1 - Islamic Banking

Islamic Banking
Prepared by:
Keramuddin “Barfaki”
MBA (Finance and Accounting)
Email: [email protected]
Subject Aims…
The key aim of this subject is to assist students in understanding the
theory and practice of Islamic banking, based on the contemporary
situations. At the end of the course outline, students will be able to:
1. Understand the theory of Islamic Banking.
2. Understand the operation of Islamic banking.
3. Identify the products offered by Islamic banking.
4. Evaluate the performance of Islamic banking and,
5. Analyze current issues and problems faced by Islamic banks.
Course Outline of Islamic Banking
 What is Islamic Banking?
 Philosophy of Islamic Banking

 Difference between Islamic Banking and Conventional Banking

 Riba its prohibition and classification
A. Riba in the Quran
B. Riba in hadith
C. Riba and its types
1_ Islamic modes of financing (Musharakah)
A. Definition of Musharakah
B. Classification of Musharakah
1. Shirkatul Milk
2. Shirkatul Aqd

C. The basic rules of Musharakah
D. Distribution of profit
E. Ratio of profit
F. Sharing of loss
G. Management of Musharakah
H. Termination of Musharakah
I. Termination of Musharakah without closing the business
2_ Islamic modes of financing (Mudra bah)
A. Definition and concept of Mudaraba
B. Business of Mudaraba
C. Distribution of profit
D. Termination of Mudaraba
3_ Islamic modes of financing (Murabaha)
E. Definition and concept of Murabaha
F. Difference between Murabaha and sale
G. Some basic rules of sales
H. Bai Mu ajjal (sale on differed payment basis)
I. Condition for Bai Mu ajjal
J. Murabaha as Modes of financing
Basic features of Murabaha financing.
4_ Islamic modes of financing (ijara)
A. Definition and concept of ijara
B. Basic rules of leasing
C. Lease ( ijara as a mode of financing
D. The commencement of lease
E. Different relations of parties
F. Liability of parties in case of loss to the asset
G. Variable rentals in long term leases
H. Penalty for late payment of rent
I. Termination of lease
J. The residual value of the lease asset
5_ Salam and istisna
A. Definition and concept of salam
B. Conditions of salam
C. Salam as a mode of financing
D. Some rules of parallel salam
E. Definition and concept of istisna
F. Difference between istisna and salam
G. Difference between salam and ijara
H. Time of delivery
I. Istisna as mode of financing
CHAPTER ONE
An introduction to the Islamic Banking
Introduction:
Islam is a way of life. A verse from the Quran states, “

this day I have perfected your religion for you,
completed my favor upon you, and have chosen Islam
as your way of life.” (Quran 5:3). The lexical meaning
of the word Islam is ‘submission’.
Actions in Islam can be categorized into two broad

categories, namely ‘Ibadaat and mu’amalaat.
Introduction…..
 ‘Ibadaat- Acts of worship
Ibadaat are based on the individual’s direct relationship with God. This
entails that specific acts of worship must be directed solely for Allah (God)
alone with sincerity. This includes one’s prayers, Fasting, pilgrimage etc.
 Mu’amalaat- interactions with People

This refers to the conduct one has with fellow human beings.
This can refer to law, work, marriage, inheritance, business transactions,
partnerships, buying, selling etc. Islamic banking falls under this category.
One must ensure their conduct is in conformity with shari’ah principles.
 objectives of human life is to please GOD- Almighty Allah via Ibadaat

and Mu’amalaat.
Introduction…
 Shari’ah – Islamic Law
Shari’ah is the set of rules which includes and clarifies obligations,
prohibitions, recommended duties, detested ( yet not blameworthy) actions,
what is lawful and unlawful etc. therefore, it includes ethics, manners, Laws,
public life, social life, economic life, politics etc.
Sources of the Shari’ah

