA

OBJECTIVES OF THE STUDY  To know about Islamic banking  To explore the financing modes of Islamic banking  To study future market potential of Islamic banking  To study how Islamic banking sustain in Indian market.

RESEARCH TYPE The researcher has been used “Exploratory research”.

SCOPE OF THE STUDY In India the scope of Islamic banking is very large because 140 million Muslims live in India which is around 15 percent of the Islamic population. According to Standard & Poor’s (S&P) rating services the potential market is $4 trillion worldwide; therefore, this can be a tool for enhancing economic development in India. This will provide opportunities to the laborers and the working class belonging to the community. There are several foreign banks operating in India, like Citi bank, Standard chartered bank, HBSC are operating interest free windows in several west Asian countries, USA and Europe. The growing awareness about the concept among Indian banks and it is generally felt that there is a huge potential market in India for Islamic banking. Several banks in the country have shown an inclination to undertake this form of interest free banking. However, unless proper regulations are in place to oversee this form of banking it will not be possible for scheduled commercial banks to follow the Islamic banking has been approved by RBI in India. This welcome development was expected after Dr. RaghuramRajan took over as the governor of RBI replacing D.Subbarao whose position on Islamic banking was not favorable. Dr. RaghuramRajan, a former Chief Economist of IMF and the Chief Economist Advisor to the Finance Ministry, was the head of the Committee of the Financial Sector Reforms (CFSR) of the planning commission which recommended Islamic banking to be approved in India. So, on August 6, 2013 Dr. Manmohan Singh approved Dr. Raghuram’s appointment as the governor of RBI, people like us got fresh hopes and RBI finally gave a go ahead to it.

STATEMENT OF PROBLEM

10

ISLAMIC BANKING SYSTEM IN INDIA The modern Islamic banking is about only five decades old but has gained significant interest in almost all parts of the world. Today, Islamic banking has become one of the fastest growing segments of the international banking and capital markets. The spread has been more in the last ten years, especially after the global financial crisis of the previous decade, primarily because Islamic banks were found to be more stable and less susceptible to crisis. Another reason for its growth is to attract investments from the Middle-East and Gulf countries besides demand from the muslim population. Islamic banking has found its way right from the developed western world like the United Kingdom to the Asian giants like Japan and China. The paper attempts to lay emphasis that India too needs to accommodate Islamic Banking. If India continues to shy away from Islamic banking it will lose huge potential investments. The paper highlights the benefits of introducing Islamic banking in India and also identifies the hurdles in the way of Islamic Banking in India.

RESEARCH DESIGN In this study we will be doing comparative analysis of Islamic banking and conventional banking in the various contexts like operational difference, administrative difference, product difference & performance difference in two different banks I.e. Islamic & non Islamic bank. We will also discuss Islamic banking in the world & in India.

DATA COLLECTION The researcher has used secondary data.

TOOLS USED FOR DATA COLLECTION The secondary data were collected from published source like books, websites, etc.

LIMITATIONS OF THE STUDY  The topic is very peculiar, the secondary data was very difficult to gather.  The time period of the study is limited with three months.

11

ISLAMIC BANKING SYSTEM IN INDIA

ISLAMIC BANKING IN INDIA

12

ISLAMIC BANKING SYSTEM IN INDIA

PRINCIPLES OF ISLAMIC BANKING  Sharing of profit and loss  Prohibition of investing in unlawful businesses  Prohibition of RIBA (interest)

ISLAMIC BANKING TAKING ROOTS IN INDIA: KERALA LAUNCHES INTEREST FREE BANK Islamic banking taking roots in India: Kerala launches interest free bank By

