Treasury Bills or T-Bills: Treasury Bills, one of the safest money market instrument, are short term borrowing insturments of the Central Government of the country issued through the Cenral Bank. They are zero risk insturments. It is available both in the primary market as well as secondary market.
Money Market
Money Market:
Money market means market where money or its equivalent can be traded. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. In short it is a place where large institutions and government manage their short term cash needs.
Money market means market where money or its equivalent can be traded. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. In short it is a place where large institutions and government manage their short term cash needs.
Principles for the management and supervision of liquidity risk
Fundamental principle
1. A bank is responsible for the sound management of liquidity risk. A bank sould establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.
1. A bank is responsible for the sound management of liquidity risk. A bank sould establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.
HPSM-Hire Purchase Under Shirkatul Meelk
HPSM-Hire Purchase Under Shirkatul Meelk (Ijara Muntahia Mittamleek)
is a special type of contract, used by Islamic Banks, which has been developed through practice. It is a combination of three contracts like Shirkat-al-Meelk, Ijarah and Sale.
is a special type of contract, used by Islamic Banks, which has been developed through practice. It is a combination of three contracts like Shirkat-al-Meelk, Ijarah and Sale.
Ijarah
Ijarah is a term which has originated from Islamic Fiqh. It is a derivative of the Arabic words Ajr and Ujrat which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of service of an asset. Generally,
Promissory Note
Promissory Note:
As per section 4 of the Negotiable Instrument Act. 1881, 'A promissory note is an instrument in writing( not being a bank-note of currency-note) containing an unconditional undertaking signed by the maker, to pay on demand or at a fixed or determinable future time a certain sum of money only to , or to the order of, a certain person, or to the bearer of the instrument.'
As per section 4 of the Negotiable Instrument Act. 1881, 'A promissory note is an instrument in writing( not being a bank-note of currency-note) containing an unconditional undertaking signed by the maker, to pay on demand or at a fixed or determinable future time a certain sum of money only to , or to the order of, a certain person, or to the bearer of the instrument.'
Musharaka
Definition: Musharaka is a contract between two or more parites in which all the partners contribute capital, participate in the management, share the profit in proportion to their capital or as per pre-agreed ratio and bear the loss, if any in proportion to their capital/equity ratio.
Istisna'a
Istisna's:
Istisna'a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific products after having manufactured, permissible under Islamic Shariah and Law of the country at an agreed price payable in advance or by installments withing a fixed period or on/within a fixed future date on the basis of the order placed by the buyer.
In short,
Istisna'a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific products after having manufactured, permissible under Islamic Shariah and Law of the country at an agreed price payable in advance or by installments withing a fixed period or on/within a fixed future date on the basis of the order placed by the buyer.
In short,
MFI class summary
Core Capital (Tier 1 Capital):
01) Paid up capital / capital deposited with BB
02) Share premium
03) Statutory reserve
04) General reserve
05) Retained earning
06) Minority Interest in subsidiaries
01) Paid up capital / capital deposited with BB
02) Share premium
03) Statutory reserve
04) General reserve
05) Retained earning
06) Minority Interest in subsidiaries
Islamic Financial Terms
Islamic Financial Terms:
1. Amanah (Deposits in trust): A person can hold a property in trust for another, sometimes by express contract and sometimes by implication of a contract. Current accounts are regarded as Amanah.
2. Arbun: Down payment, a nonrefundable deposit paid by a buyer retaining a right to confirm or cancel the sale.
1. Amanah (Deposits in trust): A person can hold a property in trust for another, sometimes by express contract and sometimes by implication of a contract. Current accounts are regarded as Amanah.
2. Arbun: Down payment, a nonrefundable deposit paid by a buyer retaining a right to confirm or cancel the sale.
Financial Statements of Financial Institutions
Financial Statements:
i) Profit and Loss account or Income Statement
ii) Balance Sheet
iii) Cash Flow Statement
iv) Statement of change in equity
v) Liquidity Statement
vi) Notes to the financial statements
i) Profit and Loss account or Income Statement
ii) Balance Sheet
iii) Cash Flow Statement
iv) Statement of change in equity
v) Liquidity Statement
vi) Notes to the financial statements
Basel 2 and Basel 3
A. Tier 1 Capital
A1. Basel 2:
Tier 1 capital ratio=4%
Core Tier 1 capital ratio=2%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.
