The Slide is about the Comparative study on Islamic and conventional Financial System..........

1. FINANCIAL SYSTEM
A COMPARATIVE STUDY

2. FINANCIAL SYSTEM DEFINED
The financial system provides a mechanism whereby
an individual, firm or household, who is a surplus
spending unit (SSU), may conveniently make funs
available to a deficit spending units (DSUs) who
intend to spend more than their current income. The
key word ‘conveniently’ is important. It means the
financial system will be so developed and mechanism
for transactions so designed and rule and regulations
for dealings so formulated that both the supplier and
demanders of funds will not face any difficulties while
they will be transacting with each other.

3. Islamic Financial System Defined
 The Islamic financial system provides a
mechanism whereby an individual, firm or
household, who is a surplus spending unit
(SSU), may conveniently make funds
available directly or indirectly to a deficit
spending units (DSU) on a participatory
basis.

4. CONSTITUENT AND FEATURES OF
CONVENTIONAL FINANCIAL SYSTEM
 Mechanism: Based on both ‘Financing’
mode and ‘Investment’ mode.
 Institutions: Commercial Banks,
Depository Institutions, Credit Unions,
Finance Companies, Merchant Banks,
Leasing Companies, Investment Banks,
Stock Exchange

5. CONSTITUENT AND FEATURES OF
CONVENTIONAL FINANCIAL SYSTEM
 Instruments: (long term) Ordinary Share,
Cumulative and non-cumulative preference share,
debenture and bonds
 Instruments: (Short term), commercial paper,
CDs, financial paper, marketable securities
 Reward : Interest for Debt, profit for equity and
rent/interest for leasing.

6. Basic Forms of Financial Instruments
 Money: Medium that is universally acceptable
in an economy both by sellers of goods and
services as payment for the goods and services
and by creditors as payments for debts.
 Security: A security is a written evidence of the
extension of loan. They are the printed
documents providing ownership or creditorship
in a business organization or public body such
as local, state or federal government. Most of
the financial instruments take the form of
securities.

7. Security Type Financial Instruments
Main types of financial instruments are as
follows:
a. Equity Instruments
b. Debt Instruments
c. Asset-backed Instrument
d. Hedging Instrument

8. Security Type Financial Instruments
Main types of financial instruments are as
follows:
a. Equity Instruments
b. Debt Instruments
c. Asset-backed Instrument
d. Hedging Instrument

9. Equity Instruments
Common Stock: A certificate of per
ownership in a corporation that entitles the
owner to certain voting privileges and to a
share in profits
Preferred Stock: A share of ownership in a
firm that entitles the holder to first claim on
the asset of the firm but afford less control
than a common stock holder over the firm’s
direction and management

10. Types of Preferred Stock
Participating Preferred Share: That preference
share which first receives its preferential dividend at
the prescribed rate, and then participates or shares
with the common stock in the remainder of the
funds declared as dividends.
Nonparticipating Preferred Share: That share
which, through the term of its issue and sale, is to
receive a preferential dividend at a stipulated rate
and nothing whatever beyond that. All other
dividends in this case, regardless of amount, go to
the common shareholders.

11. Types of Preferred Stock
Cumulative Preferred share: Cumulative
preference share is stock, the stipulated dividend of
which, if not paid in full in one or more years,
carries over or accumulates from year to year until
fully paid. Commons Shareholders are not entitled
to receive any dividend whatever as long as the
cumulative preferred dividends is in arrears.
Non-cumulative Preferred Share: On the other
hand when the provision is such that dividends or
part of dividends not paid to the preferred
shareholders in any given year are lost to them
forever, is known as no cumulative preference share.

12. Types of Preferred Stock
Redeemable Preferred stock: This means
that the corporation has the option, under the
conditions and on the terms specified in the
certificate of incorporation, of redeeming or
buying back the shares from the shareholders.
This redemption right rests, of course, entirely
with the company and the shareholders can
neither compel nor refuse the redemption of
their shares.

13. Types of Preferred Stock
Convertible preference share: Some preferred
shares are exchangeable at the option of the holder
into some other specified security of the company
(for example common share). Conversion, unlike
redemption, is at the option of the holder.
Protected preferred stock: Sometimes options are
given to preferred share to enhance attractiveness to
investors, in addition to paying the current dividend
on the preferred stock to put aside a reserve fund to
cover one or two years' future preferred dividends
before anything could be paid to the common
stockholders

14. CONSTITUENT AND FEATURES OF
ISLAMIC FINANCIAL SYSTEM
 Mechanism: Based on ‘investment’
mode, ‘buy’(Trading) mode and ‘Lease’
mode
 Institutions: Mudarabah companies, PLS
Institutions/banks, Finance companies,
Leasing Companies, Investment Banks,
Stock Exchange

15. CONSTITUENT AND FEATURES OF
ISLAMIC FINANCIAL SYSTEM
Instruments: Ordinary
Share, Mudaraba bonds,
noncumulative preference
share, Short term
investment paper,
Reward: Profit and Rent

16. Financial Market vs Financial
Intermediary
 The financial system has two major
components. One is the Financial Market
where SSUs can invest or lend their funds
directly to the DSUs. This is called Direct
Finance. An example is the market for
corporate bonds. Purchase of Stock is
another example of direct finance.

17. Financial Market vs Financial
Intermediary
 The other major component of the financial
system is made up of the Financial
Intermediaries - various institutions such as
banks, savings and loan associations and credit
unions - that as go-betweens to link up SSUs and
DSUs. Here the linkage between saver and
borrower is indirect. This is called Indirect
Finance. Even though the ultimate lender is the
SSU, the DSU owes repayment to the financial
intermediary, and the financial intermediary owes
repayment of the deposit to the SSU.