Abdullah

Edachalem

Available

at: http://www.khabrein.info/news/Islamic_banking_taking_routes_in_India__Kerala _launches_interest_free_bank_1299509784/ The Kerala government has taken revolutionary step launching the first ever interestfree Islamic banking institution in India. The Al-Baraka came into action once the Kerala High Court dismissed a couple of writ petitions which challenged the setting up of Islamic financial institution in a secular country like India. The Islamic Bank is promoted by Kerala State Industrial Development Corporation (KSIDC) which has 11 percent stake in Al-Baraka Financial Services. The financial institution which operates on Islamic principles was held back as former union minister Subramanyam swami filed PIL challenging the move. A division bench comprising Chief Justice J Chalameswar and Justice P R Ramachandra Menon dismissed the petitions claiming that the government proposed institution can follow the financial laws of the country as well as sharia rules. The first of its like institution originally planned as government undertaking failed to get Reserve Bank clearance as well as court rulings. An internal working group of RBI whose report is yet be public held that such a form of banking is not possible given present regulations. However the system had got a shot on the arm when Prime Minister Manmohan Singh asked the Reserve Bank of India to look into the prospects of introducing an interest13

ISLAMIC BANKING SYSTEM IN INDIA free banking system in the country. “There have been demands for experimenting with Islamic banking in the country,” Singh said. And now the court cleared the way for setting up the financial system as a state supported private company. Al –Baraka is proposed to work as an interest free banking system in which a sharia board will account the power to decide on the mode of investments. The company will invest the money only in Shariah compliant projects such as development and infrastructure projects, according to the promoters. The government plans to use the Al-Baraka resources for major projects like Southwest rail corridor and Coimbatore-Kochi corridor. 14 promoters of Al-Baraka have already contributed 40.2 million Indian rupees to the interest free financial institution which aims to mobilize around 400 billion rupees in total. The 17 member board of the directors is chaired by P. Mohammed Ali, veteran GCC based business man, and C.K. Menon as vice chairman. The government initiative is widely appreciated by people of the state mainly by Muslims who account for close to 24 percent of the 32 million population. It has warmly welcomed by nonresident Keralites in which Muslims play 50% role in umbers as well as in the total remittance into the state. However, a few people believe that its’ a government agenda to tap the huge amount of money from expatriate Muslims who are keeping away from interest-smitten financial systems. Political opposition has been blaming the CPI (M) led left government for their minority appeasement move. But state government is firm on its stance projecting the example of Britain having an Islamic bank with seven branches where Muslims account for only 3% of population. They also claim that there are nearly 500 Islamic finance institutions worldwide, managing $1 trillion in assets. The promoters of Al-Baraka proposed that Indian banking regulations would be changed to accommodate Islamic banking services. It would benefit the largest minority of the country as well as those who wish for interest-free banking services.

14

ISLAMIC BANKING SYSTEM IN INDIA

DIFFERENCE BETWEEN ISLAMIC BANK & CONVENTIONAL BANK

15

ISLAMIC BANKING SYSTEM IN INDIA

NO.

CONVENTIONAL

ISLAMIC BANKING

BANKING 1.

2.

3.

The functions and operating

The functions and operating modes are

modes are based on fully man

based on the principles of Islamic

made principles.

shariah.

It aims at maximizing profit

it also aims at maximizing profit but

without any restriction.

subject to shariah restriction.

It can charge additional money

This type of banking has no provision

[penalty and compound interest] in

to charge any extra money from the

case of defaulters.

defaulters. Only small amount of compensation is charged and these proceeds are given to charity.

4.

Lending money and getting it

Participation in partnership business

back with compound interest is

is the fundamental function of the

the fundamental function of the

Islamic bank.

conventional bank. 5.

The investor is assured of a

It promoters risk sharing between

predetermined rate of interest.

provider of capital and the user of funds.

6.

Since income from the advance

Since it shares profit and loss, the

is fixed, it gives little importance Islamic banks pays greater attention

7.

8.

to developing expertise in

to developing project appraisal and

project appraisal and evaluation.

evaluation.

The status of a conventional

The status of Islamic bank in relation

bank, in relation to its clients is

to its clients is that of partners,

that of creditor and debtor.

investors and trader, buyer and seller.

Conventional banking practices

Islamic banking practices are

are concerned with elimination

concerned with risk bearing when

of risk when involve in any

involved in any transaction.

transaction. 9.

