Introduction

To

Islamic Banking
A Direction to the human on a “right path” for good life…..!

By

P V V Rama Raju
President & CEO

Introduction to Islamic Banking 1

 Contents – Course Objectives
• General Introduction.
• The Islamic Economic System
• The economic philosophy of
Islam vis-à-vis interest
• Distribution of wealth.
• What is Islamic Banking ? And
Why is Islamic Banking.
• What is RIBA – it’s prohibition
• Regulations and Legal
framework.
• Shariah Principles.
Introduction to Islamic Banking
•Relationship with Religion and
Banking.
•Shariah Laws in Islamic
Banking
•Sources and Application of
funds under Islamic Banking.
•Various Islamic banking
products
•Various International Islamic
Financial Institutions.
•Conclusion.
2
 General Introduction

• Islam is not only a religion in the ordinary sense of

the world, but also a complete system of life.
• While other religious codes provide general guidance
only for the relation between man and his Creator,
• Islam guides man in his relationship with God and
gives him the norms which govern his temporal
existence.
• Islam is concerned with the spiritual, political, social
economic, moral and all other material aspects of the
human being.

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 General Introduction contd….

• Every social system has its own economic system.

• Islam being a comprehensive and distinct social
system, possesses a corresponding economic
system of its own.
• Islamic economics is fast developing into a different
and distinct paradigm of economics.
• Therefore, a number of Islamic financial institutions
have been emerging in various Muslim as well as in
some non-Muslim countries.

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 The Islamic Economic System

• One of the forms of capitalism, which has been flourishing

in non-Islamic societies, is the interest-based investment.
•There are normally two participants in such transactions.
One is the investor who provides capital on loan and the other
Manager who runs the business.
•The investor has no concern whether the business runs into
profit of loss, he automatically gets an interest (Riba) in both
outcomes at a fixed rate on his capital.
•Islam prohibits this kind of transactions and the Holly Prophet
(pbuh) enforced the ruling, not in the form of some moral
teaching, but in the form of law of land.
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 The economic philosophy of Islam
vis-à-vis Interest
•The economic philosophy of Islam has no concept of Riba because
according to Islam, Riba is that curse in society, which accumulates
money around handful of people, and it results inevitably in creating
monopolies, opening doors for selfishness, greed, injustice and
oppression.

•Deceit and fraud prospers in the world of trade and business. Islam, on
the other hand, primarily encourages highest moral ethics such as
universal brotherhood, collective welfare and prosperity, social fairness
and justice.
•Due to this reason, Islam renders Riba as absolutely haram and strictly
prohibits all types of interest based transactions. The prohibition of Riba in
the light of economic philosophy of Islam can be explained with the cost of
distribution of wealth in a society.

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6
 Distribution of wealth

•The distribution of wealth is one of the most important and most

controversial subjects concerning the economic life of man, which has
given birth to global revolutions in today’s world, and has affected every
sphere of human activity from international politics down to the private life
of the individuals.

•No doubt, Islam is opposed to monasticism, and views the economic

activities of man quite lawful, meritorious, and some times even obligatory
and necessary.
•According to materialistic economics, “livelihood is the fundamental
problem of man and economic developments are the ultimate end of
human life”

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 Distribution of wealth – Contd….

• The fundamental principle, which can help to solve the

problem of the distribution of wealth, is the concept of “wealth”
in Islam.
•According to the illustration of the Holy Quran “wealth” in all
its possible forms is a thing created by Allah, and is, in
principle His “property”.

•Allah delegates the right of property over a thing, which

accrues to man, to Him.

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 History and Development
•Islamic banking generally aims to promote and develop the application
of Islamic principles, law and traditions to the transactions of financial,
banking and related business and commercial affairs.

•It also promotes business and commercial activities that are acceptable
and consistent within Shariah principles, safeguarding the Islamic
communities and societies from activities which are forbidden in Islam.

•An advantage of Islamic banking is that Islamic banks do not deal with
loans (except for benevolent loans under Qardh Hasan).

•Instead, Islamic banking introduces the principles of Musharakah

(partnership) and Mudharabah (profit sharing), which make the
investments of Islamic banks depend on the usefulness and feasibility of
the projects in which the money are invested.

