ISLAMIC ACCOUNTING AND

BANKING

By Mohamed Farzan

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Understand the following learning outcomes:

1. Thedistinction between a conventional bank intermediary and an
Islamic intermediary;

2. The relationship between the bank and its clients;

3. The sources of funds the use of funds; the operation of current accounts
in Islamic banking ; how funds are used by Islamic banks ;

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Islamic Banks vs Conventional
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Banking
Conventional Banking Islamic Banking

1. The functions and operating 1. The functions and operating

modes of conventional banks are modes of Islamic banks are based on
based on fully manmade principles the principles of Sharia’a

2. The investor is assured of a 2. Promotes risk sharing between

predetermined rate of interest the provider of capital (investor) and
the user of funds (entrepreneur)

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Islamic Banks vs Conventional Banking

Conventional Banking Islamic Banking

3. Does not deal with Zakat 3. In the modern Islamic banking

system, it has become one of the
service-oriented functions of the
Islamic banks to be
a Zakat Collection Centre

4. Lending money and getting it 4. Partnership Business, Sales

back with compounding interest is Contracts, Lease based contracts,
the fundamental function of the Investment Activities
conventional banks

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Islamic Banks vs Conventional Banking
Conventional Banking
5. Can charge additional money
(penalty and compounded interest)
in case of defaulters
6. Makes no effort to ensure growth
with equity
Islamic Banking
5. Have no provision to charge any
extra money from the defaulters
Only small amount of compensation
and these proceeds is given to
charity
6. Gives due importance to the public
interest
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+Interest based financial Intermediation process

Current deposit Shareholders

(demand) funds
Loans and
Advances
Savings
Financial
deposit
Institution
(demand)
investments
Fixed deposit
(Notice)

Deposit interest Lending interest

rates Interest rate spread rates
(Expense) (Income)
+ Islamic Financial Intermediation process
Equity Based
Current Shareholders Financing
deposit funds
(demand)
Sales Based
Financing
Savings
Financial
deposit
Institution Lease Based
(demand)
Financing

Investment
deposits investments
(Notice)

Profit rates Profit rates

(Distribution of Profit Rate Spread
(Income)
profit)
The position of Islamic Banking and Finance
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ISLAM

Aqidah Sharia Akhlaq

(faith & belief) (practices & action) (morality & ethics)

Ibadah Muamalah
(man to God) (man to man)

Social Act. Economic Act. Political Act.

ISLAMIC BANKING
AND FINANCE

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Sharia’a Supervisory Board
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Islamic Financial Institutions (IFIs) use the services of their Sharia’a Supervisory
Board (SSB) to ensure their practices are in line with Sharia’a.

The SSB, which generally includes three or more Sharia’a scholars, follows the
following processes when determining whether a financial instrument is Sharia’a-
compliant or not:

 Reviewing the product concept description created by the product

development team.

 Reviewing the product development team’s proposals and issuing the proper
legal opinions (fatwa).