Structure, Functioning and Products of An Islamic Bank: (Enrollment No. 13BSPHH010275)

A REPORT
ON
STRUCTURE, FUNCTIONING AND PRODUCTS OF AN

ISLAMIC BANK
By
K.KIRAN KUMAR
(Enrollment No. 13BSPHH010275)
BANK NIZWA SAOG: OMAN

A REPORT
ON
STRUCTURE, FUNCTIONING AND PRODUCTS OF AN

ISLAMIC BANK
By
K.KIRAN KUMAR
(Enrollment No. 13BSPHH010275)
ICFAI BUSINESS SCHOOL (IBS)

HYDERABAD
A report submitted in partial fulfillment of the requirements of

the requirements of
PGPM Program of
IBS HYDERBAD
Distribution List :
Professor Jojo George Mathew-Project Guide
Ms. Zamzam Al Hadi-Company Guide
Date of Submission : 11th April 2014

TABLE OF CONTENTS

Abstract i
1. Introduction 1
2. Islamic Banking 2
2.1 Evolution 2
2.2 Principles of Sharia 2
2.2.1 Riba 2
2.2.2 Gharar 3
2.3 The Various Banking Services And How They Conform To Sharia 3
2.3.1 Personal Financing 3
2.3.1.1 Murabaha 3
2.3.1.2 Ijarah 5
2.3.1.3 Salam&Istisna 5
2.4 Islamic Investments 6
2.4.1 Shares 6
2.4.2 Fixed Income Securities 6
2.4.2.1 Ijarah Fund 6
2.4.2.2 Murabaha Fund 6
2.5 Insurance 7
2.6 Islamic Bond 7
3. Islamic Bank Accounts 8
4. Accounting in Islamic Finance Institutions 9

4.1 Accounting for Al wadiah Accounts 11
4.2 Accounting for a Mudharabah account 12
4.3 Accounting for a Murabaha transaction 13
4.4 Accounting for Ijarah transaction 17
5.Sukuk the Islamic Bond 21

5.1 Types of Sukuk 24
5.1.1 Sukuk Salam 25
5.1.2 Sukuk Mudaraba 26
5.1.3 Sukuk al Murabaha 27
5.1.4 Sukuk al Ijhara 28
5.2 Accounting for a Sukuk Transaction 29
APPENDIX I History of Bank Nizwa 40
APPENDIX II Company Profile 41
APPNEDIX III Organizational Structure 45
APPENDIX IV Development of Banking Structure 46

ABSTRACT

In 2008, the world economy faced its most dangerous crisis since the great
depression of 1930, the contagion which began in 2007 when sky high home prices
in the United Sates (US) finally turned decisively downwards, spread quickly first to
the US financial sector then to financial markets and overseas markets. But through
all this a sector that remained relatively stable was the Islamic Finance Sector. The
reason behind this was believed to be the principles on which the Islamic banks
perform their activities. These principles are based on Islamic law called Sharia.
Though the performance of the Islamic financial sector put it on the world map it is
still not well understood and there are many who believe it to be a dress up of
Conventional Banking. To understand Islamic Banking better an internship was
performed at Bank Nizwa, Oman’s first Islamic Bank. This provided an inside view of
how Islamic Banks function and how the various products are shaped as per sharia
and how this presumably makes them more safer. The initial internship period
helped reveal two primary guiding principles that define Islamic products, there
should be no Riba (interest) and no Gharar (Risk). Islamic banks are not allowed to
make money from money, a conventional bank could lend 5,000 Omani Rial (RO) as
a loan and earn an interest on this amount, but as stated before Islamic Banks are
not allowed to charge interest, which is the prohibited Riba as per Sharia. The Sharia
states that money can be earned only if the banks perform some work and not just
by lending money. Thus, if Islamic bank were to use this 5,000 RO for an automobile
financing they would first have to purchase the car and then sell this car to the
person seeking financing. The Islamic bank cannot charge interest but they can sell
the automobile at price inclusive of a profit margin for their efforts in purchasing
the car. Payments for the financing will be made on a monthly basis and this form of
financing is called a Murabaha. The second guiding principle Gharar implies that a
person must own something to sell it and there should be no ambiguity or
uncertainty in a transaction this is the reason behind which derivatives and
conventional insurance are banned as per Sharia. The absence of derivatives and
other high risk instruments due to the prohibition of Gharar is one of the reasons for
the stability of Islamic Banks. Another important point to note is that Islamic banks
cannot sell their loans and also every Islamic product is backed by an asset that they
can sell as a Murabaha , lease out as an Ijhara. The only time an Islamic Bank is
allowed to use money to earn money is when the third guiding principle is satisfied
i.e. profit and loss sharing. These are known as investing activities in which similar
to an equity investment an Islamic Bank invests in a Sharia compliant project and
earns a pre agreed percentage of the profit based on the performance of project and
also bear the loss thus the bank also shares the risk with the customers and thus
Islamic Banks would not engage in subprime mortgages another reason behind their
stability during the Global Crisis.

i
CHAPTER 1
INTRODUCTION

The Sultanate of Oman is a country in the Middle East. After facing heavy fiscal deficits with
the collapse of oil prices in 1986, a period between 2003 to late 2008 was the best period
for the economy due to consistently high oil prices. As seen above, the Sultanate of Oman
relies heavily on oil. A study issued by the International Monetary Fund in 2012 under the
title “Fiscal Frameworks for Resource Rich Developing Countries” which measured the
proportion of oil revenues of the total fiscal revenue of the state, indicated that the
Sultanate of Oman ranked sixth in the world which adopts the general budget based on oil
by 83%. This reliance on oil leads to a very dangerous trend called the Paradox of Plenty
and requires encouragement and promotion of non-‐oil sectors, to support and promote
sustainable development and achieve economic prosperity. Finance has been a major limit
in development for the Sultanate. Businesses found it difficult to finance its projects due to
the lack of financial services. To promote this the government promoted various financial
institutions and investment opportunities with primary importance to banking.

According to statistics released by the Central Bank of Oman in the third quarter of 2013,
the number of banks operating in the Sultanate was 19 banks distributed as follows: 7 local
banks, 9 foreign banks, the two specialized banks, and two Islamic banks, Bank Nizwa and
Al Izz bank, in addition to 510 bank branches. The amount of total loans in Omani Rial and
foreign currency stood at RO 15,169,037 while total deposits amounted to RO 15,071,942.

Oman initially operated with only commercial banks but has now introduced specialized
Islamic banks, a banking system that is based on the principles of Shariah (Islamic Law).
Two basic principles behind Islamic banking are the sharing of profit and loss and, the
prohibition of the collection and payment of Riba (interest). In fact Oman is the last to enter
the Islamic Banking segment. The establishment of the local savings bank in Egypt in 1963
marked the beginning of the Islamic banking system. The undertaking was based on
Mudaraba (legitimate speculation), through collecting individual savings from people and
investing them through Islamic banking systems, and allocating profits as agreed upon with
all parties. Similar trials took place in Malaysia and in Pakistan. The growing number of
Islamic Banks in recent years specifically in countries with dominant Islamic population
prompted Oman to join the bandwagon. Bank Nizwa is the first specialized Islamic Bank in
the Sultanate of Oman and is the location of the internship.

Islamic Banks provide similar products as its commercial counterparts but the methodology
and reasoning vary. One of the essentials for the islamic-‐banking sector to succeed is for
people to understand these differences and be able to make comparison between two
Islamic Banks or even compare it with a commercial bank. This is the objective of the
internship.