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9
 History and Development …..Contd

•The main principles of Islamic banking are the prohibition of interest

(usury) in all transactions, the undertaking of business and trade activities
on the basis of fair and legitimate profit and the prohibition of monopoly
and hoarding.
•Nevertheless, it must be remembered that Islamic banks, like
conventional banks, are profitable organisations.
•Their aim is to gain profit but they are not allowed to deal with interest or
to engage in any trade or business prohibited by Islam.

•Whilst conventional banking is believed to have begun in the middle of the

twelfth century, Islamic banking first emerged only in the late seventies and
early eighties, although the history of Islamic banking activities can be
traced back to the birth of Islam.

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 What is “Islamic Banking” ?

• Islamic banking is defined as banking system which is in consonance

with the spirit, ethos and value system of Islam and governed by the
principles laid down by Islamic Shariah.

• Interest free banking is a narrow concept denoting a number of

banking instruments or operations which avoid interest.

•Islamic banking, the more general term, is based not only to avoid
interest-based transactions prohibited in Islamic Shariah but also to
avoid unethical and un-social practices.
•In practical sense, Islamic Banking is the transformation of conventional
money lending into transactions based on tangible assets and real
services.

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 What is the philosophy
of
Islamic Banking ?
•The philosophy of Islamic banking takes and 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).

•Operating within the ambit of Shariah, the operations of Islamic banking

are based on sharing the risk which may arise through trading and
nvestment activities using contract of various Islamic modes of finance.

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 Why “Islamic Banking and Finance ?

• There may be opposing views that “Islamic Finance” is in many ways

very similar to (some times technical with) conventional finance.
•Some may feel that this similarity is an attempt to dilute the
Islamic teachings to simplify our lives, while others may feel that
the Islamic legal distinctions between Islamic and regular finance
are artificial means of creating an industry where none is needed.
•It is also mentioned that the terms “Islamic banking” or “Islamic
Finance” can be quite misleading given the many similarities
between Islamic and conventional financial contracts.

• “Islamic banks” or “Islamic financial institutions” try to ensure that all

their contracts adhere to Islamic legal requirements as well as state
requirements.

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 Definition of Islamic Banking and Finance

•Islamic finance is an ethical and equitable mode of finance that

derives its principles from the sacred law of Islam (the shari’ah).

•The Islamic bank basically implements a new banking concept in

that it adheres strictly to the ruling of shari’ah in the fields of
finance and other dealings”.

•The foundation of Islamic banking is based on the Islamic faith.

•All the actions and deeds of its practitioners are bound by the
limits of Islamic law or the shari’ah.

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 Distinctive features of
Islamic finance

• The most distinctive features of Islamic

finance are;
• the prohibition of interest, whether
nominal or excessive, simple or
compound, fixed or floating.
• the prohibition of gambling;
• dealing only in lawful (halal) things and;
• the elimination of uncertainty and
ambiguity (gharar) in business contracts.

Introduction to Islamic Banking

 Islamic Banking – Foundations

• Any predetermined payment over and above the actual amount of

principal is prohibited. (prohibition of riba - interest).

• The lender must share in the profits or losses arising out of the
enterprise for which the money was lent. (profit and loss sharing)

• Making money from money is not Islamically acceptable. Money must

work as capital not as debt.

• Gharar (uncertainty, risk or speculation) in transactions is prohibited.

• Investment should be confined to products and services that are not

forbidden.

Introduction to Islamic Banking

 What is meant by “RIBA” ?

•The word “Riba” means excess, increase or addition, which correctly

interpreted according to Shariah terminology, implies any excess
compensation without due consideration (consideration does not include
time value of money).

•This definition of Riba is derived from the Quran and is unanimously

accepted by all Islamic scholars.

•Riba literally means an increase. Technically it is any increase (large or

small, nominal or real) received on loan.

•In Islamic jurisprudence it is defined as an increase in one of two

homogeneous equivalents being exchanged without this increase being
accompanied by a return.

•Riba has been understood throughout Muslim history as being equivalent

to interest paid on a loan.

