1. DIP – 10. Islamic Banking
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2. Islamic Banking Islamic banks adhere to the concepts of Islamic law.
Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (shariah) principles and guided by Islamic economics

3. Principles of Islamic banking
Prohibition of riba (interest)
Profit sharing (mudharabah)
Safekeeping (wadiah)
Joint venture (musharakah)
Cost plus (murabahab)
Leasing (ijarah)

4. Conventional banking Islamic banking It does not deal with zakat
In modern Islamic banking, it has become one of the service oriented function of the Islamic banks to be a zakat collection centre and they also pay out their zakat
It can charge additional money in case of defaulters
Islamic banks have no provision to charge any extra money from the defaulters
Very often it results in the banks own interest becoming prominent. it makes no effort to ensure growth with equity
It gives due importance to the public interest, its ultimate aim is to ensure growth with equity
Conventional bank has to guarantee all its deposits
Islamic bank can only guarantee deposits for deposit account, thus depositors are guaranteed repayment of their funds

5. Islamic Banking –The Concept
Concept  principles  no deception and no riba (interest)
It is not new  7th Century
Money is a medium of exchange
Interest can lead to injustice/exploitation in society  Zulm
No real 'lending' as all 'lenders' obtain interests
To earn money for banks, they must obtain an equity / ownership
Requires banks to participate, share risk  profit varies
Profit share is distributed instead of interest earned
Leads to more ethical society (Unlike West  you must pay interest)
This concept encourages better resource management

6. Islamic Banking is known by several names:
Interest free banking (Iran)
PLS Banking (Pakistan)
Islamic Banking (Gulf)
Special Finance Houses (Turkey)
All expressions are used interchangeably.
Some people prefer Islamic Finance House instead of Islamic bank. (Beit ul tamweel)

7. Islamic Modes of Finances
Rental-based
Ijarah  Lease
Partnership-based
Musharakah  Partnership  time,$  share profit
Risk is shared between 2 person  loss or profit is shared
Mudharabah  Partnership one $, other effort
If profit, it is shared with the customer; bank takes its fee
If loss, customer loses; bank does not take its fee

8. MUSHARAKAH [USES OF FUNDS]
Musharakah is from the word Sharikah.
More than one partners: Partnership in capital proportion and project supervision.
A partner may waive his right of supervision or delegate it to another partner.
Arrangements: Sharing of Profit and loss in accordance with capital proportion agreed proportion.
Variant: Share of profit in agreed proportion, share of loss in capital proportion.
Applications of Musharakah:
i. in Import trade
Ii. In Agriculture

9. The structure of a Musharakah Contract
ISLAMIC
BANK
PARTNER
(Customer)
MUSHARAKAH
60% Ownership
40% Ownership

10. MUDHARABAH [USES OF FUNDS]
Mudharabah existing from pre-Islamic times.
Profit and loss sharing is a wrong translation.
Arrangement: Profit is shared on an agreed basis, loss is borne by the Rabbal Mal. (Bank)

11. Islamic Credit Cards
Ujrah Concept  Payment in exchange for services, benefits and privileges offered to the cardholders
Mudharabah  Partnership  bank $, customer benefit
Minimum age  21, With parents  18
Payable Facility Charges  varies monthly; 0 if full payment paid on or < due date
Ta'widh (compensation)  1% of outstanding balance

12. Periodic proportionate Profits / Return of Capital
CLIENT
(Mudarib)
Investor of
Capital
ISLAMIC BANK
Payment of
Mudarabah
Capital
Mudharabah
(Passive Partnership)
INVESTMENT / TRADING ACTIVITIES
Earning of Profits
ISLAMIC BANK
Periodic proportionate Profits / Return of Capital
CLIENT
(Mudarib)
Distributor of
Profits Earned

13. The bank provides to the customer (mudarib) all the capital to fund a specified enterprise
The customer contributes only entrepreneurship.
The customer is responsible for the day to day management of the enterprise and is entitled to deduct its management fee (mudarib fee) from the enterprise’s profits.
The mudarib fee could be a fixed fee (to cover management expenses) and a percentage of the profits or a combination of the two.
The balance of the profit of the enterprise is payable to the bank
If the enterprise makes a loss, the bank (as the fund provider or Rabbul Mal) has to bear all the losses unless the loss has resulted from negligence on the part of the mudarib.

14. IJARAH [USES OF FUNDS]
Ijarah is emerging as a popular technique of financing amongst the Islamic banks
Elements of a lease contact: Lessor, Lessee, instrument and period of lease,
The asset remains in the ownership of the lessor. Maintenance is the responsibility of the owner.

15. Ijara Mortgages – Lease to Own
Find a house to purchase and agree a sale price
Bank will then purchase the property outright
You then enter into 2 agreements with the bank
Pay back the purchase price  fixed monthly instalments  over 25 years
Pay agreed $ as rent each month  bank’s profit
Rent is set annually, ↓ yearly in % of payment
When fully paid  ownership is transferred to you
Borrow  up to 90% of the purchase price
Legitimate under Sharia law

16. The structure of an Ijarah Wa Iqtina Contract
Assets leased to customer – title does (not) pass at end of lease term
Transfer of title
to bank
VENDOR
ISLAMIC
BANK
CUSTOMER
(Lessee)
Payment of purchase price
Ijarah
Installment

17. Ijarah The bank buys the asset from the vendor
The bank then leases the asset to the customer
Periodic rentals are collected by the bank
The title of the asset remains with the bank under as operating ijarah
Title passes to the customer under a Lease ending with transfer of ownership, either gradually over the period of the contract, at the end.

18. SOME MISCONCEPTIONS ISLAMIC BANKING IS RELIGION BASED
ISLAMIC BANKING IS FOR A SPECIFIC COMMUNITY
ISLAMIC BANKING REPLACES INTEREST RATE WITH PROFIT AND THAT IS ALL.

19. The end of course.

20. Individual presentation
1. Discuss the importance of the Islamic system in managing a business.
2. Discuss how to make effective decisions to comply with Islam.
3. Describe Islamic banking
Musharakah
Mudharabah
Ijarah
Takaful

21. Important dates 25th Feb: Tutorial 10 Presentation Dates: 28th Feb
4th Mar
7th Mar
11th Mar***
NOTE: MAXIMUM 5 STUDENTS /EACH DATE.