Islamic finance

Islamic Finance
What is Islamic Finance or
Islamic Banking?

Islamic Finance
 Introduction to Islamic Finance
Islamic finance, despite its name, is not a religious product. It is
however a growing series of financial products developed to meet
the requirements of a specific group of people in Shariah way.
Conventional finance includes elements (interest, gambling and uncertainty) which are
prohibited under Shariah law. Developments in Islamic finance have arisen to allow Muslims
to invest savings and raise finance in a way which does not compromise their religious or
ethical beliefs.

Islamic Finance
Definition
Islamic finance is a term that reflects financial business that is not contradictory to the
principles of Shariah.
Islamic finance, while emerging over the past five decades, has its roots in the past as
well as the present.
What is Shariah?
Shariah, called Fiqh Muamalat (Islamic rules on transactions).
The rules and practices of Fiqh Muamalat came from the Quran and the
Sunnah, and other secondary sources of Islamic law such as opinions
collectively agreed among Shariah scholars (Ijma’), analogy (Qiyas) and
personal reasoning (Ijtihad).

Islamic Finance
 Banking Concepts In Islam
Islamic banking is a system based on Islamic law(Shariah).
 Holy Prophet Mohammad (peace be upon him) himself, also known as Al Ameen, was
entrusted by the people of Makkah with safekeeping their money.
 Holy Prophet (peace be upon him) travelled for business offered by Hazrat Khadeejah on
Mudarabah.
 Hazrat Abbass used to finance the traders on Modarabah basis.
 Hazrat Zubair bin Al Awwam, choosed to only receive money as loan.

Islamic Finance
History of Islamic banking
The first, experimental, local Islamic bank was established in the late 1950s in a rural area of
Pakistan which charged no interest on its lending.
In 1963 the first modern Islamic bank on record was established in rural Egypt by
economist Ahmad Elnaggar to appeal to people who lacked confidence in state-run banks.
Islamic banks started from 1974 in Egypt with the first Islamic bank “Nasser social bank”
followed by Islamic development bank in 1975, now there are over 600 Islamic bank globally.

Islamic Finance
Global Perspective of Islamic Banking
Islamic banking is one of the quickest developing enterprises on the planet. Studies uncover
that it is developing at a remarkable rate of 17.6% over last four years– with more than 300
Islamic budgetary foundations in 51 nations.
Six quick development markets nations, together with Bahrain, are imperative to the future
internationalization of the Islamic financial industry: Qatar, Indonesia, Saudi Arabia,
Malaysia, UAE, and Turkey We allude to these business sectors as QISMUT.
As of 2013 Islamic banks were serving 38 million clients all inclusive, 66% of who live in
QISMUT. We expect Islamic financial resources with business banks to develop at a CAGR
of 19.7% over 2013– 18 over the QISMUT nations to reach US$1.6t by 2018 (2012:
US$567b).

Islamic Finance
Islamic finance continues to grow in size and influence, spreading far beyond the Middle East
into Muslim-majority countries in Asia and Africa, as well as parts of Europe and beyond.
Greater awareness of Islamic finance, coupled with improved legal and regulatory structures
in many countries, is helping the sector expand across larger geographies, a trend that is
unlikely to slow in the medium term even with the greater uncertainty brought about by the
global pandemic
The Banker’s 2020 Top Islamic Financial Institutions ranking highlights the continued growth
of the industry, which has doubled in size over the past decade and has experienced a
compound annual growth rate (CAGR) of around 10.8% since 2006. Globally, there are now
47 financial institutions with more than $10bn in sharia-compliant assets, up one from the
year before, with 27 institutions recording a pre-tax profit of more than $500m in 2019.
In the latest ranking, the overall number of financial institutions reporting sharia assets
rose from 395 to 402, with the majority of those (284) being standalone Islamic financial
institutions. At the same time, the number of conventional lenders with sharia-compliant
banking windows on the list fell to 118, down two from the year before. However, this is
unlikely to be part of a larger global trend.

Islamic Finance
 Share of Islamic versus conventional banking assets worldwide in 2020, by country
Over the last four years ten of the major international conventional financial institutions have
opened Islamic finance window.
This translates into Islamic finance products potentially being available in an additional 44000
outlets/branches across more than 70 countries

Islamic Finance
Muslims population and geographical location
It is estimated that close to 2 billion people (one quarter of the
world’s population) are Muslim.
Geographically, most Muslims live in Asia (over 60%) or the Middle East and North Africa
(about 20%).
Looking forward, demand for Islamic banking services, both in more mature markets like
the Middle East but also in regions like Africa where there are still large unbanked
populations, shows little sign of waning.
Despite these figures, Islamic finance is still very much a niche market, with the vast majority
of Muslims, who have access to finance, using conventional financial products.