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 Prohibition of RIBA

• In Islamic law riba is regardless of the purpose of a loan, forbidden

because of four different revelations in the Quran:
• First revelation underlines that “God deprives riba of all blessing”,
• The second describes interest as the “unjust appropriation of others’
property,
• The third discourages Muslims from interest for their own welfare, and;
• Finally the fourth revelation urges Muslims to only ask for the principal
sum when lending money. (The Holy Quran 2:275-80)
• There are numerous traditions of the Prophet Muhammad (pbuh) which
detail the prohibition of riba. Says the Prophet (pbuh)
• Gold for gold, silver for silver, wheat for wheat, barley for barley,
dates for dates, and salt for salt; like for like, hand to hand, in
equal amounts; and any increase is Riba.” (Muslim)

Introduction to Islamic Banking

 Prohibition of RIBA …Contd
•The prohibition of riba essentially implies that the fixing in advance
of a positive return on a loan as reward for waiting is not permitted in
shari’ah.
•It is a big source of gross inequalities of income. Interest transfers
wealth from the poor to rich, increasing the inequality in the
distribution of wealth.
•Interest transfers income from the masses of depositors to the
industrialists. This lead to the concentration of income and wealth in
the society which is against the spirit of Islam.
•Interest limits investment, while profit sharing increases it.
•Interest on productive loan increases the cost of production.

Introduction to Islamic Banking 19

 Prohibition of RIBA …Contd

• According to modern view, interest is the

‘price of capital’.
• Islam rejects this notion. Capital itself is not
productive, and it is the application of human
efforts to a stock of capital which generates
output and income.
• The reward of capital cannot be fixed in
advance, unlike interest rates, but can only be
determined proportionately

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 Prohibition of RIBA …Contd.

• In an interest based system the major criteria for the

distribution of credit is the creditworthiness of the borrower.

• In a profit sharing system, the productivity of the project is

more important. Therefore, the finances go to more
productive projects.

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 Legal Frame work and Regulations

• Islamic banks have to confirm to two types of law, Shariah and

positive law.
• While Shariah law is based on religious foundations, positive law
is promulgated by the monetary authorities to safeguard public
interest.
• There is no uniformity in the laws followed by Islamic banks
around the world.
• In most Muslim countries, special laws have been passed prior
to the establishment of Islamic banks and this law specifies the
rules and regulations for the institutions which engages in
banking businesses based on Islamic principles.
• Since Islamic banks were established as private or public limited
companies, the requirements stipulated in a country’s company
laws are applicable to them.

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 INCORPORTAION
OF ISLAMIC BANKS

• Islamic banks were incorporated as companies and these

banks are either formed as private or public limited companies.
• Generally, a private limited company is one which has:
• a limited number of membership, for example, minimum of two
and a maximum of 50 members.
• Restrictions on the right to transfer shares, and
• Prohibition on public subscription of its shares.

Like other companies, Islamic banks have to have their own

memorandum and articles of associations. The contents of these
documents, however, vary from one bank to the other.

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 LEGISLATION ON ISLAMIC BANKS

• A specific law refers to legislation enacted by the

concerned regulatory authorities to govern a particular
Islamic bank.
•At present, Da Afghanistan Bank, banking regulatory
authority of Afghanistan, and the Government of Islamic
Republic of Afghanistan, have initiated steps for bringing
specific Islamic Banking Legislation / Regulations.
•In the times to come, Da Afghanistan Bank may come out
with specific Islamic Banking Regulations in order to
control and regulate the Islamic Banking practices in
Afghanistan.

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 REGULATION AND SUPERVISION
OF ISLAMIC BANKS

•It should be borne in mind that in the conventional

banking system, there are five major goals for regulation.
• Ensuring a safe, sound and secure banking system.
• Provide competition
• Efficient allocation of credit with prudent norms
• Customer protection
• Basis for monetary policy.
Islamic banks, being part of the financial system, are also subject to
the regulations and supervision of the monetary authorities of their
respective countries. The tasks of regulating and monitoring a
country’s financial system are normally given to the Central Bank of
the country (Da Afghanistan Bank in Afghanistan). There are many
similarities in terms of powers vested to central banks of Muslim
countries in regulating and supervising Islamic banks.

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 Shariah Principles

• Tawhid (the doctrine of the Unity of Allah) is the basis by which the
whole system of Islamic teachings pertaining to all aspects of life.
• It provides the foundation of the economics of Islam. Muslim
theologians have classified Tawhid into three parts: viz Tawhid
uluhiyah’, Tawhid Asma’ wa’s sifat and Tawhid rububuyah.
• Relevant to Islamic banking and finance is the Tawhid rububiyah
which has two aspects.
• One concerns the relationship amongst men themselves and the other,
men’s relations to Allah.
• It implies that Allah is the creator and that men are equal partners and brothers
to other men. In other words, rububiyah (divinity) in a Muslim society is only for
Allah.
• According to this doctrine, no man has the right to claim a bigger
share since he does not create or generate natural power
independently.