A2. Basel 3:
Tier 1 capital ratio=6%
Core Tier 1 capital ratio (common equity after deduction)=4.5%
Core Tier 1 capital ratio ( common equity after deduction) before 2013=2%
Ist January 2013=3.5%
Ist January 2014=4%
Ist January 2015=4.5%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.
B. Capital Conservation Buffer
B1. Basel 2:
There is no capital conservation buffer.
B2. Basel 3: Banks will required to hold a capital conservation of 2.5% to withstand future periods of stress bringing the total common equity requirement to 7%.
Capital conservation buffer of 2.5%, on top of Tier 1 capital, will be met with common equity, after the application of deductions.
Capital conservation buffer before 2016=0%
Ist January 2016=0.625%
Ist January 2017=1.25%
Ist January 2018=1.875%
Ist January 2019=2.5%
The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions.
C. Countercyclical Capital Buffer
C1. Basel 2:
There is no countercyclical capital buffer
C2. Basel 3:
A countercyclical buffer within a range of 0%-2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share buybacks and bonuses.
The buffer will be phased in from January 2016 and will be fully effective in January 2019.
Countercyclical capital buffer before 2016=0%,
1st January 2016=0.625%
1st January 2017=1.25%
1st January 2018= 1.875%
1st January 2019=2.5%
D. Capital for Systemically Important Banks only
D1. Basel 2:
There is no capital for systemically important banks
D2. Basel 3:
Systemically important banks should have loss absobing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel committee work streams.
The Basel Committee and the FSB are developing a well integrated approach to systemically important financial institutions which could include combinations of capital surcharges, contigent capital and bail-in debt.
Total Regulatory Capital Ratio=A+B+C+D
A1. Basel 2:
Tier 1 capital ratio=4%
Core Tier 1 capital ratio=2%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.
A2. Basel 3:
Tier 1 capital ratio=6%
Core Tier 1 capital ratio (common equity after deduction)=4.5%
Core Tier 1 capital ratio ( common equity after deduction) before 2013=2%
Ist January 2013=3.5%
Ist January 2014=4%
Ist January 2015=4.5%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.
B. Capital Conservation Buffer
B1. Basel 2:
There is no capital conservation buffer.
B2. Basel 3: Banks will required to hold a capital conservation of 2.5% to withstand future periods of stress bringing the total common equity requirement to 7%.
Capital conservation buffer of 2.5%, on top of Tier 1 capital, will be met with common equity, after the application of deductions.
Capital conservation buffer before 2016=0%
Ist January 2016=0.625%
Ist January 2017=1.25%
Ist January 2018=1.875%
Ist January 2019=2.5%
The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions.
C. Countercyclical Capital Buffer
C1. Basel 2:
There is no countercyclical capital buffer
C2. Basel 3:
A countercyclical buffer within a range of 0%-2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share buybacks and bonuses.
The buffer will be phased in from January 2016 and will be fully effective in January 2019.
Countercyclical capital buffer before 2016=0%,
1st January 2016=0.625%
1st January 2017=1.25%
1st January 2018= 1.875%
1st January 2019=2.5%
D. Capital for Systemically Important Banks only
D1. Basel 2:
There is no capital for systemically important banks
D2. Basel 3:
Systemically important banks should have loss absobing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel committee work streams.
The Basel Committee and the FSB are developing a well integrated approach to systemically important financial institutions which could include combinations of capital surcharges, contigent capital and bail-in debt.
Total Regulatory Capital Ratio=A+B+C+D
Pro-cyclical and counter-cyclical
Pro-cyclical: An economic variable positively correlates with and grows in parallel with the overall economy is pro-cyclical.
Counter-cyclical: Those variables that increase when the overall economy is slowing down are counter-cyclical.
