Study on Islamic

Finance
and Products.
Mohammed Saleem .OA
Objective of the Study
 Primary objective
To study the Islamic financial system, its
products and merits.
 Secondary objective
 To study the use these financing techniques
 To analyze the feature of Islamic products
with conventional financial products.
Financial System
 The system that allows the transfer of
money between savers and borrowers.
 Instruments & Institutions to transfer funds
from saving surplus units to saving deficit
units in the most efficient manner.
 It facilitates intermediation between savers
(fund provider) and investors ( fund user)
Financial System Efficiency
 Promotion of efficiency is the primary goal of
every Financial System.
 It is measured in terms of efficiency achieved in
mobilizing savings from saving surplus units in
the economy and in allocating these funds
among saving deficit units.
 Increase in the range of financial assets and
instruments would improve efficiency in
mobilization of funds.
For Improving Allocational
Efficiency it Needs
 Less transaction cost
 Simplified transaction system
 Availability and accuracy of information
 Should be a stable system.
Islamic Fianacial System
 Financial institutions and instruments which are functioning on
the basis of directions and rules in shariah (a set of rules that
governs every aspect of Islamic life) are known as Islamic
financial system.
 In conventional finance there is a tug of war between ethics
and efficiency.
 In Islamic finance ethics dominate all the concerns.
 The Shari'ah specifies, inter alia, rules that relate to the
allocation of resources, property rights, production and
consumption, and the distribution of income and wealth
 Shariah Prohibits
 Riba: which is taking or giving of interest

 Masir : which is involvement in speculative and gambling

transactions

 Gharar : which is uncertainity about the terms of contract or the

subject matter, eg. Prohibits selling something which one does not
own.

 Investment in business dealing in alcohol, drugs, gambling,

armaments, etc. which are considered unlawful or undesirable.
Why Interest/ Riba Prohibited
• Prohibition of interest is not limited to Islam it
is prohibited in Judaism and Christianity

• Key objective is to ensure SOCIAL JUSTICE

• Money is only a medium of exchange, no value in

itself.

• Therefore should not be allowed to give rise to more

money, via fixed interest payments, simply by being
put in a bank or lent to someone else

• Results in concentration of wealth

 Interest can leads to injustice and exploitation in
society.
Principle of Islamic Finance
 Freedom to contract
 Freedom from Riba
 Freedom from Algharar
 Freedom from gambling and unearned
income
 Freedom from price control and manipulation
 Mutual cooperation and solidarity
 Public Interest
Global Islamic Finance Industry
 1963 : Mit Gamir Project, Egypt.
 1975 : IDB, Jeddah
 1975 : Dubai Islamic Bank
 Growth Rate : 10-15%
 300 Institutions over 75 countries USD 800 billion under
management.
 Expected tocontinue with assets growing USD 1 trillion by
2010.
 Islamic Window : ABNAmro, HSBC, City Bank
Islamic Finance Products
 Investment Financing

 Trade Financing

 Lending
Musharakah ( Joint Venture)
 Musharaka is similar to a joint venture, whereby two
parties (an Islamic Financial Institution and a Client)
provide capital for a project which both may manage.

 Profits are shared in pre-agreed ratios but losses are

borne in proportion to equity participation

Client Bank
Business Venture

Profit / Loss
Mudaraba – Trustee Partnership
 Mudaraba is a contract between two
parties: One of them provides finance
( Rab ul maal) & other uses his labour and
expertise (Mudarib).

 Profit, if earned, is distributed between the

two parties in accordance with the ratio as
per the agreement. Financial Loss, if
suffered is borne by the investor only.
 Client Bank

Business Venture

Profit Loss
Murabaha ( Mark upSales)
 The client orders an Islamic Bank to purchase
certain goods at a specific cash price
 The Bank purchase these goods from the
supplier and sells to the client at a marked – up
price ( Cost + Profit).
 The differed price may be paid up on lump sum
or in installment
Cost + Profit

Cost
Goods / Ownership
Client Bank
 Ijara ( Lease)
 A contract under which an Islamic bank finances
equipment, building or other facilities for the
client against an agreed rental. The ownership
remains with the lessor bank and can be
transferred on predetermined basis.
 Salam ( Forward Selling)
 Salam means a contract in which advance
payment is made for goods to be delivered
later on.
 The seller undertakes to supply some
specific goods to the buyer at a future date
in exchange of an advance price fully paid
at the time of contract.
 Istisna
 It is a contractual agreement for
manufacturing goods and commodities,
allowing cash payment in advance and
future delivery or a future payment and
future delivery.
Qard Hassan ( Charitable Loan)
 It is an interest free loan.
 Only loan permitted by Shariah.
 The loans are made from the pooled donations of the
members, Zakat and are generally granted to those who
are facing emergency personal crisis.
Activity
 Client approaches Bank for loan and offers collateral security.
 Bank lends an amount to client.
 Client repays amount to Bank (with or without administrative
expenses) in part or in full
 TAKAFUL (INSURANCE)
 Takaful, the Islamic alternative to insurance,
is based on the concept of social solidarity,
cooperation and mutual indemnification of
losses of members.
 It is a deal among a group of persons who
agree to jointly indemnify the loss or damage
that may inflict upon any of them, out of the
fund they donate collectively.
What Distinguishes Islamic Banking

• Transactions are asset-based

• It is socially-responsible banking because it
operates under Shariah restrictions
• Does not permit financing of prohibited goods /
Industries
• It starves evil out of the society
• Ethics and moral values play a major role in
investment decisions. Not a choice but a must
 Distinguishing Features

Conventional Banking Islamic Banking

- Conventional banking - Islamic banking prices

prices money. goods and services which
creates real wealth in the
society leading to economic
well-being.
- Is based on fixed - Is based on profit
return on both Sides of sharing on deposits side,
the balance sheet. and on profit on assets
side.
 Distinguishing Features

Conventional Banking Islamic Banking

- Does not involve itself - Actively participates in

in trade and business trade and production.

- Depositors get a fixed - Profit is shared with the

rate regardless of the depositor, higher the
bank’s profitability, bank’s profit, higher the
thus insulating them depositors income.
from the bank’s true
performance.
Basic Difference between Islamic and
Conventional Modes of Finance

Conventional
money
Bank Client

money + money (interest)

Basic Difference between Islamic and
Conventional Modes of Finance

Islamic

Bank Goods & Client

Services

money
 Performance of Islamic Finance
 In comparison with conventional banking
systems, Islamic bank’s assets and deposits
have grown at GR of 20-22% while those of
conventional banks have grown at a rate of 11%
for the period 2002 – 2005.
Key Isuues

 Taxation& Legal Issues

 Risk Management
 Regulatory Issues
 Fragmentation
 Conclusion
 Islamic Finance assures Equitable distribution of
risks and rewards among the stakeholders
 Inculcating market discipline and higher ethical
standards given its emphasis on non-exploitation
and social welfare.
 It may be observed that Islamic finance is far more
interesting and complex than conventional finance
as far as financing techniques are concerned.
 it is in the area of assets rather than in liabilities that
the practices of Islamic banks are more diverse and
complex than those of conventional banks.

 it is generally believed that Murabahah is the most

widely used technique and that the majority of the
financing provided by Islamic banks goes to short-
term trade and the financing of real estate.