It does not deal with zakat

In the modern Islamic banking

(Islamic tax)

systems, it has become one of the service-oriented functions of the 16

ISLAMIC BANKING SYSTEM IN INDIA Islamic banks to be a zakat collection center and they also pay out their zakat. 10.

When conventional banks

Islamic banks bear all liability when

involve in transaction with

involve in transaction with consumer.

consumer they do not take the

Getting out any benefit without

liability only get the benefit

bearing its liability is declared haram

from consumer in from of

in islam.

interest.

17

ISLAMIC BANKING SYSTEM IN INDIA

PRODUCT OF ISLAMIC & CONVENTIONAL BANKS

18

ISLAMIC BANKING SYSTEM IN INDIA

ISLAMIC BANKING PRODUCTS

deposits products

investment products

financing products

insurance products

DEPOSITS PRODUCTS 1. Wadiah (safekeeping) In wadiah a bank is deemed as a keeper and trustee of funds. A person deposits funds in bank and the bank gurantees refund of the entire amount of the deposits or any part of the outstanding amount, when the depositor demands it.

2. Jibah A token given voluntarily by a debtor in return for loan.

INVESTMENT PRODUCTS 19

ISLAMIC BANKING SYSTEM IN INDIA

1. Murabahah Refers to the sale of goods at a price, including a profit margin agreed to by both parties, and clearly stated in the sale agreement. The bank can not charge additional profit on late payments, however, the assets remains as a mortgage with banks until the default is settled.

2. Mudarabah (profit sharing) Is a contract with one party providing 100% of the capital and the other party providing its specialized knowledge to invest the capital and manage the investment project. Profit sharing ratio is usually 1:1 or 3:2, which is usually predetermined.

3. Sukak It refers to Islamic equivalent of bonds. Sukuk securities are structured to comply with Islamic law and its investment principles, which prohibits interest charging. This is generally done by involving a tangible assets in the investment, such a by giving partial ownership of property built by the investmentcompany to the board owner.

FINANCING PRODUCTS 1. Musharakah (joint venture) Is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata.  The profit is distributed the partners in pre-agreed ratios.

 The loss is supported strictly in proportion to capital contributions. 2. Ijarah ( lease or rent ) Refers to selling the benefits of user or service for a fixed price or wage. Under this concept, the bank makes available to the customer the use of service of asset/ equipment such as plant, office automation, motor vehicle for a fixed period and price.

3. Qurd hassan ( good loan )

20

ISLAMIC BANKING SYSTEM IN INDIA Is a loan extended on a goodwill basis, with the debtor only required to repay the amount of the loan as a taken of appreciation to the creditor.

INSURANCE PRODUCTS 1. Takaful Takaful os based on the idea that what is uncertain to an individual may be uncertain to a very large number of similar individuals. It’s a type of insurance where members contribute money into a pooling system in order to guarantee Each other against loss or damage.

21

ISLAMIC BANKING SYSTEM IN INDIA

CONVENTIONAL BANKING PRODUCS

CONVENTIONAL BANK PRODUCTS

Retail Banking

Trade Finance

Treasury Operations

RETAIL BANKING 1.

Deposits

2.

Loans, Cash Credit and Overdraft

3.

Negotiating for Loans and advances

4.

Remittances

5.

Book-Keeping (maintaining all accounting records)

6.

Receiving all kinds of bonds valuable for safe keeping

TRADE FINANCE 1.

Issuing and confirming of letter of credit.

2.

Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities.

TREASURY OPERATIONS 1. Buying and selling of bullion, Foreign exchange. 2. Acquiring, holding, underwriting and dealing in shares, debentures, etc. 22

ISLAMIC BANKING SYSTEM IN INDIA 3. Purchasing and selling of bonds and securities on behalf of constituents. 4. The banks can also act as an agent of the Government or local authority. They insure, guarantee, underwrite, participate in managing and carrying out issue of shares, debentures, etc.