1
CHAPTER 2
ISLAMIC BANKING
“La tazlima wa la tazlamun”
“Deal not unjustly and you shall not be dealt with unjustly”
2.1 EVOLUTION
The establishment of the local savings bank in Egypt in 1963 marked the beginning of the
Islamic banking system. The undertaking was based on Mudaraba (legitimate speculation),
through collecting individual savings from people and investing them through Islamic
banking systems, and allocating profits as agreed upon with all parties. Similar trials took
place in Malaysia and in Pakistan.
Islamic finance has emerged as a rapidly growing industry with an increasingly global
presence. Through the use of instruments that adhere to Islamic principles, it seeks to
promote inclusive growth, equitable risk-‐sharing, and social justice. Although the industry
represents less than 2% of banking assets worldwide, it now holds an estimated $1.6 trillion
in global assets.
2.2 PRINCIPLES OF SHARIA
Islamic Banking is based on the principles of Sharia. Sharia is the Islamic religious law that
governs not only religious rituals, but also aspects of day-‐to-‐day life in Islam. Sharia,
literally translated, means "the way."
The two fundamental Islamic prohibitions that render financial contracts invalid are Riba
(Interest) and Gharar (Risk)
2.2.1 Riba
Most people are familiar with the prohibition of Riba (interest) in the Quran. This is based
on the saying in the Quran “La Tazlimuna wa la Tuzlamun” translated as “ Deal not unjustly
and you shall not be dealt with unjustly”
Many people misinterpret this statement believing that Riba is prohibited in the sense of
“exploitation of the poor debtor by the rich creditor”. But it actually means “ without
inflicting or receiving injustice” which would translate as “ without an increase or a
dimiution”. Thus when a person provides a loan he should receive back only the amount
that he provided as loan neither an increase nor a decrease in that amount this is the basic
principle behind the prohibition of Riba.
2
There are other statements in Islam that prohibit Riba one such Statement is “ Gold for Gold,
Silver for Silver, Wheat for Wheat, Barley for Barley, Salt for Salt, Like for Like, Hand to Hand,
in equal amounts and any increase is Riba”
There are three forms of Riba here we shall discuss two of them
Riba al fad: where money is exchanged for money hand to hand but in different quantities
Riba al nas’ah: where money is exchanged for money with deferment
The latter Riba al nas’ah is the principle based on which Western Finance is constructed
which is strictly prohibited.
2.2.2 Gharar
Gharar literally translates as Risk which in terms of financial contracts translates as

“Parties should be certain about what is being sold and for what price”
Gharar pertains to a person paying a fixed price for whatever a fisherman may catch
on his next dive. In this case he does not know what he is paying for as he is
uncertain about what the fisherman would be able to catch on the dive on the other
hand paying a fixed price to hire the fisherman for a fixed period of time where
whatever he catches belongs to the buyer is permitted. In this case the object of sale
the Fisherman’s labor for say one hour is well defined. In many cases Gharar can be
eliminated from contracts by carefully stating the object of sale and the price to
eliminate unnecessary ambiguities.
It is also due to this that Forwards, Options and Insurance are prohibited.
2.3 THE VARIOUS BANKING SERVICES AND HOW THEY CONFORM TO SHARIA
2.3.1 Personal Financing
Islamic Banks offer various Financial Loans designed to meet people’s needs the two
most common types are
• Murabaha (Auto Loan)

• Ijara (Home Loan)
2.3.1.1 Murabaha (Automobile loans)
Murabaha is one of the accepted financing instruments that are in compliance with
3
the principles of sharia. As per this instrument one can approach an Islamic
Financial institution and request the institution to purchase an item on his behalf
that he would promise to buy back from the institution at a price inclusive of a profit
margin for the banks efforts.
The process can be depicted as follows
Customer approaches the Bank for an

automobile loan
The customer speci]ies the exact brand and

model required and any other speci]ications if
applicable
The bank purchases the vehicle as speci]ied by

the customer and sells this to the customer
The customer now must make equal monthly

payments as agreed upon by him and the bank.

To follow Islamic Finance “ one need not deprive themselves of credit to avoid
paying Riba (interest) and one need not deprive themselves of time value of
money to avoid receiving Riba (Interest)”
Thus a bank is entitled to a profit on the loans that it provides. Thus a common
question arises as to where lies the difference between an Islamic loan and a
commercial loan. For Islamic loans to be valid the third type of Riba is the factor that
differentiates it from conventional loan.
Riba al Jahiliyyah: “defer and increase” is prohibited what this means is that
amount of debt can neither be increased for a delayed payment nor be decreased for
a prepayment.
To motivate people to pay their loans on time and to prevent people from delayed
payments Islamic Banks do charge an amount for late payment but this amount
cannot be taken as income and must be deposited for charity. This amount cannot
4
be depicted on the income statement.
2.3.1.2 Ijara (Home loans)
Ijarah is not a sale of the object but rather a sale of the right to use the object for a
specified period of time in this case the object would be a house. This is quite similar
to a lease.
The process is as follows
Customer approaches the Bank for a Home loan
The customer speci]ies Property or Land to be

acquired
Bank acquires the Property or Land , it now allows

the customer to use the land or property but retains
ownership
The customer must now pay monthly rent to the

bank and ownership is transferred to the customer
once he has made the payments of rent which
cumulatively add up to the loan amount

2.3.1.3 Salam&Istisna (Islamic Forwards)
In general the sale of nonexistent objects is forbidden due to Gharar however to

facilitate certain types of businesses, exceptions were given to two contracts
Salam
Salams are agricultural loans. This contract is permitted where the price is paid in
5
full and a well defined object of the sale is delivered after a specified time. This
prepayment of the price allows the farmers to buy seeds and spend for their own
sustenance etc in order to be able to produce the fruits.
Istisna
Istisna are loans given for the building of mosques or schools
2.4 Islamic Investments
2.4.1 Shares
Shares are permissible as per sharia law but Bonds are Preferred Shares as
prohibited as they have components of Riba.
If the company’s business is legitimate and its conduct is in compliance with the
rules of Sharia Islmaic Banks are allowed to own such common shares.
2.4.2 Fixed Income Securities
Islamic banks have accounts receivable corresponding to lease or installment

payments in leases and credit sales. In principle those accounts receivable may be
sold to the public as a fixed income investment vehicle with minimal risk. But this is
not allowed as per the principles of sharia.
Bonds and Debentures too are not allowed as the involve interest components.
In terms of Permissible Fixed Income Securities there are two permissible froms
• Ijarah Fund
• Murabaha Fund
2.4.2.1 Ijarah Fund
In these investments the banks pool together money from various investors and
then purchase real estate and then lease them. The rent that they receive from these
leases serves as fixed income for the investors. Diversification is done by buying real
estate from different areas.
2.4.2.2 Murabha Fund
It is becoming popular nowadays to have Murabaha funds along similar lines to a

Ijarah Fund. However in a murabaha the asset is no longer owned by the Islamic
Bank and what they can securitize and sell is therefore the cash flow generated by
the liability of the buyer.
6