Islamic Finance
How do Islamic banks reward their depositors
since payment of interest is not allowed?
 In Shariah, there are many ways to share profit or returns between a bank
and its customers. For example, in a deposit product, profits from a deposit
arrangement will be shared between a bank and its depositors based on an
agreed ratio and paid as dividends.
 Shariah also allows a bank to give hibah (gift) to its depositors as it deems fit.

Islamic Finance
 The salient features of Islamic
finance
1. Interest free
Islamic banking is interest-free, meaning that all banking business and activities must
prima facie be free from any element of interest.
A good example of the avoidance of interest in kind is the prohibition of any
advertisement of gifts for prospective current account holders when these
accounts are based on a Qard (loan) contract.

Islamic Finance
finance
2. The Avoidance of Uncertainty or Gambling.
All transactions made by Islamic financial institutions (IFIs) must be free from elements of
uncertainty (Gharar) and gambling (Maisir). This is because Gharar might lead to disputes
caused by an unjustified term in the contract arising from misrepresentation and fraud.
Gambling is seen as an action that always enriches one party at the expense of the other; a
zero-sum-game..
3. Profit and Loss Sharing
• Profit and loss sharing is possible in some Islamic banking activities. The bank will share the
profit made with its customers either on a proportionate basis or on an agreed profit sharing
ratio.
• In the case of a loss, the loss will be borne by the bank under a Mudarabah contract or by
both parties proportionately in the case of a Musharakah contract.
• This concept is in direct contrast to fixed income-based products as in traditional banking.

Islamic Finance
finance
4. Rights And Liabilities Of Banks And Customers
• An Islamic bank is neither a lender nor a borrower, but is instead a bona-fide
trader licensed under banking law.
• This aspect of the transaction has not been given proper attention until now,
although certain amendments to various legal systems have been made.
5. Shariah Compliance
• The central focus of Islamic finance is Shariah compliance. To ensure compliance
a distinctive feature of Islamic finance is the establishment of a Shariah advisory
or supervisory board to advise IFIs, Islamic insurance companies, Islamic funds
and any other providers which offer Islamic financial products.

Islamic Finance
The salient features of Islamic
finance
6. Unlawful Goods Or Services
• An important feature is that Islamic finance must not be involved in any activities
pertaining to unlawful goods and services.
These prohibited goods and services include:
• Non-halal foods such as pork,
• Non-slaughtered animals
• Animals which were not slaughtered according to Islamic principles
• Intoxicating drinks
• Entertainment and pornography
• Tobacco-related products
Non-involvement is not only limited to buying or selling but also includes all chains of
production and distribution, such as the packaging, transportation, warehousing and
marketing of these prohibited goods and services.

Islamic Finance
 Islamic Bank vs. Conventional Bank
Islamic Bank Conventional Bank
1: The relation between Islamic bank &
Customer is one of participation in risks and
rewards.
1: The relationship over here
between bank and customer is that
of debtors and creditors.
2: There is no previously fixed return on the
funds invested with the bank, and same is the
case when banks provide funds.
2: There is pre-agreed fixed return on the
funds either provided by the bank or invested
by the customer.
3: An Islamic bank keeps capital funds and
investors’ funds segregated, in order not
mix up the profit earned on its own funds
(capital & current up) balances.
3: The conventional banks pool together all the
funds.

Islamic Finance
 Islamic Bank vs. Conventional Bank
Islamic Bank Conventional Bank
4: Islamic banks do not provide finance by
offering cash loans, but through Musharakah
etc.
1: The conventional banks provide finance
totally by offering cash loans.
5: Islamic banking is primarily equity based. 5: The conventional system is as a whole
interest-based.
6: The Islamic system is value-oriented. 6: This system is value-neutral.

Islamic Finance
 Representatives of Islamic
Banks:
1. Clients
2. Workers of Islamic Banks
3. Shariah Advisors
4. Administrative Officers
5. Others

Islamic Finance
 Items and Services of Islamic
Finance
1: Murabahah (cost-in addition to financing)
2: Mudarabah (dozing association)
3: Musharakah (organization financing)
4: Ijara (Leasing)
5: Salam (sales by order)
6: Takaful (Insurance)
7: Sukuk (Bond)

Islamic Finance
Murabaha is a particular kind of sale where the seller discloses its cost and profit charged
thereon.
Under Murabahah, the Islamic bank buys, in its very own name products for a merchant or
purchaser who can't bear to pay legitimately, and at that point pitches them to him at a
concurred increase. This is the closeout of a ware at a cost, which incorporates an expressed
benefit known to both seller and vendee (an expense in addition to benefit contract).
Goods
supplier
Bank
Customer
100
110

Islamic Finance
Stages of Murabahah
1: Promise
2: Agency
3: Acquiring possession
4: Execution (Offer to purchase)

Islamic Finance
2: Mudarabah (dozing association)
The Mudarabah contract is a form of partnership between one who contributes capital (Rabb-
ul-maal) and the other who contributes efforts in the form of managerial skills (Mudarib).
Profit from the outcome of the venture is shared between the capital provider and manager
according to mutually agreed profit sharing ratio whilst losses are borne solely by the capital
provider, provided such loss in not due to the Mudarib’s negligence violation of a specific
condition.