23

ISLAMIC BANKING SYSTEM IN INDIA

OPERATIONAL DIFFERENCE BETWEEN ISLAMIC BANKS & CONVENTIONAL BANKS 24

ISLAMIC BANKING SYSTEM IN INDIA

The operations of any banks includes the functioning, i.e. its sources of funds, its mobilization of funds etc. In short the operations of banks means whole working mechanism of any banks. Here we will show comparison between operational functions of

sources of fund

Islamic banks & conventional banks.

capital & equity transections deposits

investment deposits

CAPITAL & EQUITY 1. Capital is the amount injected into Islamic bank during the setting up stages i.e. the paid-up capital of the Islamic bank. 2. Equity is usually the retained earnings of Islamic bank that accumulated during its operational period. 25

ISLAMIC BANKING SYSTEM IN INDIA

Transection deposits 1. CURRENT ACCOUNT

They are based on the principle of wadiah, where the depositors get the guarantee of repayment of funds, and they do not receive remuneration on such deposits 2. SAVINGS ACCOUNT

It is also based on the principle of wadiah. Here the depositor gets the income(hiba/premium) on deposits. INVESTMENT DEPOSITS 1. INVESTMENT ACCOUNT

It is operated under the principle of mudaraba, in which mudrib (active partner). Should have absolute freedom in the management of investment of the subscribed capital.  Higher fixed premium amount  A longer duration deposits  Depositor may lose some of all his funds if the banks make loss. 2. SPECIAL INVESTMENT ACCOUNT

Special investment account is also operated under the principle, and usually are directed towards larger investors & institutions.

26

ISLAMIC BANKING SYSTEM IN INDIA

APPLICATION OF FUNDS

cost plus/mark up

deferred payment

prepaid purchase

leasing

benvolent loans

manufact uring

1. MURABHA (COST PLUS/ MARK UP)

The bank finances purchase of goods or assets by buying it on behalf of its client & adding a markup before reselling it to the client on a cost plus profit basis contract. 2. BAI MUAJJAL (DEFERRED PAYMENT)

Islamic banks also do purchase & resale of the properties on a deferred payment basis. It is considered lawful in to charge a higher price of goods if payment are to be made at a later date. 3. BAI SALAM (PREPAID PURCHASE)

This method is really the opposites of the murabaha. There the bank gives the commodity first and then receives the money later. Here bank pays money first & receives 27

ISLAMIC BANKING SYSTEM IN INDIA

commodity later. This is generally used to finance agriculture products. 4. ISTISNAA (MANUFACTURING)

This is a contract to acquire goods on behalf of a third party where the price is paid to manufacturer in advance & goods are produced & delivered later. 5. QARD (BENEVOLENT LOANS)

This is the zero return kind of loan that the holy quran urges muslim to make available to those who need them 6. IJARAH & IJARA WA LQTINA (LEASING)

Under this mode, the banks buy the equipment & lease it out to their clients who may opt to buy the items eventually, in which the monthly payment will consists of A. rent for the use B. installment towards the purchase price.

28

ISLAMIC BANKING SYSTEM IN INDIA

sources of funds

SOURCES OF FUNDS OF CONVENTIONAL BANKING

capital deposits borrowings

CAPITAL The bank capital represents the net worth of the bank or its value to investors. A bank’s capital can be though of as the margin to which creditors are covered if a bank liquidities its assets. Loan-loss reserves or loan-loss provisions are amounts set aside by banks to allow for any loss in the value of the loans they have offered. 1.

Paid-up capital Paid-up/share capital indicates contribution made by the shareholders of the bank. By definition, it is part of subscribed capital which has been called-up and paid, while subscribed capital is the part of the authorized capital which

29

ISLAMIC BANKING SYSTEM IN INDIA has been issued and taken up by the public including shares issued to and paid by sponsor. 2.

Reserve fund It is amount accumulated over the years out of undistributed profit. It actually belongs to the shareholders. The accumulation of such retained reserve is an essential condition for financial soundness, stability and growth of the bank to fulfill special roles assigned to them from time to time.