18. Financial intermediation and its
advantages
 The process that channels funds from savers to users to
make investments iis referred to as financial
intermediation.
 Under conventional system financial intermediaries
borrow from the savers against a deposit interest rate and
lend the same to the ultimate users/borrowers against a
leding interest rate higher then the deposit interest rate.
 Under Islamic system both procurement and disbursement
of fund is done on a participatory basis.

19. The advantages of financial
intermediation
 It allows smaller businesses (for whom stock and
bond issuance is impractical) access to saving
funds.
 Allows savers to purchase assets that are
relatively safe and more liquid and also earn
interest/profit.
 financial institutions can pool their funds and
diversify their investments, thereby reducing risk
to small savers.
 Saving deposits are insured by regulatory
agencies.

20. Disadvantages of financial
intermediation
 It increases the cost of financing
 It deprives the ultimate savers by giving a
lower rate of interest/profit
 It encourages effortless income
 It helps concentration of wealth
 It imposes all burden on entrepreneurs

21. Financial Market
 The institutions and procedures that
facilitate the transaction of financial
securities are called financial market.
These securities may be short or long in
terms of maturity. Again the securities
may be earning fixed income for certain
period known as interest or may be
participating in the profit and loss of the
organization. The fixed income securities
are known as debenture whereas the profit
and loss sharing securers are known as
shares.

22. Classification of Financial Market
 Money Market: A money market means the institutions and
procedures that facilitate the transaction of short-term
securities. Short-term securities have the maturity of one
year or less than one year. Examples of these securities are
Govt. treasury bonds, bills of exchange, commercial paper
etc.
 The money market is a market for short term (less than one
year) loan; in fact it is money or near money that is being
bought and sold. It is not a place (like the stock market) but
an activity.

23. Classification of Financial Market
 Capital market : A capital market
includes the institutions and procedures
that facilitates the transaction of long term
securities. The maturity of long term
securities are considered to be more than
one year. Examples of long term securities
are shares, debentures etc.

24. Constituent of money market
 Bankers acceptance market
 Commercial paper market
 Treasury Bill market
 Call money market
 The Eurodollar market
 The Interest rate Futures market
Supplier of Money Market
a) Individual b) Banks
c) Financial Institution d) Govt. Treasury
e) Trading Companies

25. Constituent of Capital market
 The Stock exchange :
 The Security and Exchange Commission
 Investment Banks :
 Development Banks and Financial
Institutions:
 Finance Companies :
 Brokers :
 The investors
 The Hedgers:
 The Arbitragers:

26. THE MONETARY SYSTEM

27. Islamic vs. Conventional
View of Money
Islamic concept of money Conventional concept of
money
Money is considered as
servant
Money is considered as
Master (nest to God)
Money is considered as
only the medium of
exchange
Money is considered as
both commodity and
medium of exchange

28. Islamic vs. Conventional
View of Money
Islamic concept of money Conventional concept of
money
Money should not be
stored or used for
speculative purpose
Money should be stored
and used for speculative
purpose
Money is not considered
as commodity and hence
can not be traded
Money is considered as
commodity and hence
can be traded

29. Islamic vs. Conventional
View of Money
Islamic concept of money Conventional concept of
money
Value of money should
be kept stable at any cost
Value of money could be
eroded for the sake of
development
Money is considered as
blessing as it help
avoiding ’Riba AL Fadl’
Money is used to earn
Riba or interest

30. Islamic vs. Conventional
View of Money
Islamic concept of money Conventional concept of
money
Supply of money is
controlled and conditional
Supply of money is
uncontrolled and almost
unconditional
Credit Money is
discouraged
Credit Money is
encouraged

31. Why according to Islam money is
not a commodity
(a) Money has no intrinsic utility. It cannot be utilized
in direct fulfillment of human needs. It can only be
used for acquiring some goods or services. A
commodity, on the other hand, has intrinsic utility
and can be utilized directly without exchanging it for
some other thing. For example, rice, cloth, chair, pen
etc. are commodity because they are used directly to
satisfy human need. If a person is hungry he cannot
eat money directly rather he has to use money to
buy food for eating. A thirsty person has to buy a
glass of water against money to drink. One cannot
write by money rather he has to buy a pen to write
anything.

32. Why according to Islam money is
not a commodity
(b) Money Has no variety of Quality: The
commodities can be of different qualities
while money has no quality except that it is a
measure of value or a medium of exchange.
Therefore, all the units of money of the same
denomination are hundred percent equal to
each other. An old and dirty note of Rs.1000
has the same value as a brand new note of
Rs.1000. On the other hand goods like
clothe, food, furniture, household appliances
have got variety of qualities and categories.
Each quality of goods and services had
different value or price.

33. Why according to Islam money is
not a commodity
© Money has no Individual Identity: In commodities,
the transactions of sale and purchase are effected on
an identified particular good. A buyer of a car, for
example, agrees to buy a of a particular brand,
model, color etc. and the seller agreeing thereupon,
is obliged to supply that particular car. The seller
cannot compel the buyer to take the delivery of
another car, though of the same type or quality.
Money, on the contrary, cannot be pinpointed in a
transaction of exchange. If A has purchased a
commodity from B by showing him a particular note
of Rs.1000/- he can still pay him another note of the
same denomination.

34. Islamic verdict on use of money
 Firstly, money (of the same denomination) is
not held to be the subject matter of trade, like
other commodities. Its use has been restricted to
its basic purpose i.e. to act as a medium of
exchange and a measure of value.
 Secondly, if for exceptional reasons, money has
to be exchanged for money or if it is borrowed,
the payment on both sides must be equal, so
that it is not used for the purpose it is not meant
for i.e. trade in money itself.