Islamic Finance
Definition:
1: Musharakah is a form of partnership which is based on profit and loss sharing. The origin
of Musharakah is Shirkah which connotes the engagement of two or more parties who has a
common interest to form a partnership.
2: Technically, Musharakah is a contract between the partners to contribute capital to
an enterprise or a venture, whether existing or new, or to owner of real estate of
movable asset, either on a temporary or permanent basis.
Profits generated by that venture or real estate or asset are shared in accordance with
the terms of the Musharakah agreement, while losses are shared in proportion to each
partner’s share of capital.

Islamic Finance
Islamic
bank
Partner
(Customer)
Musharakah
60 % Shares 40 % Shares

Islamic Finance
4: Ijara(Leasing)
Means “to give something on rent” or "providing services and goods temporarily for a wage”
It means a contract for the hiring of persons or renting/leasing of the services or the
“usufruct” of a property, generally for a fixed period and price.
Usufruct
The right to use and advantages of another’s property.
usage of house for shelter, vehicle for transportation, land for farming and etc…

Islamic Finance
4: Ijara (Leasing)

Islamic Finance
 Means a contract in which advance cash payment is made for the goods to be delivered
later on.
 The seller undertakes to supply some specific goods to the buyer at a future date in
exchange of an advance price fully paid at the time of contract.
Points to remember:
1: predetermined measure
2: predefined weight
3: predefined date of delivery
4: Salam deal isn't passable for any current product

Islamic Finance

Islamic Finance
6: Takaful (Insurance)
The expression "Takaful" is gotten from the Arabic word "Kafaala" which means ensuring.
Takaful signifies "promising one another" and alludes to the idea of passable Islamic protection
or "Halal" protection.
 Takaful is a type of Islamic insurance wherein members contribute money into a
pool system to guarantee each other against loss or damage.
 Takaful-branded insurance is based on Shariah or Islamic religious law and covers health,
life, and general insurance needs
 Any claims made by the participants are paid out of the Takaful fund.

Islamic Finance
7: Sukuk (Bond)
A Sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with
Islamic religious law commonly known as Sharia. ... The issuer must also make a contractual promise to
buy back the bond at a future date at par value.
 Asset based – The ownership of the asset remains under the investor throughout the
maturity period and the pay off to the investor in linked to the performance of the sukuk.
 Debt based – The ownership of the asset does not remain with the investor and the pay off to
the investor is linked to the credit risk of the originator

Islamic Finance
Islamic finance may play key role to overcome
the pandemic of Covid-19
Qard Hassan: This instrument could provide cost-free breathing space until the environment stabilizes.
One example is when some GCC central banks opened free liquidity lines for financial institutions to
provide subsidized lending to their corporate and small and midsize enterprise clients.
Social Sukuk: These instruments could help support the education and health care systems amid
the current slump and attract environmental, social, and governance (ESG) investors (those investing
for social reasons) and/or Islamic investors (those looking for Sharia-compliant investments).
Waqf: This could help provide affordable housing solutions or access to health care and
education for people that might have lost a portion of their income.
Zakat: Based on our conversations with market participants, we believe that Zakat
could help compensate for lost household income because of COVID-19

Islamic Finance
Conclusion
Islamic banks emerged on to the financial scene in early 1970s.
During the last 40 years the Islamic financial industry has shown remarkable progress both from a
theoretical and practical perspective.
Even though Islamic banks emerged in response to market needs of Muslim clients, they are not
religious institutions. Like other banks, they are profit-seeking institutions. However, they follow a
different model of financial intermediation.
The most important distinguishing feature of the Islamic banking model is the use of risk-sharing modes
of finance.
Islamic scholars working with practical bankers have developed a number of such modes,
including Mudarabah, Musharakah, Murabahah, Salam, Istisna, leasing and Sukuk.
Salient features of all of these modes have been discussed in this presentation.
In the Islamic theory of contracts of exchange, the general rule is that of permission.
Every contractual arrangement is permissible unless expressly prohibited by Shariah.

Islamic finance

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