Example: Personal incomes and business profits generally rise when the economy is growing, ie. pro-cyclical.
Unemployment is counter-cyclical because it rises when the economy weakens.
The financial regulations of Basel 2 are critized for possibly being pro-cyclical.
Under Basel 2, banks must increase their capital ratios when they face greater risk. This might mean they have less to lend in a recession, which could make the economic downturn worse.
Counter-cyclical: Those variables that increase when the overall economy is slowing down are counter-cyclical.
Example: Personal incomes and business profits generally rise when the economy is growing, ie. pro-cyclical.
Unemployment is counter-cyclical because it rises when the economy weakens.
The financial regulations of Basel 2 are critized for possibly being pro-cyclical.
Under Basel 2, banks must increase their capital ratios when they face greater risk. This might mean they have less to lend in a recession, which could make the economic downturn worse.
Maqasid of Shariah-Objectives of Shariah
The Objectives (Maqasid) of Shariah can be divided into two parts:
A. Primary Objectives:
The primary objectives of Shariah tend to realize the protection and preservation of:
i) Religion: achieving the purpose of worship of Allah.
ii) Life: The protection and preservation of human life refers to the sanctity of life as emphasized in the Quran and Sunnah.
iii) Progeny-family unit: The protection of progeny or the family unit relates to marriage and the family institution, whose purposes are: procreation, protection against lack of chastity and the proper upbringing of children, enabling them to become good human beings and Muslims and to bring peace and tranquility to society.
iv) Property: The sanctity of the wealth of all members of society, with an emphasis on valid (Halal) earning and discouragement of a concentration of wealth leading to a vast gap between the poor and the rich and the inability of the former to meet their basic nees of food, health and fundamental education.
v) Intellect: Refers to acquiring knowledge, thus enabling people to differentiate between good and bad and to play their part in enhancing the welfare of human society as a whole.
vi) Honour: The protection of human honour and dignity refers to the prohibition of false accusations, the right to privacy and the sanctity of private life.
B. Secondary Objectives:
The above primary objectives of Shariah lead to a number of secondary objectives:
i) The establishment of justice and equity in society.
ii) The promotion of social security, mutual help and solidarity, particularly to help the poor and the needy in meeting their basic needs.
iii) The maintenance of peace and security.
iv) The promotion of cooperation in matters of goodness and prohibition of evil deeds and actions.
v) The promotion of supreme universal moral values and all actions necessary for the preservation and authority of nature.
source: Understanding Islamic Finance By Muhammad Ayub
A. Primary Objectives:
The primary objectives of Shariah tend to realize the protection and preservation of:
i) Religion: achieving the purpose of worship of Allah.
ii) Life: The protection and preservation of human life refers to the sanctity of life as emphasized in the Quran and Sunnah.
iii) Progeny-family unit: The protection of progeny or the family unit relates to marriage and the family institution, whose purposes are: procreation, protection against lack of chastity and the proper upbringing of children, enabling them to become good human beings and Muslims and to bring peace and tranquility to society.
iv) Property: The sanctity of the wealth of all members of society, with an emphasis on valid (Halal) earning and discouragement of a concentration of wealth leading to a vast gap between the poor and the rich and the inability of the former to meet their basic nees of food, health and fundamental education.
v) Intellect: Refers to acquiring knowledge, thus enabling people to differentiate between good and bad and to play their part in enhancing the welfare of human society as a whole.
vi) Honour: The protection of human honour and dignity refers to the prohibition of false accusations, the right to privacy and the sanctity of private life.
B. Secondary Objectives:
The above primary objectives of Shariah lead to a number of secondary objectives:
i) The establishment of justice and equity in society.
ii) The promotion of social security, mutual help and solidarity, particularly to help the poor and the needy in meeting their basic needs.
iii) The maintenance of peace and security.
iv) The promotion of cooperation in matters of goodness and prohibition of evil deeds and actions.
v) The promotion of supreme universal moral values and all actions necessary for the preservation and authority of nature.
source: Understanding Islamic Finance By Muhammad Ayub
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