DEPOSITS Deposits from public represent by far the most powerful sources of fund to a bank, accounting for over 90% of the total. These deposits are key to a bank’s potential growth. These funds are liabilities of the bank, because these have to returned to the owners on demand. 1. Current deposits The depositors of such

30

ISLAMIC BANKING SYSTEM IN INDIA

31

ISLAMIC BANKING SYSTEM IN INDIA

PERFORMANCE ANALYSIS OF ISLAMIC & NON ISLAMIC BANKS

32

ISLAMIC BANKING SYSTEM IN INDIA

In evaluate of the financial performance of the banks, the financial ratio is used on the study. Financial ratio procedure to evaluate the banks performance was introduced by Cole (1972) (as cited in Rosly and Bakar, 2003). The ratios are grouped under three broad categories. They are profitability ratio, liquidity ratio and credit risk ratio. Profitability ratio consists of the return on assets ratio and return on equity ratio. Liquidity ratio includes the net loan to asset ratio, while, credit risk ratio includes common equity to total asset ratio and total equity to net loans ratio.

a) Profitability Ratio The profitability ratios are used to assess the capability of the banks to generate the earnings as compared to their expenses and other relevant costs incurred during certain period of time. This study used the following ratio to evaluate the profitability performance of the banks. . 1. Return on Assets (ROA) = net profit / total asset

KERALA GRAMIN BANK 2016-17

2017-18

Net profit

1029362

537806

Total assets

189120754

208242692

Return on assets

0.0054

0.0025

33

ISLAMIC BANKING SYSTEM IN INDIA

CHERAMAN FINANCIAL SERVICE LIMITED 2016-17

2017-18

Net profit

3525527

8093136

Total assets

267124305

302984072

Return on assets

0.0132

0.0267

RETURN ON ASSTS 0.03

0.025 0.02 0.015 0.01 0.005 0 2016-17

2017-18 kerla gramin

charamen finance

INTERPRETATION  The higher the value of the ROA is indicator of higher capability of the firm  Here it can be seen that return on assets of both banks is not up to the mark i.e. near to zero.  But return on assets of Islamic bank is higher than the other so, it can be said that its profitability is high.

34

ISLAMIC BANKING SYSTEM IN INDIA

2. Return on Equity (ROE) = net profit / equity

KERALA GRAMIN BANK 2016-17

2017-18

Net profit

1029362

537806

Equity

84143

84143

Return on equity

12.223

6.3915

CHERAMAN FINANCIAL SERVICE LIMITED 2016-17

2017-18

Net profit

3525527

8093136

Equity

336200000

318000000

Return on equity

0.0105

0.0255

35

ISLAMIC BANKING SYSTEM IN INDIA

RETURN ON EQUITY 14 12 10 8 6 4 2

0 2016-17

2017-18

Axis Title kerala gramin bank

cheraman finance

INTERPRETATION  The higher the value of the ROE is indicator of higher financial performance. It assesses how effectively the banks used the shareholder funds.  Here it can be seen that kerala gramin bank does not have much equity. So ROE is quiet higher in the year 2017, which becomes its half in the year 2018 due to the reduction in net profit.  Here the ROE of cheraman finance is very low in both the years 2017 & 2018.

36

ISLAMIC BANKING SYSTEM IN INDIA

2 LIQUIDITY RATIO Liquidity means how quickly the cash availability in the bank converts its assets into cash to meet the needs of the depositors and borrowers. Net Loans to Asset Ratio (NetLTA) = net loans/ total asset.

KERALA GRAMIN BANK 2016-17

2017-18

Net loans

117602781

143100924

Total assets

189120754

208242692

Net loan to asset ratio

0.6218

0.6871

CHERAMAN FINANCIAL SERVICE LIMITED 2016-17

2017-18

Net loans

99065877

10217699

Total assets

302984072

267124305

Net loan to asset ratio

0.3269

0.3825

37

ISLAMIC BANKING SYSTEM IN INDIA

NET LOAN TO ASSET RATIO 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2016-17

2017-18

kerala gramin bank

cheraman finance

INTERPRETATION  The higher the Net LTA is indicator of less liquid the bank will be.  The chart shows net loan to assets ratio of both the banks of kerala for the year 2017 & 2018.  It can be seen that Net LTA ratio of kerala gramin bank is almost double than the cheraman finance.  This indicates higher liquidity of cheraman finance service limited as compared to kerala gramin bank.