2.5 Insurance
In a financial insurance contract where premium is paid regularly to the insurance
company and the insured receives compensation for any insured losses in the event
of a loss the insured may collect a large sum of money after paying only one monthly
premium on the other hand the insured may also make many monthly payments
without ever collecting any money from the insurance company this amounts to
Gharar (risk) as there is an uncertainty and thus is prohibited.
2.6 Islamic Bond
One Islamic capital market instrument that has proven successful in other
jurisdictions in soaking up liquidity from Islamic banking sectors is sukuk,
commonly referred to as Islamic bonds.
Sukuk are different from bonds, however, in a number of important ways.
First, the assets on which sukuk are based must be Sharia-‐compliant unlike the
underlying assets of a bond issue.
Second, sukuk give the sukuk holder partial ownership in the underlying asset
whereas a bond is a debt obligation of the issuer to the bond holder.
Third, the value of sukuk is based on the market value of the underlying asset rather
than on the issuer’s credit worthiness as reflected in the rating of bonds.
Fourth, sukuk holders receive a share of the profits (and must share in any losses)
that the underlying assets in contrast to regular interest payments and the principal
when the bond matures.
Fifth, an obligor’s payments to sukuk holders depend on the profits and losses that
the underlying assets generate. A bond issuer’s payments to bond holders are not
tied to the performance of the underlying assets. Being asset-‐backed or asset-‐
based, sukuk are secured and provide a much better risk than unsecured
conventional bonds or similar instruments.
7
CHAPTER 3
Islamic Bank Accounts

Islamic banking is a form banking activity that is consistent with the principles of sharia
(Islamic law). Islamic Banks provide three types of accounts to their customers. Current and
Savings accounts similar to Commercial Banks,these accounts provide no interest payments to
the customers and are known as al wadaiah. In order to earn returns customers may invest in
the third type of account investment accounts. These accounts work on the principle of profit
and loss sharing called mudarabah and musharkah instead of interest rates.

Musharaka: Musharaka is a partnership with Risk Sharing. In a musharaka a person who
finances the investment works along with the person being financed and gets a percntage of the
profit and must bear the losses. These are rarely used in Islamic banks.

Mudharabah: A Mudharabah is a partnership similar to a musharaka except in this case the
lender (investment account holder) is a silent member who provides funds to the borrower (the
bank), who then uses these funds in Islamicaly valid investments such as ijarah, murabaha and
istisna. In case of a profit an accepted proportion is provided to the ledner and the borrower
recieves a portion. In case of a loss the lender must bear the loss while the borrower only loses
the time and effort spent on the investment.

In Islamic Banking the lender is known as Rab ul Mal or Sahi ul Mal and the borrower as
Mudarib.

There are two types of mudharabah restricted and unrestricted. In a restricted mudarabah the
lender can specify where and how the funds need to be used where as in an unrestricted
mudarabah the borrower can use the funds for any islamically legal investment.

Mudharabah investors are not equivalent to the shareholders as they are not owners of the
Islamic bank. They are also technically not creditors as the contract is an investment contract

Commercial Bank A/c Islamic Bank A/c Features
Savings Al Wadaiah No interest rate
Current Al Wadaiah No interest rate
Term Deposit Restricted Mudharabah Profit and Loss sharing
Unrestricted Mudarabah
8
CHAPTER 4
Accouting in Islamic Financial Institutions

Islamic institution assets differ from asstes of commercial banks mostly in their documentation,
for example a deposit in a commercial bank is a liability but in an Islamic Bank a deposit in an
investment account is considered equity and not a liability.

Another example would be related to islamic bonds or sukuk, where riba(interest) is prohibited
thus an income statement cannot display interest. Thus as seen above Islamic financial
Institutions require principles/standards of accounting which confirm to their methods of
operation. The Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI), an Islamic international autonomous not-‐for-‐profit corporate body prepares
accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions
and the industry. AAOIFI was established on the 27th March,1991 in Bahrain.

Objectives of AAOIFI
To develop accounting and auditing thoughts relevant to Islamic financial institutions

To disseminate accounting and auditing thoughts relevant to Islamic financial
institutions and its applications through training, seminars, publication of periodical
newsletters, carrying out and commissioning of research and other means

To prepare, promulgate and interpret accounting and auditing standards for Islamic
financial institutions

To review and amend accounting and auditing standards for Islamic financial
institutions.

Objectives of IFRS
To develop a single set of high quality, understandable, enforceable and globally
accepted International Financial Reporting Standards (IFRSs) through its standard-‐
setting body, the International Accounting Standards Board (IASB

To promote the use and rigorous application of those standards

To take account of the financial reporting needs of emerging economies and small and
medium-‐sized entities (SMEs)

To promote and facilitate adoption of IFRSs, being the standards and interpretations
issued by the IASB, through the convergence of national accounting standards and IFRSs.

As seen from the objectives, AAOIFI standards are speicific to Islamic Financial Institutions
where as IFRS standards are more generalistic. IFRS has its foundation in secularism where as
AAOIFI in religion. Thus in IFRS, the preparer of the financial statements is accountable to the
stakeholders where as in AAOIFI the preparer is accountable to the stakeholder, common
9
people and god. Thus users of the financial statements not only want know the perfomance of a
company but also want to know if the company’s activities are Halal (religiously acceptable
according to Muslim law).Most of the IFRS standards, which confirm to sharia are accepted and
only those, which don’t, are modified by AAOIFI to meet their requirements.

10
GAAP which confirm to sharia

Money Measurement GAAP prohibited by sharia
Cost Concept
Entity
Substance over form
Going Concern

Dual Aspect

Accounting Period

Conservatism

Realization

Matching

Consistency
Materiality

Historical Cost Concept

The conventional accounting measurement is based on the cost principle that considers the
acquisition cost or historical cost as appropriate measurement basis. However, this principle is
questionable from the Islamic point of view due to its conflicts with the concept of fairness and
justice. AAOIFI, recommends the use of cash equivalent value that indicates the value that
would be realized if an asset was sold for cash in the normal course of business as at the date of
the financial statement.

Substance over Form Concept

While accounting for business transactions and other events, we measure and report the
economic impact of an event instead of its legal form. This is called substance over form
principle. But in Islamic Accounting it is the legal form that is given importance. For example a
Murabaha where a car loan is provided by purchasing the car and then selling it to the debtor is
considered a sales transaction and not a financing transaction.

4.1 Accounting for Al wadiah Accounts
Al wadiah accounts are similar to current and saving accounts with no interest. They are
liabilities. Wadiah are contracts between the bank and the customer, who gives his surplus
money to the bank. The bank must keep the money safe and return it when requested by the
customer.

If the bank performs well consistently they may reward the customer by gifting them a portion
of the profit called hibah.

11
Journal Entries of Al wadiah
1. A deposits 40 R.O in a alwadiah account

R.O. R.O.
Dr Cash Account 40 -‐
Cr Wadiah Deposit Account -‐ 40

Assets Liabilities Owners Equity
Cash Wadiah Deposit Account
40 40

2. Bank gifts Hibah of 10 R.O. to the Account Holder A after a year due to their good performance
during the year.

R.O.
Revenue from an Islamically valid investment 400
Less:Direct Cost 50
Profit/Loss 350
Less: Hibah Depositors 10
Net Income to the Islamic Bank 340

R.O. R.O.
Dr Profit and Loss account 10 -‐

Cash Wadiah deposit Account Retained Earnings
40 40 0
+350 +10 +340
390 50 340

3. A withdraws 50 R.O. from the account

R.O. R.O.
Dr Wadiah Deposit Account 50 -‐
Cr Cash Account -‐ 50

Cash Wadiah deposit Account Retained Earnings
390 50 340
(50) (50) -‐
340 0 340

4.2 Accounting for Mudharabah account
Mudharabah accounts are not a liability but they are not equity either. They represent a special
type of Equity
12
1.A deposits 40 R.O in a mudharabah account

R.O. R.O.
Cr Equity of unrestricted Mudharabah -‐ 40

Cash Unrestricted Mudharabah
40 40

2.The Bank invests this amount in an Islamically Valid asset and obtain a return a proportion of
which is then provided to the mudrabah account of A

R.O.
Less:Direct Cost 50
Profit/Loss 350
Less: Profit to Depositors 10

R.O. R.O.
Dr Profit and Loss account 10 -‐

Cash UnrestrictedMudharabah Retained Earnings
40 40 0
+350 +10 +340
390 50 340

3.A withdraws 50 R.O from the mudharabah account
R.O. R.O.
Dr Wadiah Deposit Account 50 -‐

Cash Unrestricted Retained Earnings
Mudharabah
390 50 340
(50) (50) -‐
340 -‐ 340

4.3 Accounting for a Murabaha transaction
Murabaha are similar to automobile loans in commercial banks but in this case the Bank buys
the automobile first and then sells it to the customer who will then make monthly payments
that would cumulatively add up to the financed amount plus an accepted profit margin.