The two primary sources of the shari’ah are the Quran and the Sunnah other
sources include ijma (consensus) and ijtihad (juristic decision).
ORIGIN OF THE WORD “BANK”
The word bank derived from,
 Greek “Banque”
 French Banke means chest (deposit)
 German bank means heap or mound ( a group/
collection of things).
 Italians Banco means accumulation of money or
stock.
Definition of Bank
A Bank is a financial institution licensed to receive deposits and
make loans.
What is Banking?
Banking can be defined as the business activity of accepting and

safeguarding money owned by other individuals and entities and then
lending out this money.
What is Islamic Banking?
Islamic Banking (IB)
Definition:
Islamic baking can be defined as a form of modern banking based on
Islamic legal concepts using risk sharing as its main method excluding
financing based fixed pre determined return.
OR,
An Islamic banking is a financial institution whose statutes, rules and
procedures expressly state its commitment to the principle of sharia
and to the banning of the receipt and payment of interest on any of its
operation.
Philosophy of Islamic Banking
The philosophy of Islamic banking takes the lead from
Islamic Shariah. According to Islamic Shariah, Islamic
banking cannot deal in transactions involving interest/
riba (an increase stipulated or sought over the principal of
a loan or debt). Further, they cannot deal in the
transactions having the element of Gharar or Maiser .
Moreover, they cannot deal in any transaction, the subject
matter of which is invalid ( haram in the eyes of Islam).
Continue……..
Islamic banks focus on generating returns through

investment tools which are Shariah compliant as well.
Islamic Shariah links the gain on capital with its
performance. Operating within the ambit of Shariah, the
operations of Islamic banking are based on sharing the
risk which may arise through trading and investment
activities using contracts of various Islamic modes of
finance.
Scope of Islamic Banking in Afghanistan
 Afghanistan is an Islamic Emarat.

 Population is more then 30 millions.
 99%of the population is Muslims.

 Islamic financial will receive strong support from
the government and the private sector.
 It will play critical role in the economy of
Afghanistan.
Difference B/W Islamic Banking and conventional Banking
Conventional Banking Islamic Banking
1_ conventional banks risk

1_ Islamic banks risk sharing.
transfer.
2_ conventional banks are 2_ Islamic banks are based on
based on fully man made
principle of Divine law.
principles.
3_ it aims at maximizing 3_ it also aims at maximizing
profit with only legislative profit but subject to sharia and
restrictions.
legislative restrictions.
Continue….
Conventional Banking Islamic Banking
4_ depositors are guaranteed 4_ profits are shred between the
a predetermined rate of bank and the depositors according
to a pre agreed ration and these
return (interest).
profits are not guaranteed.
5_ participate in partnerships and
5_ lend money with a join ventures with customers. We
predetermined rate of return. share in profit and assume losses
incurred by our customers.
6_ the relationship of an Islamic

6_ the relationship of the bank with its client is that of
bank with its client is that of partners, investors and
creditors and debtors. entrepreneur, buyers and seller.
Salient Features of Islamic Banking
Islamic financial transactions are based on Shariah

principles (Islamic jurisprudence)
1. No element Riba or Usury
2. No element of uncertainty
3. No element of gambling
4. No trading/investment in prohibited commodities
Questions.
1_ Define Bank?
2_ What is Banking?
3_ What is Islamic Banking?
4_ Philosophy of the Islamic Banking.
5_ Scope of Islamic Banking in Afghanistan.
6_ Difference between Islamic and conventional
Banking?
7_ Salient Features of Islamic Banking.
Thanks!
End of the chapter one!

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Islamic Banking

Islam is a way of life. A verse from the Quran states, “

Actions in Islam can be categorized into two broad

 Mu’amalaat- interactions with People

 objectives of human life is to please GOD- Almighty Allah via Ibadaat

Sources of the Shari’ah

Banking can be defined as the business activity of accepting and

Islamic banks focus on generating returns through

 Afghanistan is an Islamic Emarat.

 99%of the population is Muslims.

Conventional Banking Islamic Banking

1_ conventional banks risk

6_ the relationship of an Islamic

Islamic financial transactions are based on Shariah

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