Islamic Finance

Case study

1. Define the main assets of Islamic banking?

The main assets in Islamic banking are based on principles of Islamic sharia. The
Islamic banks mentioned in case study have various different assets including cash
and cash equivalents that is under possession for bank commitments, higher liquid
assets to get some returns as liquid assets are lesser in Islamic banks comparative
to conventional banks. High liquid assets are substitutions of bonds in Islamic
banking. accounts and notes receivables in mentioned Islamic banks of the case
originates from credit facilities and is determined by economic well-being and
customers credit policy. The short term trade financing includes murabaha(Profit
sharing) and salam comes under receivables that is a signed contract with an
agreed down payment along with price. The medium term investment in Islamic
banking leads to assets generation called Ijarah,Istisnaa and long term investment
yields musharakah(PARTNERSHIP)(Chong and Liu,2007) these all constitute main
assets in Islamic banks mentioned in the above case
1. Break down
percentages?

Banks
Shamil bank
of bahrain
Emirates
bank
intl
UAE
Al
rajhi
banking and
investment
corp
ABC Islamic
banking
Jorden
Islamic bank
First Islamic
investment
bank
investor
bank

the

assets

Assets(major groups)

Inventory
(Cash AND DEPOSITS)

in

to

major

groups

and

calculate

Year 1999 Year

$US
2000$US
310,751
358,535
47,784
2,570,809
1,308,286
1,262,523

Percentage%

1,331,564
2,041,015
709,451

53,2%

164

283
119
197,511
155,386
42,125
3839
1268
2571

0.6%

3,199,446
2,215,526
983,920

30.7%

15.3%
49.1%

21%
66%

2. Are the assets treated identically in the accounts by the different

banks?
The assets mentioned in the list of Islamic bank in this case study have classified
the assets in to four major categories and all are treating the assets identically, the
four major segments each bank is treating its assets are inventory that constitutes
cash and deposits, then is asset backed transactions that pertains with murabaha/
ijarah (leasing) Istisna(services/credit products salam(related to delivery), Porfit
sharing transactions(Mudarabah that entails profit sharing
and loss bearing;
Musharakh profit and loss sharing) and finally the fee based transactions that comes
in terms of trade financing. the bank vary from each other in terms of distinct
characteristics in ownership of these assets and contractual relationships for their
receivable(Bibadad and Bojan, 2005).
3. Define the major sources of finance for Islamic banking
In order to operate like conventional banks the Islamic banks also needs funds and
financing to run its transactions that come from various categories of halal sources
that are legitimates in light of shariah and the shariah presents two concepts for
sources of finance in Islamic banks i.e wadiah (restrictions for profit sharing for the
depositor) and Mudaribah(profit will be shared with the depositor but loss will stay
with the capital provider)(Bibadad and Bojan, 2005). The two main categories
constituting the sources of funds include:

Shareholders working capital

Customer deposit collections(contracts: al-wadiah deposits and mudharabah
deposits)

Separate accounting records to avoid any mingling at islamic banks are done to
avoid any ambiguity and conflict with conventional banking means of doing
transctions and obtaining sources of funds

4. Identify the key liabilities of Islamic banking

The key liabilities of Islamic banks very much like that of asset classification comes
under five distinct sections. The first and top most being current or demand
deposits that constitutes wadiah and wakalah that are considered to be same as
demand deposits. Unrestricted investment accounts that undertake fixed
deposits called as Mudaribah based SIA and profit yielded on the basis of asset
performance leads to profit sharing. Restricted Investment accounts that
contain mudarabah PSIA and same as unrestricted investment account it

undertakes profit sharing based on performance of assets. Profit equalization

Reserves this liability has distinctive characteristics and is considered as a
practical tool in balance sheet of all Islamic banks. Shareholders equity, the very
imperative liability in Islamic as well as conventional banks that is kept to invest in
infrastructure maintenance and other important transactions for the Islamic
banks(Hidayati et al, 2002)

5. How important are current accounts and investment accounts a s

sources of finance
Current accounts and investment accounts serves as a potential source of funding
in Islamic banking. The deficit in any of this section implies significant after affects
to the funding of Islamic banking transaction. current account serves as a means of
savings and ultimately boost the investment opportunities so a deficit or negative
current account could bring uncertainties to the banking well-being.so financing the
deficit in current account is always recommended in islamic as well a conventional
banking

6. Where in the accounts do you find restricted and unrestricted

investment accounts
In Islamic banks the restricted and unrestricted investment accounts are located in
mudaribah(profit sharing investment) section of investment account. the
unresteicted Investment account or URIA that refers to no limitations when it comes
to investing in accounts funds. Through appropriate but not restricted means bank
allows the depositor to invest funds on an agreed percentage amount to share the
returns generated through this investment. Contrary to this,restricted investment
account refers to certain impositions while making investemnty, in ways of making
investemnts so certain conditions are set while undergoing this investment between
the account holder and investing parties to refrain from certain activities while
undertaking this investment.