13
1. A approaches an Islamic Bank for an automobile loan, A specifies to the bank the car model he
rquires

2. The Bank then purchases the car from the dealer

R.O. R.O.
Dr Murabaha Asset account 3000 -‐

Cash MurabahaAsset Paid-‐up capital
5000 -‐ 5000
(3000) +3000 -‐
2000 3000 5000

3. The Bank sells the car to the customer
! Car costs 3000 R.O.
! The Bank and customer agree upon a profit margin of 10% for 5 years
! Thus the customer would pay 4500 R.O. in whole making monthly payments of 900R.O.
per year inclusive of a profit margin payment of 300R.O. per year for 5 years

Calculation of Loan Repayment
" 3000 R.O. Loan for 5 years at 10% this (10/100)*3000=300 R.O. per year
" For 5 years total Profit= 300 R.O per year * 5 years = 1500 R.O. per year
" Thus the total value of loan would be (Loan amount + Profit Margin)= 3000 + 1500
= 4500R.O

" Amount to be paid per year= 4500/5 = 900 per year

R.O. R.O.
Dr Murabaha Financing account 4500 -‐
Cr Murabaha Asset account -‐ 3000
Cr Unearned Profit -‐ 1500

Assets Liabilities Owners
Equity
Cash Murabha Murabha Unearned Paid up
Asset Financing Profit Capital
2000 3000 -‐ -‐ 5000
-‐ (3000) +4500 (1500) -‐
2000 -‐ 4500 (1500) 5000

14

4.Loan Repayments from Year1 to Year 5

Year 1

R.O. R.O.
Cr Murabaha Financing Account -‐ 900

R.O. R.O.
Dr Unearned Profit 300 -‐
Cr Profit and Loss account -‐ 300

R.O.
Less:Direct Cost -‐

Cash Murabha Murabha Unearned Paid-‐up Retained
Asset Financing Profit Capital Earnings
2000 -‐ 4500 (1500) 5000 -‐
900 -‐ -‐900 +300 -‐ +300
2900 -‐ 3600 (1200) 5000 300

Year 2

R.O. R.O.

R.O. R.O.

R.O.

2900 -‐ 3600 (1200) 5000 300
900 -‐ -‐900 +300 -‐ +300
3800 -‐ 2700 (900) 5000 600

15
Year 3

R.O. R.O.

R.O. R.O.

R.O.

3800 -‐ 2700 (900) 5000 600
900 -‐ -‐900 +300 -‐ +300
4700 -‐ 1800 (600) 5000 900

Year 4

R.O. R.O.

R.O. R.O.

R.O.

4700 -‐ 1800 (600) 5000 900
900 -‐ -‐900 +300 -‐ +300
5600 -‐ 900 (300) 5000 1200

Year 5

R.O. R.O.
16

R.O. R.O.

R.O.

5600 -‐ 900 (300) 5000 1200
900 -‐ -‐900 +300 -‐ +300
6500 -‐ -‐ -‐ 5000 1500

4.4 Accounting for Ijarah

Ijarah are similar to house loans, here the bank purchases the apartment/house specified by the
customer. The customer is then given permission to use the property but the bank retains
ownership. The customer then makes rental payments to the bank until the cumulative sum is
equal to the loan amount plus profit margin after which the ownership of the property is
transferred to the customer.

1.A approaches the bank for a house loan worth 3600 R.O for which he specifies the property to be
bought

R.O. R.O.
Dr Ijarah Asset account 3600 -‐

Cash Ijarah Asset Paid-‐up capital
5000 -‐ 5000
(3600) +3600 -‐
1400 3600 5000

2. The bank Purchases the property and then allows A to use the house keeping ownership of the
property, A must make monthly rent payment of 110 R.O. for 3 years

Calculation of rent payment
" Loan amount 3600 R.O. consider bank’s profit margin as 10% p.a. thus A has to pay
17
(10/100)*3600= 360R.O as profit margin to bank per year
" Profit for 3 years = 360 * 3 = 1080 R.O.
" Thus A should pay mothly rent for 3 years = (3600/36)+(1080/36)
= 100+30
= 130 R.O. per month
" The useful life is taken as 5 years and the Net Book Value of the property disposed off as
Habiah (gift) .

Yearly depreciation= (3600-‐400)/5 = 640 R.O.
The net book value at the end of 3 years should be paid by A

Cash Ijarah Asset Paid-‐up capital
5000 -‐ 5000
(3600) +3600 -‐
1400 3600 5000

3.Customer makes monthly payments at the end of every month
Year 1
Month 1
R.O. R.O.
Cr Ijara Revenue Account -‐ 130

Month2
R.O. R.O.

Month3
R.O. R.O.

Month4
R.O. R.O.

Month5
R.O. R.O.
18

Month6
R.O. R.O.

Month7
R.O. R.O.

Month8
R.O. R.O.

Month9
R.O. R.O.

Month10
R.O. R.O.

Month11
R.O. R.O.

Month12/Year 1
R.O. R.O.

R.O. R.O.
Dr Ijara Revenue Account 1560 -‐
Cr Profit and Loss Account -‐ 1560

R.O. R.O.
Dr Profit and Loss Account 640 -‐
Cr Accumulated Depreciation -‐ 640
19

R.O.
Less:Depreciation 640

Cash Ijarah Accumulated Paid-‐up Retained
Depreciation capital Earnings
1400 3600 -‐ 5000 -‐
+1560 (640) -‐ +920
2960 3600 (640) 5000 920

Year 2
Month 1-‐Month 12
R.O. R.O.

R.O. R.O.

R.O. R.O.

R.O.

Cash Ijarah Accumulated Paid-‐up Retained
Depreciation capital Earnings
2960 3600 (640) 5000 920
+1560 -‐ (640) -‐ +920
4520 3600 (1280) 5000 1840

20
Year 3
R.O. R.O.

R.O. R.O.

R.O. R.O.
Cr Ijhara Asset (net Depriciation) -‐ 1680

R.O. R.O.

R.O.
Gain/Loss from sale of asset 0
Net Income 920

Cash Net book value of ijarah Paid-‐up Retained
asset capital Earnings
4520 2320 5000 1840
+1560 (1680) -‐ 920
+1680 (640)
7760 -‐ 5000 2760

21
CHAPTER 5
SUKUK:The Islamic Bond

During the Second Conference on Islamic Banking and Finance 2013 held in
Muscat,Oman His Excellency Hamood Sangour Al Zadali revealed that the Oman
would issue their first Islamic Bond called Sukuk in 2014. Bank Muscat, Oman's
largest lender, plans to establish a 500 million rial ($1.3 billion) Islamic bond
program, and expects to conduct the first sukuk issue by an Omani bank in
September 2014.