38

ISLAMIC BANKING SYSTEM IN INDIA

3) CREDIT RISK RATIO Credit risk is the likelihood that a borrower will default on its loan or lease, causing the bank to lose any potential interest earned. Following are the financial ratio that used to measuring the credit risk performance of the banks. i. Common Equity to Total Asset ratio (CETA) = common equity/ total assets.

KERALA GRAMIN BANK 2016-17

2017-18

Common equity

84143

84143

Total assets

189120754

208242692

Common

equity

to 0.000445

0.000404

total asset ratio

CHERAMAN FINANCIAL SERVICE LIMITED 2016-17

2017-18

Common equity

336200000

318000000

Total assets

302984072

267124305

Common

equity

to 1.1096

1.1905

total asset ratio

39

ISLAMIC BANKING SYSTEM IN INDIA

COMMON EQUITY TO TOTAL ASSET RATIO 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2016-17

2017-18

Axis Title Krla gramin bank

cheraman finance

INTERPRETATION  The higher the ratio of CETA indicates the greater capacity for the bank to maintain the assets losses.  It can be clearly seen that the CETA of kerala gramin bank is half of CETA of cheraman finance whose CETA is 1.1.  This indicates that cheraman finance (Islamic bank) has the greater capacity to maintain assets losses.

40

ISLAMIC BANKING SYSTEM IN INDIA ii. Total Equity to Net loans (TENL) = total equity/ net loans.

KERALA GRAMIN BANK 2016-17

2017-18

Total equity

84143

84143

Net loans

117602781

143100924

Total equity to net 0.000715

0.00058

loans

CHERAMAN FINANCIAL SERVICE LIMITED 2016-17

2017-18

Total equity

336200000

318000000

Net loans

99065877

102176799

Total equity to net 3.394

3.112

loans

41

ISLAMIC BANKING SYSTEM IN INDIA

Total equity to net loans ratio 4 3.5 3 2.5 2 1.5

1 0.5

0 2016-17

2017-18

Axis Title kerala gramin bank

cheraman finance

INTERPRETATION  The higher the ratio of TENL indicates the higher capacity for a bank to adjust the loans losses.  The chart clearly shows that cheraman finance’s ratio is almost 3 times of kerala gramin bank’s TENL ratio.  Therefore it can be said that cheraman finance has higher capacity to adjust its losses on loans.

42

ISLAMIC BANKING SYSTEM IN INDIA

FINDINGS & SUGGESTIONS

43

ISLAMIC BANKING SYSTEM IN INDIA

FINDINGS

44

ISLAMIC BANKING SYSTEM IN INDIA

SUGGESTIONS

45

ISLAMIC BANKING SYSTEM IN INDIA

CONCLUSION

46

ISLAMIC BANKING SYSTEM IN INDIA

BIBLIOGRAPHY

 https://www.pdfcoke.com/doc/16522911  https://www.pdfcoke.com/doc/131308913  https://ifinanceexpert.wordpress.com/  https://scroll.in/article/845062/with-first-sharia-compliant-co-opbank-in-kerala-has-islamic-banking-moved-ahead-in-india  https://zulkiflihasan.wordpress.com/2011/03/08/islamic-bankingtaking-roots-in-india-kerala-launches-interest-free-bank/  https://www.researchgate.net/publication/265625647_Islamic_Ban ks_from_a_Global_Perspective  https://www.sc.com/global/av/pk-ib-cb-differences.pdf  https://www.researchgate.net/profile/Michael_Skully/publication/2 65625647_Islamic_Banks_from_a_Global_Perspective/links/54bf4 0bd0cf28ce68e6b4650/Islamic-Banks-from-a-GlobalPerspective.pdf?origin=publication_detail  https://www.pdfcoke.com/doc/18588323

47

ISLAMIC BANKING SYSTEM IN INDIA

ANNEXURE

48

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