Advanced topics in Islamic
banking
Essentials of Islamic Banking and Finance
IRSHAD AHMAD AIJAZ
irshad786@gmail.com
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1
Contents
 Treasury Operations;
− Capital market opearations;
− Money market operations;
− FX market operations;
 Stock market in Islamic finance;
 Relation of Islamic bank with banks;
 International trade and finance and Islamic banking;
 Interest rate benchmarking in Islamic banking;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2
Treasury Operations
 Treasury operation are important for every financial
institution;
 Treasury is concerned about management of liquidity – cash;
 Treasury department takes care of bank's short or long
positioning;
 Treasury operations comprise of main three functions:
− Capital market operations;
► Financial
instruments of >1 year life are dealt under the umbrella of
this market;
► Investment in stock and bonds are done through this department;;
− Money market operations;
► Financial
instruments of <1 year life are dealt trough this market;
► Treasury bills and other short term arrangements are done through
this market;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 3
Treasury Operations
− FX market operations:
► These
operations belong to trade in all sorts of currencies;
► Bank manage their requirement of foreign currencies through this
department;
► Local and international payments are made through this department;
 These three functions of treasury departments are usually
done in overlapping ways;
 One department may take care of other operations;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 4
Treasury Operations – capital market
operations
 Islamic banks do not deal in bonds and other fixed income
securities as they are non permissible instruments;
 Islamic banks deals in Sukuk which are Islamic bands;
 Details will be presented by group #
;
 All stock are not eligible for investment as many of them are
of banks, insurance companies and of those companies which
are not acceptable in Islam;
 There is criteria for selection of stocks;
 This criterion is called Stock Selection Criteria;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 5
Treasury Operations – capital market
operations
 T bills and other ways of short term liquidity management are
not acceptable to Shari'ah;
 There is almost no any practicable alternative for Islamic
money market;
 Repo and Reverse repo are buy back arrangements;
 Many other ways of liquidity provisioning are not Shari'ah
accepted ways;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 6
Treasury Operations – FX operations
 Trade of currencies is a special kind of sale which has
different rules;
 According to a view of some Fuqahaa’ currencies are
substitute to gold and silver and thus must be exchanged on
two basis:
− Spot basis,
► Immediate
payment of both ends;
− Equality of both side if the exchanged currencies are same;
► Any
additional amount is not allowed;
► More payment for new currencies is an example of it hence not
allowed;
► Different currencies could be exchanged for higher and lower price;
► 1 $ could be exchanged with Rs. for higher price;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 7
Stock market and equity investment in Islamic finance
 Stock market is part of capital market;
 It deals in share of companies;
 Stocks are classified in Shari'ah as a 'proof of undivided
ownership in a partnership';
 The stock holder is owner of the partnership up to the value
the share reflects (face value, book value or market value);
 The profit a partnership earns and distribute (dividend) or
increase / decrease in value of share (capital gain / loss) both
go the stock holder because of his right of ownership;
 A stock will be Shari’ah compliant if it does not fall under the
four prohibitions we studies earlier;
 Since a stock is an undivided portion in a partnership, rules of
partnership (Shirkah / Musharakah)Essentials
applyof Islamic
on Finance
stocks
also;
– IU Gulshan Campus, Slide # 8
Stock market and equity investment in Islamic finance
 Three major issues are there in current financial system:
− No concept of non-Shari’ah compliance in general prohibitions;
► Majority
of corporate bodies do not discriminate between Halal or
Haram activities;
− Involvement in Riba;
► Major
part of financial system is interest-based;
► Companies pay interest and earn it;
− No attention to laws of contract in Islam;
► Partnerships
do not pay attention to rules set out by Shari’ah for
partnerships;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 9
Stock market and equity investment in Islamic finance
− Now, three possible status of business activities of a firm are there:
► Purely


Haram business activities;
Film making, pornography, liquor making/ trading, gambling companies,
conventional financing companies, banks and conventional insurance are
example of this type;
Some scholar include unethical businesses in this type like weapon
industry and tobacco companies in this category as well;
− Purely Halal business activities;
► Almost
all manufacturing and general business activities are example
of this kind;
− Mixed business activities;
► The
companies that are involved primarily in Halal business but they
have some involvement in non-Shari’ah compliant activities;
► The structure of big companies is generally of this nature;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 10
Stock market and equity investment in Islamic finance
 Fatwas about these companies:
− The first category is absolutely Haram with no ambiguity;
− The second category is Halal completely;
− The third category is a point of discussion;
− Majority of companies involve in interest based activities;
− Fuqaha have explained some flexibilities in state of need;
− Therefore Ulema have set two criteria:
► If
a firm is leveraged (from interest bearing loans) then this should not
be more than majority
► If a firm is earning interest then this income:
 Must not be in considerable size;
 Must be subtracted from total income (purification process);
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 11
Relationship of Islamic bank with
other banks
Regulator (SBP or SECP)
Other
Islamic Financial
Intermediary
Other
Islamic Financial
Intermediary
Islamic Financial
Intermediary – Bank
or Insurance Co.
Depositors






Other
Non Islamic Financial
Intermediary
Mudarabah
Musharakah
Regulator;
Ameen – Islamic banks deposit money without
taking any profit – CRR and SLR requirements
Regulator;
Ameen – Islamic banks deposit
money without taking any profit
– CRR and SLR requirements


Other
Islamic Financial
Intermediary
Customers
Many types of funding are
possible;
Trade, Rental and Partnership;


Can not invest with this bank;
May have other transaction based
relation – trading of goods.
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 12