With the growth of Islamic financial institutions suitable investment opportunities
that were sharia complaint were developed one such investment opportunity that
stood the test of time due to its compliance with the principles of sharia was the
Islamic bond called sukuk. Banks use Islamic bonds to borrow money from those in
surplus and use these in Islamicaly valid investments such as Ijhara, Murabaha,
Mudharabha, Istisna, Salam. For this the bank provides the lenders with a certificate
and co-‐ownership of the investment and promise to repurchase the certificate at the
end of a certain period for a fixed price.
22

So what are Islamic Bonds and how do they differ from Conventional Bonds

Islamic Financial Services Board (IFSB-‐2) defines sukuk as:

“Certificates that represent the holder’s proportionate ownership in an
undivided part of the underlying asset, where the holder assumes all rights
and obligations to such asset.”

Sukuk are based on Islamicaly valid investments since conventional bonds are based
on Riba these are prohibited.

Sukuk must comply to the underlying

1.  Funds raised must be used for Shariah compliant (halal) activities.

2.  Fund raised may be used to finance needed tangible assets. Specificity of assets is
important, since Sukuk unlike conventional bonds cannot be used for general
financial needs of the issuer.

3.  Income received by sukuk holders (investors) must be derived from the cash
flows generated by the underlying.

4.  Sukuk holders have a right to the ownership of the underlying asset and its cash-‐
flows.

5.  Clear and transparent specification of rights and obligations of all parties to the
transaction, in particular the originator (customer) and sukuk holders.

6.  No fixity in returns.

From a sharia perspective the Sukuk certificate is not trade able hence there is
no secondary sukuk market. Though it does exist in Malaysia this is a niche
market.

23

5.1 TYPES OF SUKUK

As stated previously sukuks are based on Islamicaly valid investments such as
Ijhara, Murabaha, Mudharabha, Istisna, Salam. In all these contracts the investor
obtains co-‐ownership for which he may receive a proportion of the profits and must
also bear any loses. As there is profit and loss sharing and a lack of either riba
(interest) or gharar (risk/ambiguity) sukuk are Islamicaly valid securities/
investment opportunities.

24
5.1.1 Sukuk Salam

Special Purpose Vehicle (SPV) is a company set up for sukuk transactions
which operates for charity

1. The Investor provides Cash to the Special Purpose Vehicle (SPV)

2. The SPV then issues a Sukuk certificate to the Investor

3. The special purpose vehicle then provides this money to the obligator, as this
is a salaam contract it can used for agricultural loans only

4. The obligator would agree to either agree to provide the fruits or vegetables
he grows or proceeds for the sale of the fruits and vegetables

5. From these returns the SPV provides periodic distribution of income.

25
5.1.2 Mudaraba Sukuk

1. Investors (rab-‐al-‐mal) provide cash to the Special Purpose Vehicle (SPV)


3. The SPV then provides the cash proceeds to the obligator (Mudarib). In a
Mudaraba contract the Investors (rab-‐al-‐mal) are the cash providers and the
Obligators (Mudarib) use their expertise to invest these shares and earn
profits in an Islamicaly compliant manner. An agreed percentage of this
profit goes to Investors and any lose should also be borne by the investor. In
case of a loss the Mudarib only loses his time and effort put into the project.

26
5.1.3 Sukuk al Murabaha

1.Investors provide cash to the Special Purpose Vehicle (SPV)


3. The Obligator in this case approaches the SPV for the sukuk al murabha, he
specifies the asset that he requires and promises to purchase it on a deferred
payment basis.

4.The SPV then purchases the asset and sells it to the Obligator who then makes
installment payments inclusive of a profit to the SPV, which is then provided to the
Investors

27

5.1.4 Sukuk Al Ijhara

1.Investors provide cash to the Special Purpose Vehicle (SPV)


3. The Obligator in this case approaches the SPV for the sukuk al ijahara he specifies
the asset that he requires and the SPV promises to purchase and lease it to the
obligator.

4.The Obligator must make monthly leases for the use for the use of the asset which
cumulatively add up to the asset value plus a profit margin for the SPV’s efforts.

Special Purpose Vehicle (SPV) acts as a wakala (agent) to the investors thus
the profits are accrued by the investors.
28
5.2 WORKING OF A SUKUK (ISLAMIC BOND)

To understand the working of a sukuk let us consider two hypothetical companies
ABC & XYZ. ABC raises money through a conventional bond issue while XYZ through
an Islamic Bond issue (sukuk Ijhara type).

Let us consider ABC issues a 5 year conventional bond Face Value of RO 20,
Coupon rate of 10% and redeemed at a premium of RO 30.

Date Transaction R.O
Jan 1 2011 ABC issues corporate bond RO 1000 face -‐20
value and coupon rate of 10%
Bond secured on ABC’s Office Buliding
Dec 31 2011 ABC pays interest 2
Dec 31 2013 ABC pays interst 2
ABC redeems the bond 30

Bond Liability Table and Internal Rate of Return
f
Time Period Monthly IRR
Payments
0 -‐20 17.11%
1 2
2 2
3 2
4 2
5 32

Period Bond Interest on bond Cash Bond Liability
laibility liability paid after payment
before
payment
1 20 3.42 2 21.42
2 21.42 3.67 2 23.09
3 23.09 3.95 2 25.04
4 25.04 4.28 2 27.32
5 27.32 4.68 2 30.00

29

Assumptions
• Revenue of 500 RO per anum
• ABC distributes all profits to its shareholders
• As of 1 January 2011 ABC owns building costing 100 RO, other operating
assets of 250 RO and 50 RO cash before the bond issue. These assets are
financed by 400 RO of shareholders equity.
• All values in Rial Omani (RO)
• Accounting as per IFRS Standards
Income statement over 5 years

Year1 Year2 Year3 Year4 Year 5
Revenue 500 500 500 500 500
Less:Interest (3.42) (3.67) (3.95) (4.28) (4.68)
Expense
Net Profit 496.58 496.33 496.05 495.72 495.32
Less:Distribution (496.58) (496.33) (496.05) (495.72) (495.32)
to share holders
Retained Profit -‐ -‐ -‐ -‐ -‐

Cash flow Statement

Cash flow from operating activities

Revenue 500 500 500 500 500
Less:Interest (3.42) (3.67) (3.95) (4.28) (4.68)
Expense
Noncash 1.42 1.67 1.95 2.28 2.68
interest expesne
Net Cash 498 498 498 498 498
Generated

Cash Flow from financing activities
30

Year 1 Year 2 Year 3 Year4 Year5
Proceeds 20
from issue
of bond
Dividend (496.58) (496.33) (496.05) (495.72) (495.32)
paid
Redemption (30)
of bond
Netcash (476.58) (496.33) (49.05) (495.72) (525.32)
from
financing
activities

Year1 Year2 Year3 Year4 Year5
Net Increase 21.42 1.67 1.95 2.28 -‐27.32
in Cash
Intial cash 50 71.42 73.09 75.04 77.32
balance
Cash at the 71.42 73.09 75.04 77.32 50
end of the
year
Balance Sheet
Assets
Building 100 100 100 100 100
Other Assets 250 250 250 250 250
Cash 71.42 73.09 75.04 77.32 50
Total 421.42 423.09 425.04 427.32 400
Liabilities and Owners Equity
Shareholders 400 400 400 400 400
Equity
Bond 21.42 23.09 25.04 27.32 -‐
Liability
Total 421.42 423.09 425.04 427.32 400

