1. Introduction to Islamic Banking & Finance
Abdulazeem Abozaid

2. Basis of IBF
Islamic Finance is based on principles that are derived from the Quran and Sunna of the Prophet peace be upon him.
The basic principle in Islamic Law is permissibility. Under this principle all commercial and financial transactions are permissible except those that contain prohibited elements.

3. How does Islamic Finance differ from conventional finance ?
Islamic Modes of Finance & Investment are committed to all Sharia Prohibited Practices
Prohibited Practices
Riba ( Interest )
Sale of Debt
Ghabn (Fraud)
Gharar (Uncertainty)
Dealing in unlawful properties

4. What is Riba? Literally: Increase.
Technically: stipulated increase over the loan which a debtor agrees to pay to his creditor in relation to time.
Rationale:
Money does not have an intrinsic value. It is a measuring tool, a store of value unit and a medium of exchange, not a commodity that could be bought or sold
Lending = renting money

5. Sale of Debt Sale of debt occurs in: Discounting commercial papers
Dealing in bonds
Sale of Sukuk, shares or fund units when they do not represent tangible assets, usufructs or services

6. Uncertainty (Gharar)
Gharar: Uncertainty/Ambiguity in a contract
Examples of Gharar:
Selling unknown goods
- The contents of a sealed box are sold; presumably, the box contains a collection of goods, without specifying the quantity of each.
- Buying an a commodity for unknown price; what’s in one’s wallet/pocket.
Gambling
The gambler is ignorant of the result of the gamble; the outcome depends on chance and not efforts.
Rationale: Uncertainty is likely to lead to dispute between contracting parties.

7. GHABN
Deception that leads the seller to underestimate or the buyer to overestimate the price of the good.
It can be divided into two kinds:
Slight or minor Ghabn (الغبن اليسير). It is tolerated in contracts.
Large, excessive, or major Ghabn (الغبن الفاحش). Not tolerated.
Examples:
Selling at higher than the market value by means of cheating
Bidding a price without intending purchase, just to increase the price payable by the actual purchaser (Najash).
Covering defects and selling as defect free.

8. Dealing in Unlawful Properties
Liquor
Intoxicants
Lawful properties but used for unlawful purposes

9. SOME allegations of similarities with conventional finance

10. DIFFERENT PRICING FOR CASH AND CREDIT SALES
Price in deferred sale is higher than spot sale.
The bank purchases goods on cash and sells them on credit. The forward price depends on the repayment period. The longer is the maturity, the higher the price.
Such price difference, being dependent upon repayment time, is it similar to the interest charged on conventional loans?

11. Why price should be higher with spot than deferred payment?
In fact, price difference is similar to the difference between the price of the same commodity under present and future delivery.
Price difference is due to the degree of urgency of benefiting from the direct use of real commodities.
Similarly, prices charged with deferred payment should justifiably be higher than with spot payment. The difference is not Riba.

12. Cont’d
The misconception stems from misunderstanding of the prohibition of Riba
Modern capitalist theory does not differentiate money and physical commodity
Both are seen as factors of production, money is a form of commodity

13. Cont’d Acquire goods and services. Store some wealth,
In Islam, money is differentiated from commodities
Money has no intrinsic utility. It cannot be utilized directly .
As a means of exchange, money can only be used to:
Acquire goods and services.
Store some wealth,
As a unit of account to measure the monetary value of things.

14. Cont’d
Commodities, on the other hand, have intrinsic utility and can be utilized directly.
Because money has no intrinsic utility, present money does not command a higher value than future money when money is exchanged for money.
Present money cannot therefore be sold for a higher quantity of future money, as both have no value of their own.
Conclusion: Sharia acknowledges time value of money in sale contract, not in loan contracts since money cannot be treated as commodity.

15. Classification of Islamic Banking Products:
Deposit (Wadi’a) products:
Current account; based on Loan
Saving account; based on Mudaraba
Time deposit; based on Mudaraba/wakala (agency in investment)

16. Financing Products Sale-based financing contracts: Murabaha
Forward Sale
Salam
Istisna
Ijara Financing
Equity-based financing contracts:
Mudaraba
Musharaka
Fee based Financing
Wakala

17. PRODUCTS OF ILL REPUTE IN ISLAMIC BANKING

18. Buy-Back Sale (Einah)
Einah refers to selling a commodity on a deferred basis then buying it bank on a spot basis at a lower price.
Obviously, it is meant for extending interest-based debt.
This legal trick cannot be condoned by Shariah.
Some applications:
Personal Financing
Overdraft Facility
IPDS: ‘Islamic’ Private Debt Securities

