Special Topics In Banking &

Finance

Dr. Karim Kobeissi

Arts, Sciences and Technology University in
Lebanon

Chapter 8:Islamic Banking

Why Islamic Banking

Before explaining the concept

what is Islamic Banking the
elaboration on the question
why Islamic Banking is
important.
Islam is a complete code of life
that
provides
guidance
regarding each aspect of life

Why Islamic Banking (con)

The primary objectives of the
Islamic Economic System are:
1. Equal Distribution of wealth
2. Social justice
Since such objectives can never
be achieved in Interest / Riba
based economic systems, the
Islamic Economic System was

Islamic Banking - Definition

Islamic Banking is a banking system (set of
functions and operations ) that is based on the
principles of Islamic law (also known as Shariah)
and guided by Islamic economics.
Two basic principles behind Islamic banking are:
1) The sharing of profit and loss
2) The prohibition of the collection and payment
of interests which Muslims consider haram

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL

BANKING

Islamic
Banking

Conventional
Banking

1)Functions
and
1) Functions
operations are
and
based on fully
operations are man made
based on
principles

Shariah
principles

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL

BANKING

Islamic
Banking

Conventional
Banking

2)

2) Investor is
assured of predetermined rate of
interest.

Promote risksharing
between
provider of capital
(investors
customers)
and
user
of
funds
(entrepreneurs

Islamic banks). The

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL

BANKING

Islamic
Banking

Conventional
Banking

3) Aim at
maximising
profit but
subject to
Sharia'h
restrictions

3) Aim at
maximising
profit without
any restrictions.

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL

BANKING

Islamic
Banking
4) Investor and
traders, buyer or
seller, partners
relationship.

Conventional Banking
4)
Creditor-Debtor
relationship
existing between two persons in
which one, the debtor (customer), can
be obliged to furnish services, money,
or goods to the other, the creditor
(bank).
The
relationship
usually
implies that the debtor has received
something from the creditor, in return
for which the debtor has promised to
make repayment at a later time. If the
debtor fails to make repayment by the
deadline then an attorney may begin
a formal collection process, then it is
possible to attach the debtors

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL

BANKING

Islamic Banking Conventional

5) Encourage
asset-based
financing and
based on
commodity
trading.

Banking

5) Based on
money trading.
Money is a
medium of
exchange and
not a commodity,
its sale and

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL

BANKING

Islamic
Banking

Conventional
Banking

6)
It
is
almost
6) No right of
risk
free
profit if there is
banking
and
no risk
depositor
has
involved.
no risk of
losing its
money because

Islamic Banking Products & Services

Currently available Islamic Banking Products
and services are:
a) Partnership based modes of financing
-) Musharaka Finance
An Islamic mode of finance in which capital is provided by
two or more parties for project development. Banks
can provide financing to a project with equity rather
than a fixed-interest loan. The profits of the project are
shared among the investing parties on the basis of
their participation or on a pre-agreed ratio and the
losses are shared on the basis of equity participation.
-

Mudaraba Finance

While in Musharaka, all involved parties provide capital to

share in the profit or loss of the project, in Mudaraba,

b) Trade based modes of financing

-) Murabaha Finance
An Islamic financing structure, where an intermediary
(bank) buys a property with free and clear title to it.
The intermediary and prospective buyer (customer)
then agree upon a sale price (including an agreed upon
profit for the intermediary) that can be made through a
series of instalments, or as a lump sum payment.
Similar in structure to a rent to own arrangement, the
intermediary retains ownership of the property until
the loan is paid in full.
-) Salam Finance
A contract in which advance payment is made for goods
to be delivered at a future date. The seller
(bank/customer) undertakes to supply some specific
goods to the buyer (bank/customer) at a future date in
exchange of an advance price fully paid at the time of

c) Rental based modes of financing

-) Diminishing Musharaka Finance
According to this concept, a financier and his client participate either
in the joint ownership of a property or an equipment, or in a joint
commercial enterprise. The share of the financier is further
divided into a number of units and it is understood that the client
will purchase the units of the share of the financier one by one
periodically, thus increasing his own share till all the units of the
financier are purchased by him so as to make him the sole owner
of the property, or the commercial enterprise, as the case may
be. Diminishing Musharaka Finance has been used mostly in
house financing where the client wants to purchase a house for
which he does not have adequate funds.

-) Ijarah Finance
In Islamic banking,the Ijarah contract is quite famousand
desired by both bankers and customers. AI-Ijarah Muntahiya
Bit Tamlik, for instance, is among the contracts developed under
the Ijarah contract. It is the concept whereby banks lease the

Structure of AI-Ijarah Muntahiya Bit Tamlik

1- A customer goes to an Islamic
bankand proposes a financing
scheme for him to own a particular
property.
2- The Islamic bank will first evaluate
whether or not this particular
customer is eligible to get financing.
If it is okay, then the Islamic bank
will go see the property.
3- Once the property is boughtby the
bank, it will be leased to the
customer.
4- The customer has to pay the rental
price until the contract matures.
Once it matures, the customer can
take ownership of the property by
buying it from the bank.