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Study on Islamic

and Products.
Mohammed Saleem .OA
Objective of the Study
Primary objective
To study the Islamic financial system, its
products and merits.
Secondary objective
To study the use these financing techniques
To analyze the feature of Islamic products with
conventional financial products.
Financial System
The system that allows the transfer of money
between savers and borrowers.
Instruments & Institutions to transfer funds from
saving surplus units to saving deficit units in the
most efficient manner.
It facilitates intermediation between savers (fund
provider) and investors ( fund user)
Financial System Efficiency
Promotion of efficiency is the primary goal of every
Financial System.
It is measured in terms of efficiency achieved in
mobilizing savings from saving surplus units in the
economy and in allocating these funds among
saving deficit units.
Increase in the range of financial assets and
instruments would improve efficiency in
mobilization of funds.
For Improving Allocational
Efficiency it Needs
Less transaction cost

Simplified transaction system

Availability and accuracy of information

Should be a stable system.

Islamic Fianacial System
Financial institutions and instruments which are functioning on
the basis of directions and rules in shariah (a set of rules that
governs every aspect of Islamic life) are known as Islamic
financial system.

In conventional finance there is a tug of war between ethics

and efficiency.

In Islamic finance ethics dominate all the concerns.

The Shari'ah specifies, inter alia, rules that relate to the

allocation of resources, property rights, production and
consumption, and the distribution of income and wealth
Shariah Prohibits
Riba: which is taking or giving of interest

Masir : which is involvement in speculative and gambling transactions

Gharar : which is uncertainity about the terms of contract or the subject matter, eg.
Prohibits selling something which one does not own.

Investment in business dealing in alcohol, drugs, gambling, armaments, etc. which

are considered unlawful or undesirable.
Why Interest/ Riba Prohibited

Prohibition of interest is not limited to Islam it
is prohibited in Judaism and Christianity

Key objective is to ensure SOCIAL JUSTICE

Money is only a medium of exchange, no value in

Therefore should not be allowed to give rise to more
money, via fixed interest payments, simply by being
put in a bank or lent to someone else

Results in concentration of wealth
l Interest can leads to injustice and exploitation in
Principle of Islamic
Freedom to contract
Freedom from Riba
Freedom from Algharar
Freedom from gambling and unearned
Freedom from price control and
Mutual cooperation and solidarity
Global Islamic Finance Industry
1963: Mit Gamir Project, Egypt.
1975: IDB, Jeddah
1975: Dubai Islamic Bank
Growth Rate : 10-15%
300 Institutions over 75 countries USD 800 billion under
Expected tocontinue with assets growing USD 1 trillion by
Islamic Window : ABNAmro, HSBC, City Bank
Islamic Finance Products

Investment Financing

Trade Financing

Musharakah ( Joint Venture)
Musharaka is similar to a joint venture, whereby two parties
(an Islamic Financial Institution and a Client) provide capital
for a project which both may manage.

Profits are shared in pre-agreed ratios but losses are borne

in proportion to equity participation

Client Bank
Business Venture

Profit / Loss
Mudaraba – Trustee Partnership

Mudaraba is a contract between two parties:

One of them provides finance ( Rab ul maal) &
other uses his labour and expertise (Mudarib).

Profit, if earned, is distributed between the two

parties in accordance with the ratio as per the
agreement. Financial Loss, if suffered is borne
by the investor only.
Client Bank

Business Venture

Profit Loss
Murabaha ( Mark upSales)
The client orders an Islamic Bank to purchase
certain goods at a specific cash price
The Bank purchase these goods from the supplier
and sells to the client at a marked – up price ( Cost
+ Profit).
The differed price may be paid up on lump sum or
in installment
Cost + Profit

Goods / Ownership
Client Ban
Ijara ( Lease)
A contract under which an Islamic bank finances
equipment, building or other facilities for the client
against an agreed rental. The ownership remains
with the lessor bank and can be transferred on
predetermined basis.
Salam ( Forward Selling)

Salam means a contract in which advance

payment is made for goods to be delivered
later on.
The seller undertakes to supply some
specific goods to the buyer at a future date
in exchange of an advance price fully paid at
the time of contract.

It is a contractual agreement for

manufacturing goods and commodities,
allowing cash payment in advance and
future delivery or a future payment and
future delivery.
Qard Hassan ( Charitable Loan)
It is an interest free loan.
Only loan permitted by Shariah.
The loans are made from the pooled donations of the members, Zakat
and are generally granted to those who are facing emergency personal
Client approaches Bank for loan and offers collateral security.
Bank lends an amount to client.
Client repays amount to Bank (with or without administrative expenses) in part or in

Takaful, the Islamic alternative to insurance,

is based on the concept of social solidarity,
cooperation and mutual indemnification of
losses of members.
It is a deal among a group of persons who
agree to jointly indemnify the loss or damage
that may inflict upon any of them, out of the
fund they donate collectively.
What Distinguishes Islamic Banking

Transactions are asset-based

It is socially-responsible banking because it
operates under Shariah restrictions

Does not permit financing of prohibited goods /

It starves evil out of the society

Ethics and moral values play a major role in
investment decisions. Not a choice but a must
Distinguishing Features

Conventional Banking Islamic Banking

- Conventional banking - Islamic banking prices

prices money. goods and services which
creates real wealth in the
society leading to economic
- Is based on fixed - Is based on profit
return on both Sides of sharing on deposits side,
the balance sheet. and on profit on assets
Distinguishing Features

Conventional Banking Islamic Banking

- Does not involve itself - Actively participates in

in trade and business trade and production.

- Depositors get a fixed - Profit is shared with the

rate regardless of the depositor, higher the
bank’s profitability, bank’s profit, higher the
thus insulating them depositors income.
from the bank’s true
Basic Difference between Islamic and
Conventional Modes of Finance

Bank Client

money + money (interest)

Basic Difference between Islamic and
Conventional Modes of Finance


Bank Goods & Client


Performance of Islamic Finance
In comparison with conventional banking systems,
Islamic bank’s assets and deposits have grown at
GR of 20-22% while those of conventional banks
have grown at a rate of 11% for the period 2002 –
Key Isuues

Taxation & Legal Issues

Risk Management
Regulatory Issues
Islamic Finance assures Equitable distribution of risks and
rewards among the stakeholders
Inculcating market discipline and higher ethical standards
given its emphasis on non-exploitation and social welfare.
It may be observed that Islamic finance is far more
interesting and complex than conventional finance as far
as financing techniques are concerned.
it is in the area of assets rather than in liabilities that the
practices of Islamic banks are more diverse and complex
than those of conventional banks.

it is generally believed that Murabahah is the most widely

used technique and that the majority of the financing
provided by Islamic banks goes to short-term trade and
the financing of real estate.