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 Shariah Principles Contd…

Basically, there are four sources of Islamic laws:

• The Qur’an

• The Sunnah

• The Ijma’, and

• The Qias

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27
 The Qur’an

• From the Islamic perspective, the Qur’an embodies the divine

law and is, therefore, superior to any man-made law.
• The Qur’an in general draws the larger boundaries of the Islamic
law within which all human actions can be confined.
• It provides the framework within which humanity should
structure their legal, social, economic, political and
administrative system.
• The Qur’an prohibits behaviour such as drinking of alcoholic
beverages, engaging in games of chance, committing murder,
stealing, committing adultery, exacting usury and worshipping
anything or anyone other than God.

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 The Ijma’,

Ijma’ means the consensus of opinion. There are

four types of Ijma’, namely:
• the regular Ijma’ of the companions of the Prophet (the
highest authority)
• the irregular Ijma’ of the companions which represent the
opinions of a few companions which are not repudiated
by the rest.
• The Ijma’ of the mujtahids of the later ages on questions
arising after the time of the companions of the Prophet..
• The Ijma’ of the jurists of the later ages on a question
about which there were differences of opinion amongst
the companions.

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 The Qias

• Qias means analogy.

• As all rules are based on objectives and interests, such
objectives and interests are causes for such rules.
• When addressing a particular problem, the same rule to another
problem where the causes for both were identical can be applied
by analogy.

The Shariah is the legal aspect of Islam as understood

from the four fundamental sources of the Islamic
religion as mentioned above.

Introduction to Islamic Banking

 MEANING AND CONCEPT OF
“SHARIAH”

• Islamic laws are also known as Shariah laws, sometimes referred

to as Islamic jurisprudence.
• The original meaning of the word Shariah or shar ‘is the path or
the road leading to the water’ and the verb shara’a literally
means ‘to chalk out or mark out a clear road to water’.
• In a religious sense, it means ‘the highway of good life’.
• In other words, Shariah is the way which directs man’s life to the
right path.
• From the words ‘the right path’, therefore, came the meaning
‘law’.
• The word Shariah also has its correlation with the word din
which literally means ‘submission’ or ‘following’.

Introduction to Islamic Banking

 MEANING AND CONCEPT OF
“SHARIAH”
• Shariah is the ordination of the Way and its proper subject is God,
whereas din is the following of that Way and its subject is man.
• Therefore, as far as Qur’anic idioms go, one may speak of Shariah
and din interchangeably.
• According to Muslim belief, the concept of Shariah is not only to
govern man in the conduct of life in order to realise the Divine
Will, but covers all behaviour-spiritual, mental, physical.
• Therefore, Shariah principles are more than law, covering the total
way of life including faith and practices, personal behaviour, legal
and social transactions.
• In other words, in the Muslim religion of Islam, Shariah is a
comprehensive principle of a total way of life.

Introduction to Islamic Banking

 MEANING AND CONCEPT OF
“SHARIAH”

• On the root of Islamic banking and finance, Islam is

perceived as consisting of three basic elements
namely, Aqidah, Shariah and Akhlaq.
• Aqidah concerns all aspects of faith and belief of a
Muslim in Allah and His will.
• Shariah as mentioned earlier is concerned with all
forms of practical actions by a Muslim manifesting his
faith and belief.
• Akhlaq covers all aspects of Muslims behaviour,
attitude and work ethics with which he performs his
practical actions.

Introduction to Islamic Banking

 MEANING AND CONCEPT OF
“SHARIAH”

• Practical aspects of Shariah affecting the daily life of a Muslim

can be further divided into two, namely Ibadat (relation between
God and man) and Muamalat (relationship between man and
man).
• Ibadat is concerned with the practicalities of a Muslim’s worship
of Allah in the context of man-to-Allah relationship,
• whereas Muamalat is concerned with the practicalities of his
mundane daily life, in the context of various forms of man-to
man relationship.
• The Islamic banking system, therefore, being part of economic
activities is linked to Shariah principles through Muamalat.