Let us consider XYZ issues a 5 year Islamic bond to obtain financing of RO 20,
yearly payments of RO 2 and promises to buy back the bond after 5 years at a
price fixed at RO 30

31
There are three parties in a Sukkuk (islamic bond) in this case

1. Investors
2. Special Purpose Vehicles
3. Investors

Special Purpose Vehicle (SPV) is a company set up for sukuk transactions
which operates for charity

SPV have some costs of their own here it is assumed to be 100 Baisa and a
profit of 100 Baisa which it distributes to charity

Note: 1 R0 = 1000 Baisa

32

The various transactions are

Date Transaction RO
1 January 2011 XYZ sells its office building to SPV 20
XYZ agrees to repurchase the bulding after
Five years for 30 RO
SPV leases office Building for RO 2 p.a.
SPV issues sukuk to investors who 20
subscribe fot it by paying the issue price in
this case 20 R.O.
SPV charges 0.2 baisa for its cost and
profit
31 December 2011 XYZ pays rent to SPV 2
SPV Charge to Investror 0.2
SPV pays cash to the investor 1.8
XYZ repuraches bulding at the price fixed 30

Assumptions
• Revenue of 500 RO per anum
• XYZ distributes all profits to its shareholders
• As of 1 January 2011 XYZ owns building costing 100 RO, other operating
assets of 250 RO and 50 RO cash before the bond issue. These assets are
financed by 400 RO of shareholders equity.
• All values in Rial Omani (RO)
Accounting as per IFRS Standards for an Islamic bond of XYZ company
33

Sukuk Profit rate

Time Period Monthly Profit Rate
Payments
0 -‐20 17.11%
1 2
2 2
3 2
4 2
5 32

Sukuk Payment Table for IFRS accounting

Period Sukuk Payment due Cash Sukuk
laibility paid Liability after
before payment
payment
1 20 3.42 2 21.42
2 21.42 3.67 2 23.09
3 23.09 3.95 2 25.04
4 25.04 4.28 2 27.32
5 27.32 4.68 2 30.00


Revenue 500 500 500 500 500
Less:Sukuk (3.42) (3.67) (3.95) (4.28) (4.68)
payment
Expense
Net Profit 496.58 496.33 496.05 495.72 495.32
to share holders
Retained Profit -‐ -‐ -‐ -‐ -‐
34
Cash flow Statement

Revenue 500 500 500 500 500
Less:Sukuk (3.42) (3.67) (3.95) (4.28) (4.68)
payment
Expense
Noncash 1.42 1.67 1.95 2.28 2.68
payment
expense
Net Cash 498 498 498 498 498
Generated

Cash Flow from financing activities
Year 1 Year 2 Year 3 Year4 Year5
Proceeds 20
from issue
of sukuk
Dividend (496.58) (496.33) (496.05) (495.72) (495.32)
paid
Redemption (30)
of sukuk
Netcash (476.58) (496.33) (49.05) (495.72) (525.32)
from
financing
activities

Net Increase in 21.42 1.67 1.95 2.28 -‐27.32
Cash
Initial cash 50 71.42 73.09 75.04 77.32
balance
Cash at the end 71.42 73.09 75.04 77.32 50
of the year

35
Balance Sheet

Assets
Building 100 100 100 100 100
Other Assets 250 250 250 250 250
Cash 71.42 73.09 75.04 77.32 50
Total 421.42 423.09 425.04 427.32 400
Shareholders 400 400 400 400 400
Equity
Sukuk 21.42 23.09 25.04 27.32 -‐
Liability
Total 421.42 423.09 425.04 427.32 400

Accounting as per AAIOFI Standards for an Islamic bond of XYZ company

Sukuk Profit rate

Time Period Monthly Profit Rate
Payments
0 -‐20 17.11%
1 2
2 2
3 2
4 2
5 32

Sukuk Payment table

Period Sukuk Payment due Cash Sukuk
laibility paid Liability after
before payment
payment
1 20 3.42 2 21.42
2 21.42 3.67 2 23.09
3 23.09 3.95 2 25.04
4 25.04 4.28 2 27.32
5 27.32 4.68 2 30.00

36

Revenue 500 500 500 500 500
Less:Sukuk 2 2 2 2 2
payment
Expense
Net Profit 498 498 498 498 498
to share holders
Retained Profit 1.42 1.67 1.95 2.28 2.68

Cash flow Statement

Revenue 500 500 500 500 500
Less:Sukuk (2) (2) (2) (2) (2)
payment
Expense
Netcash 498 498 498 498 498
generated
from operating
activities
Cash flow from Investing activities

In Islamic accounting form is given importance over substance hence the
selling of building and then eventual repurchase is taken as an investing
activity and not a financing activity as depicted in the IFRS method.

Year 1 Year2 Year3 Year4 Year 5
Sale of 100 -‐ -‐ -‐
bulding
Purchase -‐ -‐ -‐ -‐ (110)
of
Buliding
Net cash 100 -‐ -‐ -‐ (110)
from
Investing
activities
37
Cash flow from Financing activities
Year 1 Year2 Year3 Year4 Year 5

Distribution (496.58) (496.33) (496.05) (495.72) (495.32)
to Share
holders
Net Cash (496.58) (496.33) (496.05) (495.72) (495.32)
from
Financing
activities

Year 1 Year2 Year3 Year4 Year5
Net 101.42 1.67 1.95 2.28 -‐107.32
Increase
In cash
Cash at 50 151.42 153.09 155.04 157.32
the
beginning
of the year
Cash at the 151.42 153.09 155.04 157.32 50
end of the
year

Balance Sheet

Assets
Building -‐ -‐ -‐ -‐ 110
Other Assets 250 250 250 250 250
Cash 151.42 153.09 155.04 157.32 50

Total 401.42 403.09 405.04 407.32 410
Shareholders 400 401.42 403.09 405.04 407.32
Equity
Retained 1.42 1.67 1.95 2.28 2.68

profit
Total 401.42 403.09 405.04 407.32 410

38
As Islamic finance does not foll0w substance over form here too “the building
is sold and cash is received” is the accounting transaction not “increasing cash
and increasing liability where the building is security”

39
APPENDIX I
HISTORY OF BANK NIZWA
The formation of Bank Nizwa came about with the Central Bank of Oman granting
its initial approval to the licensing of the Bank to Sheikh Saud bin Ali Al Khalili.
Sheikh Saud and a further 92 other Omani individuals, companies and pension funds
constitute the founder shareholders of the Bank. Bank Nizwa is Oman's first
dedicated Islamic bank, with fully Shari'a compliant products and services.

The Bank offers an entire portfolio of commercial banking services, in accordance
with the license issued by the Central Bank of Oman (CBO) and the Banking Law
promulgated by the Royal Decree No. 114/2000.

The Founders appointed a Founding Committee to represent them and to help
manage the establishment of the Bank as a licensed Shari'a compliant commercial
bank. The Founding Committee consisted of five individuals including the Chairman
of the Founding Committee, Ahmed bin Saif Al Rawahi.

Since launching its operations in January 2013, the bank now provides a full range
of banking solutions to individuals, small and medium size enterprises, corporations
and government institutions. IT aims to be the bank of choice for the people of
Oman.

Bank Nizwa is equipped with state-‐of-‐the-‐art banking systems and software which
are driven to offer customers the best Islamic Banking experience.

