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 1950 – Islamic Banking in Theory
 1970 – Islamic Banking in Practice
 180 – Islamic Financial Institutions
 $300 Billion
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 Exodus

Leviticus

Deutronomy

Psalms

Proverb
Interest is Forbidden :
 Nehemiah
 Ezakhiel
 7 Verses of the Quraan
 More than 40 sayings of the Prophet Muhammad
(Peace Be Upon Him)
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1.
2.
3.
Procedures
Interest
Uncertainty
4.
Speculation
5.
Unlawful Products
6.
Unlawful Services
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(Mudarib)
Investor of
Capital
CLIENT
Payment of
Mudarabah
Capital
CLIENT
Periodic proportionate
Profits / Return of Capital
(Mudarib)
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Profits Earned
INVESTMENT / TRADING
ACTIVITIES
Earning of Profits
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The structure of a Murabaha Contract
VENDOR
Transfer of title to bank
ISLAMIC
BANK
Transfer of title to customer
CUSTOMER
Payment of
(P) SHOAYB JOOSUB
Payment of marked
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• The Bank Buys the asset from the Vendor
• The customer then buys the asset from the bank at a mark-up price (P+X) , which is payable on a deferred payment basis.
• The period covering the deferred payment is effectively the period of financing.
• The title to the asset is transferred to the customer at the time of purchase but usually the customer provides the same or other assets as collateral to the bank for the period of financing.
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The structure of an Ijarah Wa Iqtina Contract
VENDOR
Transfer of title to bank
ISLAMIC
BANK
Assets leased to customer – title does (not) pass at end of lease term
CUSTOMER
(Lessee)
Payment of Ijarah purchase price
Installment
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• The bank buys the asset from the vendor
• The bank then leases the asset to the customer
• Periodic rentals are collected by the bank
• The title of the asset remains with the bank under as operating ijaarah
• Title passes to the customer under a Lease ending with transfer of ownership, either gradually over the period of the contract, at the end.
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The structure of a Musharaka Contract
ISLAMIC
BANK
PARTNER
(Customer)
60% Ownership
MUSHARAKA
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40% Ownership
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• Both the Bank and the customer contributes towards the capital of the enterprise
• Under a “diminishing” musharakah, the customer buys out the bank`s share over a period of time.
• The customer and the bank share in the profits according to the agreed proportions, which may be different from the proportions of capital contributed. Any losses of the enterprise will be borne by the customer and the bank according to their capital contributions.
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CLIENT
(Mudarib)
Investor of
Capital
ISLAMIC BANK
Payment of
Mudarabah
Capital
ISLAMIC BANK
Periodic proportionate
Profits / Return of Capital
CLIENT
(Mudarib)
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Profits Earned
INVESTMENT / TRADING
ACTIVITIES
Earning of Profits
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• The bank provides to the customer (mudarib) all the capital to fund a specified enterprise
• The customer contributes only entrepreneurship.
• The customer is responsible for the day to day management of the enterprise and is entitled to deduct its management fee(mudarib fee) from the enterprise`s profits.
• The mudarib fee could be a fixed fee (to cover management expenses) and a percentage of the profits or a combination of the two.
A classical mudarib fee is based on a percentage of the profits only.
• The balance of the profit of the enterprise is payable to the bank
• If the enterprise makes a loss, the bank (as the fund provider or
Rabbul Mal) has to bear all the losses unless the loss has resulted from negligence on the part of the mudarib.
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The structure of a Salam Contract
COMMODITY
OWNER
Delivery of asset at future date
ISLAMIC
BANK
Delivery of asset
At future date
CUSTOMER
Advance payment Advance payment of purchase price
(P) of purchase price
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• A Salam (sometimes referred to as Salaf) is a short term agreement in which a financial institution makes full pre-payments for future delivery of a specified quantity of goods on a specified date.
• A salam is primarily a deferred delivery sale contract usually used for commodity finance. It is similar to a forward contract where delivery is in the future in exchange for spot payment. To mitigate the asset risk a financier can enter into parallel Salam
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The structure of a Istisna` Contract
CUSTOMER
Delivery of asset at future date
ISLAMIC
BANK
Delivery of asset
At future date
MANUFACTURER
Payment of delivery
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Progress payment of purchase price
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• Istisna` is primarily a deffered delivery sale contract similar to salam. It is similar to conventional work in progress financing for a capital project. In practice it is usually used for construction and trade finance such as pre shipment export finance.
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• Four fundamental Principles
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The structure of a Sukuk Contract
CUSTOMER
TRANSFER OF
ASSETS
ISLAMIC
BANK
ISSUE OF
SUKUKS
CASH CASH
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INVESTORS
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• Sukuks represent proportionate beneficial ownership. For a defined period the risk and returns associated with the cash flows generated from the assets belong to the sukuk holder. The characteristics of a sukuk are similar to a conventional bond with the difference being that they are asset backed.
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