ISF 1101 FOUNDATION OF ISLAMIC FINANCE

Islamic Financial
System

Outline

Markets in the economy

Financial markets
Financial intermediation
Components of Islamic financial
institutions and markets
Key markets in brief

Markets in the economy

Flow of
payment
Production of
goods & services

Producing units
(primarily
businesses and
government)

Consumption of
goods & services

Financial
Markets

Consuming
Units

(flow of financial
claims)

(primarily
households)
Producti
ve
services

Producti
ve
services

Flow of
income

Flow of
payment

Product
Markets

Factors
Markets

Flow of
income

Financial Markets
Financial Markets within a
Financial System

Direct Financial
Markets

Bonds

Equity

Indirect
Financial
Markets

Banks

Unit
Trusts

Takaful

Financial Intermediation
Savings &
Investment

Financing

Surplus Units

Individuals

Businesses

Deficit Units
Financial
Intermedia
ry (e.g.
bank)

Individual
s

Businesse
s

Governme
nt

Return on
investment &
savings

Banks
Liabilities

Return
on
Governme
financing
nt

Banks Assets

Rationale for Financial Intermediation

Efficiency

Information gathering costs

Search costs

Transaction costs
More optimal allocation of resources

Better matching of surplus and deficit units

Transaction costs
Monetization/financialization

Conversion of savings from tangible assets (precious

metals, inventory, livestock) to financial assets

Tangible assets subject to deterioration, theft

Tangible assets less productive, saver must also be

investor
Regulation

More centralized monitoring and control enables

better protection of vested interests
Governments economic policy

Substantial financial resources can be marshaled and

channeled to priority economic sectors

Components of Islamic Financial Institutions &

Markets
Institutions

Markets

Banking

Non-Banking

Regulators

Supranational

Retail

Pension Funds

Central Bank

IDB

Equity

Investment

Takaful

Securities
Commission

World Bank

Bonds/Sukuk

Finance
Companies

Development
Finance

Deposit
Insurance

IMF

Money market

Discount
Houses

Co-operatives
& Societies

AAOIFI

ECB

Foreign
exchange

Mutual funds

IFSB

BIS

Derivatives

ADB

Mortgage

Leasing Co.s
Factoring Co.s

Commodities

Venture
Capital

Private Equity
Venture
Capital
Offshore
Alternative
Investments

Key Markets in Brief

1.

2.

3.
4.
5.

Banking
a. Retail banking mass market
b. Investment banking wholesale, corporate
Capital Market
a. Bonds/sukuk
b. Equities/stocks
Money market short term liquidity/borrowings
Insurance/takaful
Others
a. Derivatives risk management, speculation
b. Currency, commodities spot and derivatives
c.
Private equity equity investment not publicly
traded
d. Venture capital seed capital, unproven
business models, high growth ventures