Currently with three branches in Muscat, Nizwa and Sohar, the bank will expand its
branch network extensively over the next five years as part of its strategic plan to
grow the bank.

40
APPENDIX II
COMPANY PROFILE

COMPANY INFORMATION
Company Name Bank Nizwa
Established on Jan 29, 2012
Head Office Shatti al Qurm
Fiscal Year Jan1
Period 12 Months
No. of Branches 3
Principal Activities Retail Islamic Banking
Auditors KPMG LLP- Oman
CONTACT
Address Beach One, Shatti Al Qurum
P.O Box 14321
Telephone +968-24655555
Fax 45684895
Website http://www.banknizwa.om
Email Hadi.daou@banknizwa.om
MANAGEMENT MEMBERS
Amjad Ak Busaidi Chairman
41
Amer Al Suleimani Deputy Chairman
Jamil El Jaroudi Managing Director
Musbah Al Mutairi Board Member
Andel Al Kandy Board Member
Abdul Aziz Al Kahlili Board Member
Youssef Al Harthi Board Member
Saif Al Mawali Board Member
Muadh Al Ghazali Board Member
Khalid al Kayed General Manager Finance
Ahmed Abdullah General Manager Risk
Dr. Ashraf Nabhan Al Nabhani General Manager Corporate Support
Nasser Said Al Lamki General Manager Internal Audit
Hadi Daou Head of legal and compliance
Samira Redha Fadhlani Deputy General Manager HR
Asad Batla Head of consumer Banking
Dr. Anwar Soubra Head of Sharia
Mehdi Zaidi Head of strtategy
Dr. Yousuf Janahi Deputy Head IT
Helmi Izham Harun Rashid Deputy General Manager Mrkt&Invst
Shantanu Gosh Deputy General Manager Operations
Sohail Abbasi Deputy General Manager corporate &

commercial
42
EQUITY PROFILE
Paid up Capital (R.O) 150,000,000
Share Par Value (R.O) 0.100
Issued Shares 1,500,000,000
FINANCIALS ( for Quarter 2 of 2013) All prices in Rial Omani (R.O)
Share Price 0.095
Total Revenue 707,805
PBT -9,752,479
PAT -9,752,479
ROI -0.85%
Leverage 0.128
Loss per Share 0.0073
Stock Market Muscat Securities Market
Market Cap Size Micro Cap
STRATEGY
Values Driven
Principled
Innovative
Helpful
Vision Strive to be the bank of choice for the

people of Oman.
43
Comparative Advantage Oman's first dedicated Islamic bank,
with fully Shari'a compliant products
and services
SECTOR/MARKET
Sector Islamic Banking
Strength 1.First Islamic Bank in Oman and hence lack

of legacy issues that my be faced by existing
banks in setting up Islamic departments
2. Diverse workforce, brought together from

various backgrounds builds a strong
infrastructure for the bank.
Weakness 1.As the first Shari’a compliant bank in

Oman there will be a lack of any reliable
historical data that can be used to project
market behavior.
2.Poeples understanding of Islamic banking

my be low for which significant investment
in the promotion and education of islamic
baking must be made.
Opportunity 1.To address the unmet demand for non-‐

conventional banking in Oman
2.To meet increasing demand for Islamic

products.
Threat 1.Existing Commercial Banks with strong

customer loyalty creating their own Islamic
windows.
44
APPENDIX III
ORGANIZATIONAL STRUCTURE
45
APPENDIX IV
Development of Banking sector
Oman experienced a change in 1970 with His Majesty Sultan Qaboos bin Said Al Said taking
power this brought about a change in the economic development of the country with an
increase in investment in infrastructure, development of human resources, increase in
private sector participation and diversification of the economy.
Sultanate of Oman relies heavily on oil. Oil was first discovered in 1964 but exports started
in 1967. In 1970 oil contributed to 100% of the revenue of Oman. This reliance on oil was a
very dangerous trend and required encouragement and promotion of non-‐oil sectors to
promote sustainable development and achieve economic prosperity.
Development in Oman went through three phases: 1971-‐1975 preparation phase, 1976-‐
1980 formal phase, 1981-‐1985 momentum phase. In the preparation phase projects were
carried out in a ad hoc basis in which there was no definite plan of investment, project
proposals were put forward to the administration for approval. But Oman’s revenue still
mainly stemmed from its oil revenue due to which it was facing the paradox of plenty
(resource curse) which is a paradoxical situation in which countries with an abundance of
non-‐renewable resources experience stagnant growth or even economic contraction. As a
result, the nation becomes overly dependent on the price of commodities, and overall gross
domestic product becomes extremely volatile. Additionally, government corruption often
results when proper resource rights and an income distribution framework is not
established in the society, resulting in unfair regulation of the industry. The resource curse
is most often witnessed in emerging markets following a major natural resource discovery.
This was the situation faced by Oman.
The country was facing severe fiscal deficits and applied for a Medium term loan at Morgan
Grenfell. This led Morgan Grenfell, Hambros, British bank of Middle East to launch a study
on the Sultanate’s financial status. The World Bank also offered a technical assistance to
establish a planning team, which recommended a Development council to be established
and the formulation of development law. These technical committee reports and the
financial studies by Morgan Grenfell, Hambros, British bank of middle east enabled a shift in
the economic situation with the formulation of the development law.
The first five year plan was established in September 1976 which promoted
• Private sector participation

• Development of human resources
• Diversification of the economy
• Equitable geographic distribution of government programs
Infrastructure was developed, with particular emphasis to roads, housing, electricity, water
services, schools and hospitals. By 1995 Oman had completed its major infrastructural
investments. But was evident from above Oman barely produced enough oil to cover its
46
development cost. Finance has been a major limit in development. Businesses found it
difficult to finance its projects due to the lack of financial services. To promote this the
government promoted various financial institutions and investment opportunities with
primary importance to banking.
The Banking sector in Oman was initially very limited, the British Bank of middle east
(BBME) was established in 1948 with the condition that no other bank could be opened in
the sultanate for 20 years and it also served as the central bank. Thus BBME was the only
bank in the Sultanate till 1972 when a regulation was passed formulating the Central Bank
of Oman and by 1996 -‐24 new banks were opened in the Sultanate.
Bank Nationality Year Charted
British Bank of Middle East UK 1948
Standard Charted Bank UK 1968
Oman Saving and Finance Bank Oman 1969
Habib Bank Ltd Pakistan 1972
Habib Bank AG Switzerland 1973
National Bank of Oman Oman 1973
Oman Arab Bank Oman 1973
Bank Melli Iran 1974
Bank of Oman, Baharain, Kuwait Oman 1974
Citibank US 1975
Bank Dhofar al-‐Umani al-‐Faransi Oman 1975
Oman International Bank Oman 1975
National Bank of Abudhabi UAE 1976
Bank Saderat Iran 1976
Bank of Baroda India 1976
Bank Muscat Oman 1976
Commercial Bank of Oman Oman 1977
Banque du liban et d’outre Mer Lebanon 1981
47