19. SELL FOR IMMEDIATE CASHIN
COLLUSION
WITH SUPPLIER
EINA SALE
EINA SALE
INDIVIDUAL
IMMEDIATELY
AFTER
PURCHASE GOODS, DEFERRED PAYMENT
WANTS CASH
SELL FOR IMMEDIATE CASH
SAME
SUPPLIER 19 19

20. IPDS: Creation of debt (dayn) via Einah
Sell Asset X for $100m
Investor (Financier)
Issuer
Cash payment $100m
Sell Asset X for $120m
Deferred payments $120m
Securities issued against the debt and made negotiable

21. Tawarruq
Tawarruq refers to purchasing a commodity from one party on credit then selling it immediately to another for cash.
Tawarruq shares the same objective of Eina as both are meant for obtaining cash.
Some applications:
Personal & Corporate Financing
Overdraft Facility

22. SELL METAL FOR IMMEDIATE CASH INSTITUTIONAL TAWARRUQ
BANK
SELL ON MURABAHA
BUY METAL
PROMISE TO BUY
AGENCY AGREEMENT
SELL METAL FOR IMMEDIATE CASH
INSTITUTIONAL TAWARRUQ
التورق المؤسسي
CUSTOMER
COLLUSION
WITH BANK
NEEDS CASH
LME

23. Sale of Debt (Bay’ al-Dayn)
Although sale of debt is prohibited in the Shariah, it has been unlawfully practiced in Islamic finance, like in:
‘Islamic’ factoring
‘Islamic’ accepted bills
‘Islamic’ Debt Securities
With these arrangements, the underlying consideration is the permissibility of the sale of debt, by the creditor, at a discount
Based it on the assumption that Debt arising from sale of commodities is different from debt arising from a money loan.

24. The Criterion of the Non-Shari’ah Compliant Transaction
When a financing mode is structured in such a way that secures a guaranteed profit to the financier without taking any risks. Or, when the financier acts in reality as a creditor who provides money without being involved in the investment process; i.e. when the substance is interest-bearing debt.
This will render the transaction impermissible regardless of its legal form, e.g. sale, lease… .
Some banks’ Sharia boards attempt to validate transactions based on their legal forms.

25. Islamic Finance Products

26. DEPOSIT PRODUCTS

27. checks debit cards ATM Money transfer PAYMENT SERVICES PROFIT SHARE
CUSTOMERS
WAKALA FEES
checks
QARD HASSAN
CASH AS
MUDARABA
OR WAKALA
CASH AS
debit cards
INVESTMENT
DEPOSITS
UNRESTRICTED
ATM
Money transfer
ISLAMIC
BANKS
DEMAND
DEPOSITS
RESTRICTED

28. SIMPLE FINANCING PRODUCTS

29. FINANCE A SHARE IN PROFITS ISLAMIC BANK A SHARE IN MANAGEMENT
EXTINGUISH gradually
EQUITY
FINANCE,
MUSHARAKA
DIMINISHING
FUND
USER

30. - + DO NOT’S DO’S ISLAMIC BANK MONITORING UNRESTRICTED MUDARABA
FUND
USER
TRANSPARENCY

31. DEFERRED PAYMENT LUMP-SUM OR INSTALLMENTS
Buyer
Promise to Buy
SPOT DELIVERY
Murabahah contract
SPOT PAYMENT
ISLAMIC BANK
Sale Contract
SPOT DELIVERY
MURABAHA
SUPPLIER

32. DEFERRED PAYMENT: LUMP-SUM OR INSTALLMENTS
SALE
DEFERRED PAYMENT: LUMP-SUM OR INSTALLMENTS
DEFERRED-PAYMENT
SALE CONTRACT
Buyer
SPOT DELIVERY
OWNS
COMMODITIES
ISLAMIC BANK

33. ISTISNA’ CUSTOMER MANUFACTURER PAYMENTS IN STAGES DELIVERY OF ASSET
REQUIRES AN ASSET WITH CERTAIN SPECIFICATIONS
PARALLEL ISTISNA
COMMISSION TO MANUFACTURE
ASSET DELIVERY
INSTALLMENTS
ISTISNA’
COMMISSION TO MANUFACTURE
ISTISNA’
REQUIRES AN ASSET WITH THE SAME SPECIFICATIONS
BANK

34. CUSTOMER BANK IJARAH FINANCING TITLE TRANSFER: FORWARD LEASE
Conditional promise to gift
or sell at token price
CUSTOMER
RENTAL PAYMENTS = USUFRUCT AND PART OF ASSET VALUE
ASSET PRICE
REAL ESTATE OWNER
DELIVERY, LEASE STARTS
PROMISE TO LEASE
USUFRUCT
IJARAH
FINANCING
DELIVERY
PURCHASE
BANK

35. Thank You
For Queries