7. Are investment accounts assets or liabilities

Investment account comes under asset category provided that it is not borrowed
from some external party in that case it will be rendered as a liability. A long term
investment is a long term asset to facilitate long term transactions and flow of
business in banking arena. Investments are considered as a mean of positive cash
flows and economic benefits.

8. How do activities of Islamic bank differ between countries

The comparative study of Islamic banking practices in banks mentioned in case
studies from different countries represent somehow coherence in the way they
finance the business and do banking. There is no market disparity in the way they
transact and keep balance of their accounts in terms of assets and liabilities and in
the way they invest in the banking transactions. Islamic banks are based on same
Islamic principles across boundaries. Shariah communicates same laws for Muslim
countries so the difference in operations may occur in usage of shariah principles
by these islamic banks. the way banks accommodates the funds may vary from
other bank operating in different location.
9. How are activities of Islamic commercial banks different from
conventional ones
Islamic banking activities are in accordance and consistent with Islamic law
sharia,that follows the banking transactions in light of holy Quran and sunnah and
avoid all unjust means of making profit that usually is overlooked in conventional
banking. Islamic banks are free of riba based transactions, activities that are
favoring oppressions are avoided in islamic banking, islamic taxation is favored for
zakat to help needy. All such activities and actions taking place in economy through
unfair and unjust mean and through haram means are prohibited in Islamic banking,
contrary to this in conventional banking a relationship of debtor and creditor is
established in accordance with an agreed amount of interest between both parties
that in other term is taking advanatage of borrower money and interest that is
prohibited in islam is used as opportunity cost of money

10.

Do the Islamic banks featured in this case study make money

Despite the prohibition of interest and loan in islamic banks, shariah does allow
islamic banks the means to make money to Islamic banks. The list of Islamic banks
mentioned in case study follow the aspects of musharakah, the profit and loss
sharing tactic in Islamic banks where depositor invest capital aim the bank for the
growth of their business very much similar to direct investment and consequent
loss and profit is shared between bank and depositor. The mentioned Islamic banks
are also making money through ijarah that is rentals that usually ends up in
purchase of those assets through leasing. The mortgage transactions is Islamic
banking, Islamic banks resells the purchased items on profit(Kesowani,2012).

11.

Calculate return on capital employed for each bank

Return on capital employed that measures the profitability of a firm. In this case
study the ROCE for the islamic banks have been calculated below in the table using
the formula:
Return on capital employed= earnings before interest and tax/ capital
employed
Capital employed is directly obtained by subtracting current liabilities and total
assets and in case of interest zakat and other provisions were considered

banks
Shamil bank of bahrain
Emirates bank intl UAE
Al rajhi banking and investment corp
ABC Islamic banking
JORDAN ISLAMIC BANK
First islamic investment bank
Meezan bank
Investor bank
Al-baraka islamic bank
Arab islamic bank
Tadamon islamic bank
Amana investment

ROCE for yr 2000

15,617-230,000=-214,386 =-214383
1,033,635-1,435,014= -410,379
1,584,454-2,250,000= -665,546
13,432-42,500= -229,068
1,382,279-38,500= 1,343,779
4582-112,500= -107,918
148,116-1,697,152= -1,549,036
1,379,645-1,297,049=82,596
4,125,319-4064= 4,121,255
551-95,022= -94,471
1,394,287-1,741,207= -346,920
48,773-205,200= -156,427

REFERNCES:

Bidabad, Bijan (2005), Non-Usury Bank Corporation (NUBankCo), The Solution

to Islamic banking, Proceeding of the 3rd International Islamic Banking and
Finance Conference, Monash University, KL, Malaysia, 16-17 November, 2005.
Chong,B.S. and Liu,M. (2007)," Islamic Banking: Interest-Free or InterestBased?", [Online]. Available from: www.efmaefm.org/0EFMAMEETINGS/EFMA
%20ANNUAL%20MEETINGS/2007-Vienna/Papers/0019.pdf
Hedayati, Aliaskhar, and other co-authors, (2002), "Internal banking
operation (2) ", Iran Bank Institute, Central Bank Of Iran, 5th publish, pp 9 (in
Farsi).
Kesowani.J.(2012).comparative study between islamic and convental
banking.[Online]. Available from:
http://www.academia.edu/3643191/Comparative_study_between_islamic_and
_conventional_bank.