According to statistics released by the Central Bank of Oman in the third quarter of 2013,
the number of banks operating in the Sultanate were 19 banks distributed as follows: 7 local
banks, 9 foreign banks, the two specialized banks, and two Islamic banks, Bank Nizwa and
Al Izz bank, in addition to 510 bank branches. The amount of total loans in Omani Rial and
foreign currency stood at RO 15,169,037 while total deposits amounted to RO 15,071,942.
In 2011 the local banking industry had witnessed many developments, including the
promulgation of a decree which provided new horizons for Islamic banking inside Oman by
giving licences for specialised Islamic banks and Islamic windows at licensed traditional
commercial banks. This decree was formed with an expectation that Islamic banks would
provide the suitable financial support for small and medium enterprises and entrepreneurs
and help them with innovative Shariah-‐compatible solutions that meet their needs.
The growing awareness of the principles of Sharia has resulted in the formation of Sharia
based Islamic Stock market indices, the Muscat Security Market (MSM) too launched its new
sharia compliant index
Introduction of Islamic banking would inject more liquidity into local capital markets as
individuals seeking sharia-‐compliant investment options would no longer have to look
abroad. The new MSM Sharia Index would also provide one more reason for these investors
to place their funds locally. But this index was weighted more towards the industrial firms
and the service sector which is in converse to the primary index heavily weighted to the
banking sector, the introduction of the new Islamic Bank, such as Bank Nizwa also helps to
counter this problem.
Two new dedicated Islamic banks, Bank Nizwa and Alizz Islamic Bank, and Islamic banking
windows in seven conventional lenders have already started or are poised to start
operations. High public demand for Sharia-‐compliant products has resulted in an
enthusiastic market response to the introduction of Islamic banking and a rush among
customers opening new accounts. Market analysts expected Islamic banking institutions to
capture a 5-‐7.5 per cent market share of Oman’s OMR16 billion total banking deposits by
the end of 2013 and an asset base of OMR3-‐4 billion in the next three to four years. The
challenge for institutions awash with depositors’ funds and high levels of capitalization will
be to find a home for excess liquidity in Sharia-‐compliant vehicles.
48
APPENDIX V
REFERENCES
CENTRAL BANK OF OMAN, 2014. Future Vision of the Sultante: Development Sectors and
Projects. Al-‐Marakazi, (Vol 28), pp. 6-‐16.
THOMAS BAUNSGAARD, MAURICIO VILLAFUERTE, MARCOS POPLAWSKI-‐ RIBEIRO, AND

CHRISTINE RICHMOND, 2012. Fiscal Frameworks for Resourse Rich Developing Countries.
[online]. Available from: https://www.imf.org/external/pubs /ft/sdn/2012/sdn1204.pdf
[Accessed 27 May 2014]
BANK NIZWA. The Evolution. [online]. Available from: http://www.banknizwa.om/

evolution.html [Accessed 25 May 2014]
THE ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL

INSTITUTIONS (AAOIFI), About AAOIFI. [online] Bahrain: The Accounting And Auditing
Organization For Islamic Financial Institutions. Available from: http://www.aaoIfI .com/en/
about-‐aaoifi/about-‐aaoifi.html
IFRS Foundation, About the IFRS Foundation and the IASB. [online] Available from:
http://www.ifrs.org/The-‐organisation/Pages/IFRS-‐Foundation-‐and-‐the-‐IASB.aspx
SHAHUL HAMEED MOHAMED IBRAHIM, 2007. IFRS vs AAOIFI: The Clash of

Standards?.[online] Munich:Munich Personal RePEc Archive Available from: http://mpra.ub
.uni-‐muechen.de/12539/1/MPRA_paper_12539.pdf
THE ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL

INSTITUTIONS (AAOIFI), 2010. Accounting, Auditing & Governance Standards 2010,English
Version. Bahrain: The Accounting And Auditing Organization For Islamic Financial
Institutions.
CENTRAL BANK OF OMAN, 2014. Oman Second Comference on Islamic Banking and
Finance raises a number of Important issues. Al-‐Marakazi, (Vol 38), pp. 4-‐5.
BUSINESS REPORTER, 2014. Bank Muscat's sukuk issue seen by September. Times of Oman.
2 March. P.B1

MOHD NAZRI BIN CHIK,Sukuk:Sharia Guidelines for Islamic Bonds.[online]. Available from:
http://www.bankislam.com.my/en/Documents/cinfo/Sukuk_ShariahGuidelin es.pdf
[Accessed 10 March 2014].
MOHAMMED AMIN, Accounting for sukuk. [online]. Available from: http://www.mo

hammedammin.com/islamic_finance/sukuk-‐accounting-‐under-‐IFRS-‐andAAOIFI.html
49

Structure, Functioning and Products of An Islamic Bank: (Enrollment No. 13BSPHH010275)

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Structure, Functioning and Products of An Islamic Bank: (Enrollment No. 13BSPHH010275)

Hochgeladen von

Copyright:

Verfügbare Formate

A REPORT

STRUCTURE, FUNCTIONING AND PRODUCTS OF AN

(Enrollment No. 13BSPHH010275)

BANK NIZWA SAOG: OMAN

STRUCTURE, FUNCTIONING AND PRODUCTS OF AN

ICFAI BUSINESS SCHOOL (IBS)

A report submitted in partial fulfillment of the requirements of

Professor Jojo George Mathew-Project Guide

Ms. Zamzam Al Hadi-Company Guide

Date of Submission : 11th April 2014

3. Islamic Bank Accounts 8

4. Accounting in Islamic Finance Institutions 9

5.Sukuk the Islamic Bond 21

APPENDIX I History of Bank Nizwa 40

APPENDIX II Company Profile 41

APPNEDIX III Organizational Structure 45

APPENDIX IV Development of Banking Structure 46

“La tazlima wa la tazlamun”

2.2 PRINCIPLES OF SHARIA

Gharar literally translates as Risk which in terms of financial contracts translates as

2.3.1 Personal Financing

• Murabaha (Auto Loan)

2.3.1.1 Murabaha (Automobile loans)

The process can be depicted as follows

Customer approaches the Bank for an

The customer speci]ies the exact brand and

The bank purchases the vehicle as speci]ied by

The customer now must make equal monthly

2.3.1.2 Ijara (Home loans)

The process is as follows

Customer approaches the Bank for a Home loan

The customer speci]ies Property or Land to be

Bank acquires the Property or Land , it now allows

The customer must now pay monthly rent to the

2.3.1.3 Salam&Istisna (Islamic Forwards)

In general the sale of nonexistent objects is forbidden due to Gharar however to

2.4 Islamic Investments

2.4.2 Fixed Income Securities

Islamic banks have accounts receivable corresponding to lease or installment

2.4.2.1 Ijarah Fund

2.4.2.2 Murabha Fund

It is becoming popular nowadays to have Murabaha funds along similar lines to a

2.6 Islamic Bond

Savings Al Wadaiah No interest rate

Current Al Wadaiah No interest rate

Term Deposit Restricted Mudharabah Profit and Loss sharing

• Revenue of 500 RO per anum

• ABC distributes all profits to its shareholders

• All values in Rial Omani (RO)

• Accounting as per IFRS Standards

Income statement over 5 years

• Revenue of 500 RO per anum

• XYZ distributes all profits to its shareholders

• All values in Rial Omani (RO)

Sukuk Profit rate

Cash flow from operating activities

Year1 Year2 Year3 Year4 Year 5

Cash flow from operating activities

Year1 Year2 Year3 Year4 Year 5

Cash flow from Investing activities

Year 1 Year2 Year3 Year4 Year 5

Cash 151.42 153.09 155.04 157.32 50

Retained 1.42 1.67 1.95 2.28 2.68

Address Beach One, Shatti Al Qurum

Opportunity 1.To address the unmet demand for non-‐

Bank Dhofar al-‐Umani al-‐Faransi Oman 1975

THOMAS BAUNSGAARD, MAURICIO VILLAFUERTE, MARCOS POPLAWSKI-‐ RIBEIRO, AND