Introduction to Islamic Banking

 Relationship between the
Banking system and Religion
within Islam:
• In other words, a significant segment of Muamalat is the conduct of a
Muslim’s economic activities within his economic system.
• within this economic system is the banking and financial system within
which he conducts his banking and financial services.
• Thus Islamic banking and finance, being part of a Muslim’s economic
activities, is a Muslim’s link to Muamalat, to Shariah, to Islam, and finally
to Allah.
• This is the foundation of the purpose or the root of Islamic banking and
finance.
• Within the Islamic scheme of life and Shariah framework, Islam imposes
its ‘akkam’ (laws) representing norms or values on its believers.
• These laws or values are not man-made but ordained by Allah.
• These laws are derived from the sources of Shariah, the two
primary sources being the Al-Qur’an and Al-Sunnah.

Introduction to Islamic Banking

 SHARIAH LAWs IN
ISLAMIC BANKING SYSTEM
• As stated above, the objective of Shariah is to construct life on the basis
of virtues and to cleanse it of vices.
• Shariah is, therefore, expected to provide not only the right path but also
to govern all activities of the Muslims toward the betterment of the whole
community.
• In reality, however, instead of being governed by the Shariah, Muslims
are constantly bound by customary and positive laws.
• The emergence of Islamic banking in the 1960s and 1970 served as an
impetus for the reestablishing of the Shariah in commercial activities.
• This was largely because banking laws in all Muslim countries were
conventional banking laws or interest based laws.
• But then, interest is prohibited by Qur’an and the Hadith.
• In order to allow Islamic banks to operate, governments of Muslim
countries commissioned Muslim jurists to promulgate laws which
are applicable to this new style of banking.

Introduction to Islamic Banking

 SHARIAH LAWs IN
ISLAMIC BANKING SYSTEM

• In the process of reestablishing Shariah law in

banking, it was inevitable for Muslim jurists to refer to
the primary source of Shariah i.e the Qur’an and
Hadith.
• The Qur’an, however, being primarily a book of
religious and moral principles and exhortations, is not
a legal document.
• With regards to Islamic banking, the Qur’an has given
clear and implicit guidelines that its operations should
be free from any element of interest.
• As an ordinary business entity, the Islamic bank is
expected to conform to the rules and guidelines given
by Qur’an.
Introduction to Islamic Banking
 SHARIAH PRINCIPLES USED
IN ISLAMIC BANKING

• Muslim jurists and scholars have suggested a

number of Shariah principles to be adopted by
Islamic banks in delivering their products and
services.
• Among the most widely used Shariah
principles recommended by these scholars
are mudarabah, Musharakah, murabahah, bai-
mua’zzal, ijara wa-iktina, qard hassan, wadiah
and rahn

Introduction to Islamic Banking

 Categories of Shariah principles

• Profit and loss sharing principles

• Mudarabah
• Musharakah
• Fees or charges based principles
• Murabahah
• Bai mu’azzal
• Ijara
• Ijara wa-iktina
• Free service principles
• Qard hassan
• Ancillary principles.
• Wadiah
• Rahn

Introduction to Islamic Banking

 General Principles of “Shariah”

• Islamic banks, being institutions founded on Islamic doctrines,

confirm to Islamic rules and regulations known as Shariah laws
which consist of ibadat and muamalat.
• As Islamic banking business mobilizes material resources and
are part of economic activities, Islamic banks are governed by
Shariah through the components of muamalat.
• The Shariah governing the operations of Islamic banks originate
from four sources, that is, the Qur’an, Hadith, Ijma and Qiyas.
• The Quran and Hadith are the primary sources of Shariah, whilst
Ijma and Qiyas are secondary sources which are only applied
when no solution on the matter in question is found in the
primary sources.
• Since Islamic banking is relatively new, Muslim countries have
yet to promulgate complete sets of Shariah laws to govern the
entire Islamic banking system.

Introduction to Islamic Banking

 General Principles of “Shariah”

• In most countries, the only Shariah component in

Islamic banking law is the prohibition of interest in the
operation of Islamic banks.

• Instead of interest used in conventional banks,

Islamic banks adopt principles such as profit-loss
sharing (example, mudarabah and Musharakah), fees
or charges based (example, murabahah, bai-mua’zzal,
ijara wa-iktina), free service (example, qard hassan)
and ancillary principles (example wadiah and rahn).

