M. Kabir Hassan, Rasem N. Kayed, and Umar A. Oseni: Introduction To Islamic Banking and Finance: Principles and Practice
M. Kabir Hassan, Rasem N. Kayed, and Umar A. Oseni: Introduction To Islamic Banking and Finance: Principles and Practice
M. Kabir Hassan, Rasem N. Kayed, and Umar A. Oseni: Introduction To Islamic Banking and Finance: Principles and Practice
Chapter 1
Introduction to Islamic
Banking and Finance
Learning Objectives
The Shari’ah
• Defines man-to-God and man-to-man relationships
The Qur’an
• The first source of the Shari’ah
• General and specific rules on religious, commercial, political,
economic, legal and social norms
• Emphasis on mutual consent and consensus among
consenting parties
• Prohibits exploitative measures:
– Excessive risk or uncertaintly (gharar)
– Usary or interest (riba)
The Sunnah
• The second primary source of the Shari’ah
• Mit Ghamr Local Savings Bank in Egypt of 1963 (“the first modern-day
trial of Islamic baking”)
• Retail banking
• Corporate banking
• Real estate
• Investment banking
Figure 1.2:
Timeline of
Modern-day
Experiments of
Islamic banking
and finance
from 1962 to
1975
Learning Objective 1.2
Explain the historical
Conceptual Arguments for Islamic development and
conceptual arguments of
Banking and Finance Islamic banking and
finance
• Interest-free
• Ethical
• Islamic banking
• Takaful
• May be:
- Fully fledged Islamic banks
- Islamic subsidiaries or
- ‘Windows’ of conventional banks
Learning Objective 1.3
Understand the
Components of Islamic Banking and components and operating
structures of the Islamic
Finance Industry banking and finance
industry as well as the
process of development of
Islamic finance products.
Takaful (Islamic Insurance)
• Fund mobilization
• Fund utilization
- Sharing modes
- Sale modes
- Leasing modes
Learning Objective 1.3
Understand the
Key Operating Mechanisms of components and operating
structures of the Islamic
Islamic Banking and Finance banking and finance
industry as well as the
process of development of
Islamic finance products.
• An ethical manner
• Net equities owned by shareholders
• Investment deposits
• Demand deposits
Learning Objective 1.3
Understand the
Key Operating Mechanisms of components and operating
structures of the Islamic
Islamic Banking and Finance banking and finance
industry as well as the
process of development of
Fund utilization Islamic finance products.
Understand the
components and operating
Chapter 3
Sources of Funds
Other sources
1. Current Accounts: account opened by individuals,
companies and firms by depositing cash, cheques and/or
bills (based on concept of wadi’ah)
Application of Funds
• The main channels for the outflow of the funds include the:
- musharakah
- mudarabah
murabahah (cost-plus financing)
- ijarah (lease)
- istisna’ (manufacturing contract)
- bay salam
- bay mu’ajjal (deferred sale contract) models
Learning Objective 3.2
Understand how exchange-
Concept of Exchange-Based Contract based contracts are used as
financial instruments in
Islamic finance
Murabahah (Mark-up)
• Project finance
• Construction
• Manufacture and design of machinery for specific purposes,
and
• Trade finance
Learning Objective 3.2
Understand how exchange-
Concept of Exchange-Based Contract based contracts are used as
financial instruments in
Islamic finance
Tawriq (Securitisation)
Parties to Tawriq
• ijarah (leasing)
• ijarah muntahia bi al-tamlik (financial lease)
• ijarah thumma al-bay (leasing and subsequent purchase)
• ujrah (fees)
• ju’alah (commission)
Ijarah (Leasing)
Concept of Service-Based
Understand how service-
based contracts are used as
financial instruments in
Contract Islamic finance
Ujrah (Fees)
Legality of Mudarabah
The legality of mudarabah contract is established in the
Qur’an, Sunnah, practices of companions, and ijma
Types of Mudarabah
• Restricted (muqayyad)
• Unrestricted (mutlaq)
Rahn (Collateral/Pledge)
A collateral, pledge or mortgage offered as security for a debt
that allows the creditor to take away the debt from such
security in the event of any default on the part of the debtor
Muqasah (Setting-off)
Types of Muqasah:
1. Muqasah al-Qanuniyyah (Legal Set-off)
2. Muqasah al-Talabiyyah (Set-off on Demand)
3. Muqasah al-Ittifaqiyyah (Consensual Set-off)
Legality of Muqasah
Kafalah (Guarantee)
Legality of Kafalah
The concept of guarantee has been in practice since the
time of the Prophet (PBUH)
Learning Objective 3.5
Know the nature of
Supporting Contracts supporting contracts in
Islamic finance, including
the unilateral supporting
contracts.
Elements of Kafalah
• Sighah (expression)
Types of Kafalah
• kafalah bi al-nafs (physical guarantee)
• kafalah bi al-mal (financial guarantee)
Learning Objective 3.5
Know the nature of
Supporting Contracts supporting contracts in
Islamic finance, including
the unilateral supporting
contracts.
Modern Application of Kafalah
Wakalah (Agency)
Wadi‘ah (Safekeeping)
Hibah (Gift)
Wa’ad (Promise)
Wa’ad: A promise or undertaking by a party to carry out a
unilateral contract
Examples of Wa'ad:
- Murabahah transactions
- al-ijarah thumma al-bay’ contracts
Tabarru’ (Donation)
• Bay al-dayn
• Hawalah
• Bay al-Inah
• Hibah
• Bay al-salam
• Hilah
• Bay al-sarf
• Ibra’
• Bill of Exchange
• Ijarah
• Debt-based financing
instruments
• Ijarah mawsufah fi
dhimmah
• Dual banking system
• Ijarah muntahia bi al-tamlik
• Equity capital
• Ijarah thumma al-bay’
• General investment account
(GIA)
• Ijma
Key Terms and Concepts
• Riba • Takaful
• Secondary market • Tawarruq
• Sharī‘ah Supervisory • Tawriq
Council
• Ujrah
• Short-term liquidity
• Wa’ad
• Special investment account
• Wadi’ah
(SIA)
• Wakalah
• Special purpose vehicle
• Waqf
• Sukuk
• Tabarru’
Structure of Banking
Industry
Structure of Banks in India
Structure of Banks in India
Central Bank
• Foreign banks.
Structure of Public Sector Banks
Primary Functions of Commercial Banks
• Accepting deposits
• Transfer of money.
•Pension management
•Investment management
•Private banking
•E-banking
Functions of Investment Banks
•Information provision
•Valuation services
Development Banks and
Specialized Banks
• Specialized development financial institutions.
Measurement and
management of banking
risks in a regulated
environment
•Credit risk
•Liquidity risk
•Market risk
•Operational risk
Risk Management Structure
Risk Management in Banks
•Technology driven
•Model driven
•Dynamic strategies
•Integration of risk
management process
•Supportive legal
Board of Directors
• Banking
Business Risk Management Practices
decision policy
mobilization
Credit
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