iMAL*IslamicProfitCalc

For The Islamic Banking Industry

Table of contents
Overview ............................................................................................................................ 3 Islamic economy............................................................................................................. 3 Islamic Profit & Loss System......................................................................................... 4 The modules incorporate:.............................................................................................. 4 Path modules are: .......................................................................................................... 4 Islamic and Conventional Systems .................................................................................. 5 Islamic vs. Conventional Systems: ................................................................................. 6 Distinguishing Path........................................................................................................... 6 Summary............................................................................................................................ 7

Purpose
This White paper highlights the experience and competency of Path in providing a solid Integrated IT Solution iMAL*IslamicProfitCalc, for the processing of the profit calculation in Islamic Banking.
. Written by Path Solutions. Ref: WP-PCS2.9.1

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Overview
The world of business is continuously changing. The banking sector, in particular has undergone enormous modifications. The movement towards globalization, new competitive environment, dramatic acceleration of electronic communication, bank mergers and acquisitions has created new realities for the banking industry. Todays banking competition is no longer just an attractive rate, but more important is how convenient are the banks products and offered investment opportunities and the quality of the services provided by the banks officers. In many countries the banking industry has already moved or is in the process of moving towards the Islamic banking paradigm. Islamic Banks avoid the receipt and payment of interest in their transactions and conduct operations in a way that helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system whose operations are based on Islamic principles of transactions of which profit and loss sharing is a major feature, ensuring justice and equality in the economy.

Islamic economy
Islamic economy is based on completely different considerations than Western economy. It is based on Shariah, the Islamic law, which governs secular as well as religious activities. The basic objective of Shariah is to ensure general human well-being and socio-economic justice.

It teaches that all wealth belongs to Allah and that humans are merely trustees of this wealth-entrusted with it to realize the above-mentioned objectives. Individuals do not have
absolute right over their wealth. They must not wastefully consume their wealth, and they must give to others their due. One of the main aims of Islamic economy is that wealth, instead of becoming concentrated in the hands of a few, should be allowed to circulate in society as widely as possible, so that the gap between the rich and the poor is narrowed as far as naturally practicable. In the Western economy, the individual has unconditional and absolute rights over wealth and is allowed to use it as he or she pleases.

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Islamic Profit & Loss System

Islamic banks work on the basis of profit and loss sharing, and function without interest. As Islam, instead of allowing fixed interest, have created ways in which people can make profit and loss on their money. Some of the different profit and loss sharing arrangements which are used by Islamic banks include: 1- Mudarabah: The bank acts as a partner, providing cash to the borrower and sharing in the net profits and net losses of the business. 2- Murabaha: The bank, as a partner, provides the capital for purchasing the goods for a share of the profit once the goods are sold. 3- Musharaka: The bank provides part of the equity and part of the working capital for the business, and shares in profits and/or losses. 4- Ijara: The bank purchases a piece of equipment and rents it to the business.

The modules incorporate:

Built in control procedures Built in limit monitoring and exposure control Extensive credit risk measurement and evaluation

Extensive reporting tools

Path modules are:

Geared and built specially for Islamic Banking Operations Built to provide full management of all aspects of Islamic Banking products Designed for on the- counter speed of service Transaction driven; Process driven and client centric allowing efficiency of transactions Flexible modules allowing processing and full management of new products Open modules that can basically be integrated with other vendors modules

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Islamic and Conventional Systems

Islamic Finance is inherently different than conventional finance.
The importance of the differences between Islamic finance and conventional finance lies in the fact that in Islamic finance a trade is involved (and hence the bank is a trader/merchant). Also a financing transaction is processed whereby the bank is a provider of equity financing; hence the bank is a partner/shareholder and is exposed to the risks and rewards and movements in the market and at the same time it plays a role and directly contributes to the economic cycle/growth. In addition, Islamic investments must be in ethical sectors i.e. they must comply with the Sharia guidelines. Whereas in conventional finance, the bank is merely a lender and hence a

conventional bank is not directly exposed to the market risks and movements. The above roles of a bank (merchant/financer) and contributor in the economic sector make the basis of the distinguishing character of the Islamic financing being: Trade related: profit based on mark-up Equity related: pure form of equity financing; profit and loss sharing Interest free no usury avoids exploitation Only related to Ethical investments and has to comply with the regulatory environment governed by the Sharia boards An efficient manager of pools of funds (clients and banks funds) and applies more complex profit calculation procedures.

Islamic Investment services are designed to provide you with the opportunity to invest your funds and earn profits, whilst comply with the Sharia regulations.

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Islamic vs. Conventional Systems:

Islamic modules are especially designed and geared towards Islamic Principles application. Islamic systems should allow full management of Islamic products from inception to closure of the deals, i.e.: Efficiency in processing transactions coupled with internal controls and limits monitoring Effectiveness in assessing, controlling and managing credit and liquidity risks Speed in on the counter service (Time To Market) Flexibility for management of new and innovative products Off balance sheet accounting:

A bank applying Islamic products needs control procedures and positions monitoring of the bank and the clients funds

Distinguishing Path
It is a fact that many aspects of the Islamic economy differ greatly from those of the Western economy. Path has explored the typical risks undertaken by Islamic banks and has supported all the aspects of Islamic banking. As well it has great expertise in Islamic Banking & Funds Management, and has gained extensive business Know-How; so No learning curve. Path has introduced iMAL*IslamicProfitCalc, that calculates the actual profit to be distributed to the different investors related pool, based on Modaraba liability contracts and in compliance with Islamic Sharia. The profit distribution is based on a set of criteria and parameters that are built in the system. In Islamic banking depositors are not merely depositors they are rather investors that participate in different investment pools. The cash available from each pool of investors will be invested in different pre-set investment. These investments generate profit periodically; profits are accrued on a daily basis.

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This mechanism of investment pooling or managing unrestricted investment accounts is fully catered by the system. Furthermore, all required computation sheets, reports, and letters are automatically generated. The system caters for multi-pooling where the bank can create different pools based on the needed funds, risk provisions and mudareb profit. Profits are accrued on a periodical basis and distributed based on the customer instructions. These investments are recorded, processed and managed through the different modules of iMAL i.e: Depositors accounts are managed in iMAL*Accounting and NostroVostro, investments are recorded, processed and managed using iMAL*IslamicInvest, treasury, DirectInvest, Registrar,Assets and distributed by iMAL*ProfitCalc. All transactions are then posted to the core system, ie. iMAL*Accounting.

Summary
Islamic banking certainly faces many challenges today due to the fact that we live in an economy driven and manipulated by interest. Path gives support to the Islamic Banking sector by providing efficient and Sharia compliant solutions for the proper management and processing of the banks transactions.

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In the preparation of this document, every effort has been made to offer the most current, correct, and clearly expressed information possible. Nonetheless, inadvertent errors can occur, and business conditions often change. Further, the information in the text is intended to afford general guidelines on matters of interest to readers. The application and impact of the information can vary widely, however, from case to case, based upon the specific or unique facts involved. Accordingly, the information in this document is not intended to serve as professional advice. Path Solutions has no obligation to tell you when information in this document changes or when the document is

updated.

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