Introduction to Islamic Banking

 Islamic Banking
Source of Funds(Liabilities)

• Shareholders’ equity (contract: al-Musharakah or joint

venture on profit sharing).
• Customers’ deposits in current accounts (contract: Al
Wadiah Yad Dhamanah or guaranteed custody).
• Customers’ deposits in savings accounts (contract:
Al-Wadiah Yad Dhamanah or guaranteed custody)
• Customers’ deposits in general investment accounts
(contract: Al-Mudharabah or trustee profit-sharing).
• Customers’ deposits in special investment accounts
(contract: Al-Mudharabah or trustee profit-sharing)

Introduction to Islamic Banking

 Islamic Banking
Application of funds (Assets)
• Statutory reserve (contract: Al Wadiah Yad Dhamanah o
guaranteed custody)
• Liquidity requirements (contract: Al-Qardh Al-Hassan or
benevolent loan.
After meeting the statutory reserve requirements and holding the
required level of liquid assets, the Islamic bank is free to apply
the remainder of their funds for banking operations. The various
types of financing facilities include:
• Project financing (contract: Al-Mudharabah or trustee profit-
sharing)
• Project financing (contract: Al-Musharakah or joint venture profit
sharing)
• Financing the acquisition of assets (contract: Al-Bai Bithaman
Ajil or deferred instilment sale)
• Financing the use of services of assets (contract: Al-Ijarah or
leasing)

Introduction to Islamic Banking

 Islamic Banking
Application of funds (Assets)
• Loan syndication services (contract: Al-Ujr or fee)
• Securitization and debt-trading (contract: Bai-al Dayn
or Debt-trading)
• Trade financing:
• letter of Credit (contract: Al-Wakalah or agency)
• letter of credit (contract: Al-Musharakah or joint venture profit-
sharing)
• letter of credit (contract: Al-Murabahah or deferred lump sum sale
of cost plus)
• Letter of Guarantee (contract: Al-Kafalah or
guarantee)
• Working capital financing (contract: Al-Murabahah or
deferred lump sum sale of cost plus)
• Securitisation and Islamic Accepted Bill (IAB)
(contract: Bai al-Dayn or debt-trading)

Introduction to Islamic Banking

 Islamic Banking
various products

Deposit products :

Product / Services Applicable Islamic principles

and concepts
Savings Account Mudharabah / Wadiah yad Dhamanah

Current Account Mudharabah / Wadiah yad Dhamanah

General Investment Account (Term Mudharabah

Deposits)

Special Investment Account Mudharabah

Specific Investment Account Mudharabah

Introduction to Islamic Banking

 Islamic Banking
various products
Financing (Loan) products:

Product / Services Applicable Islamic principles and concepts

Term financing Bai Bithaman Ajil
Working capital financing Murabahah / Bai Bithaman Ajil
Syndicate finance Istisna / Bithaman Ajil / ijarah thumma Bai
Project financing Bai Bithaman Ajil / istisna / ijarah
Plant & machinery financing Bai Bithaman Ajil/ istisna / variable rate ijarah
Personal financing Bai Bithaman Ajil / Bai inah / Mudharabah
Fixed asset financing Bai Bithaman Ajil
Housing finance Bai Bithaman Ajil / Istisna / variable rate ijarah
Industrial hire purchase Ijarah Thumma Bai
Land financing Bai Bithaman Ajil
Leasing finance Ijarah
Cash line facility Bai inah / Bai Bithaman Ajil / Murabahah
Computer financing Bai Bithaman Ajil
Education finance Murabahah / Bai Bithaman Ajil / Bai inah
Bridge finance Istisna / Bithaman Ajil
Equipment finance Bai Bithaman Ajil
Hire purchase Wakalah
Benevolent loan Quard Hassan
Introduction to Islamic Banking Block discounting Bai Dayan
 Islamic Banking
various products
Trade Finance

Product / Services Applicable Islamic principles

and concepts
Accepting Bills Murabahah / Bai Dayn

Bank Guarantee Kafalah

Export Credit refinancing Murabahah / Bai Dayn

Letter of Credit Wakalah / Murabahah / ijarah / Bai

Bithaman Ajil

Shipping Guarantee Kafalah

Trust Reciept Wakalah / Murabahah

Introduction to Islamic Banking

 Islamic Banking
various products

Treasury / Money Market Investment

Product / Services Applicable Islamic principles and

concepts

Islamic Treasury bills Bai al-inah

Negotiable debt certificates Bai Bithaman Ajil
Foreign Exchange Ujr
Commercial papers Murabahah
Negotiable instrument of deposit Mudaharabah

Government investments issues / Bai al-Inah

certificates

Introduction to Islamic Banking

 Islamic Banking
various products

Banking Services
Product / Services Applicable Islamic principles and
concepts

ATM services Ujr

Cashiers Order Ujr
Demand Draft Ujr
Standing instructions Ujr
Stock-broking services Ujr
TT / Funds transfer Ujr
Travellers Cheques Ujr
Tele Banking Ujr

Introduction to Islamic Banking

 Islamic Banking
various products

Card Services

Product / Services Applicable Islamic principles and

concepts

Debit Card Ujr

Credit Card Bai Inah / Bai Bithaman Ajil

Charge Card Quard Hasan

Introduction to Islamic Banking

 International Islamic
Financial Institutions

With the emergence of Islamic finance,

some international financial institutions
also have come on to the scene.

Introduction to Islamic Banking

 Islamic Development Bank
(IDB)

• The Islamic Development Bank (IDB)-based

in Jeddah Saudi Arabia- is a multilateral
development bank serving Muslim
countries.
• The purpose of the Bank is to foster the
economic development and social
progress of member countries and Muslim
communities individually and collectively
in accordance with the principles of
shari'ah.

Introduction to Islamic Banking

 The Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI)

• AAOIFI is an Islamic international autonomous that

prepares accounting, auditing, governance, ethics and
shari'ah standards for Islamic financial institutions.
• The objectives of AAOIFI include:
• To develop accounting, auditing, governance and
ethical thought relating to the activities of Islamic
financial institutions.
• To harmonize the accounting policies and procedures
adopted by Islamic financial institutions through the
preparation and issuance of accounting standards and
the interpretations of the same to the said institutions.
• To prepare, promulgate and interpret accounting and
auditing standards for Islamic financial institutions.

Introduction to Islamic Banking

 Islamic Financial
Services Board (IFSB)

• Established in Malaysia in November 2002. IFSB

serves as an international standard-setting body for
the regulatory and supervisory agencies that have
an interest in ensuring the soundness and stability
of the Islamic financial services industry.

• It also strives to develop prudential standards in

accordance with the unique features of Islamic
financial institutions in coordination with the
existing standard-setting bodies.

Introduction to Islamic Banking

 International Islamic
Financial Market (IIFM)

• The International Islamic Financial Market (IIFM) aims

to facilitate international secondary market trading of
Islamic financial products and instruments by
providing independent shari’ah enhancement and
issuing guidelines for new products and
instruments.”

• The core product of IIFM is the shari’ah endorsement

or enhancement of existing and new Islamic financial
products and instruments which are offered by
Islamic financial institutions, conventional banks with
Islamic banking subsidiaries windows and so forth.

Introduction to Islamic Banking

 International Islamic
Rating Agency (IIRA)

• The basic aim of the IIRA (Bahrain) is to support

shari’ah compatible banks and mutual funds and help
them penetrate the international market.
• It rates Islamic banks and their financial instruments,
sukuk, to help them offer 'credible products' in the
international market.
• It also provides complementary rating information on
Islamic  banks to that produced by other rating
agencies, including measures of their compliance
with shari’ah law.

Introduction to Islamic Banking

 Liquidity Management Center
(LMC)

• The LMC, established in Bahrain in 2002, seeks to

develop an active secondary market for short-term
shari’ah compliant treasury products. The key
objectives of the LMC include:
• to facilitate the creation of an interbank money market
that will allow Islamic Financial Services Institutions
("IFSIs") to effectively manage their asset liability
mismatch;
• to provide short-term liquid, tradable, asset-backed
treasury instruments (sukuks) where IFSIs can invest
their surplus liquidity.

Introduction to Islamic Banking

 Conclusion

• On the whole, the Islamic banking system is far from

comprehensive.
• It appears that the elimination of interest from the banking
system remains top priority.
• The main difficulties faced by Islamic Banks are the lack of Islam
based investment opportunities.
• Timely support and guidance of the regulatory authorities,
Shariah board members and other Islamic scholars and jurists is
the need of the hour in order to set the right path for the
introduction of Islamic Banking in Islamic Republic of
Afghanistan.

Introduction to Islamic Banking

 Khudah Hafez

I sincerely convey my thanks for the noble opportunity to

stand before learned dignitaries for presenting the little
attempt on Islamic Banking before international banking
experts.

With the limited knowledge and other constrains, the above

attempt had been made with utmost sincerity and high respect
to the religious sentiments. Hope, any little mistake / ignorance
found in this attempt, could be excused as it is unintentional.

By
P V V Rama Raju
President & CEO

Introduction to Islamic Banking