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1950 – Islamic Banking in Theory
1970 – Islamic Banking in Practice
180 – Islamic Financial Institutions
$300 Billion
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Interest is Forbidden :

Exodus
 Nehemiah

Leviticus
 Ezakhiel

Deutronomy
 7 Verses of the Quraan

Psalms

Proverb
 More than 40 sayings of
the Prophet Muhammad
(Peace Be Upon Him)
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1.
Procedures
4. Speculation
2.
Interest
5. Unlawful Products
3.
Uncertainty
6. Unlawful Services
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• Deposits
• Financing
• Services
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(Mudarib)
Investor of
Capital
CLIENT
Payment of
Mudarabah
Capital
INVESTMENT / TRADING
ACTIVITIES
Earning of Profits
CLIENT
Periodic proportionate
Profits / Return of Capital
(Mudarib)
Distributor
ofBY MOULANA
PREPARED
ProfitsSHOAYB
Earned JOOSUB
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The structure of a Murabaha Contract
Transfer of title
to customer
Transfer of title
to bank
VENDOR
ISLAMIC
BANK
CUSTOMER
Payment of
Payment of marked
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purchase price
up price (P + X)
SHOAYB JOOSUB
(P)
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• The Bank Buys the asset from the Vendor
• The customer then buys the asset from the bank
at a mark-up price (P+X) , which is payable on a
deferred payment basis.
• The period covering the deferred payment is
effectively the period of financing.
• The title to the asset is transferred to the customer
at the time of purchase but usually the customer
provides the same or other assets as collateral to
the bank for the period of financing.
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The structure of an Ijarah Wa Iqtina Contract
Assets leased
to customer –
title does (not)
pass at end of
lease term
Transfer of
title
to bank
VENDOR
ISLAMIC
BANK
Payment of
Ijarah
purchase
Installment
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price
SHOAYB JOOSUB
CUSTOMER
(Lessee)
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•
•
•
•
The bank buys the asset from the vendor
The bank then leases the asset to the customer
Periodic rentals are collected by the bank
The title of the asset remains with the bank under
as operating ijaarah
• Title passes to the customer under a Lease ending
with transfer of ownership, either gradually over
the period of the contract, at the end.
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The structure of a Musharaka Contract
ISLAMIC
BANK
PARTNER
(Customer)
60% Ownership
40% Ownership
MUSHARAKA
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• Both the Bank and the customer contributes
towards the capital of the enterprise
• Under a “diminishing” musharakah, the customer
buys out the bank`s share over a period of time.
• The customer and the bank share in the profits
according to the agreed proportions, which may
be different from the proportions of capital
contributed. Any losses of the enterprise will be
borne by the customer and the bank according to
their capital contributions.
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CLIENT
(Mudarib)
Investor of
Capital
ISLAMIC BANK
Payment of
Mudarabah
Capital
INVESTMENT / TRADING
ACTIVITIES
Earning of Profits
ISLAMIC BANK
Periodic proportionate
Profits / Return of Capital
CLIENT
(Mudarib)
Distributor
PREPAREDof
BY MOULANA
SHOAYB
Profits
Earned JOOSUB
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• The bank provides to the customer (mudarib) all the capital to fund a
specified enterprise
• The customer contributes only entrepreneurship.
• The customer is responsible for the day to day management of the
enterprise and is entitled to deduct its management fee(mudarib fee)
from the enterprise`s profits.
• The mudarib fee could be a fixed fee (to cover management
expenses) and a percentage of the profits or a combination of the two.
A classical mudarib fee is based on a percentage of the profits only.
• The balance of the profit of the enterprise is payable to the bank
• If the enterprise makes a loss, the bank (as the fund provider or
Rabbul Mal) has to bear all the losses unless the loss has resulted
from negligence on the part of the mudarib.
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The structure of a Salam Contract
Delivery of
asset
At future date
Delivery of
asset at future
date
COMMODITY
OWNER
ISLAMIC
BANK
CUSTOMER
Advance payment
Advance payment
of purchase price
of purchase price
PREPARED
BY
MOULANA
(P)
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• A Salam (sometimes referred to as Salaf) is a
short term agreement in which a financial
institution makes full pre-payments for future
delivery of a specified quantity of goods on a
specified date.
• A salam is primarily a deferred delivery sale
contract usually used for commodity finance. It is
similar to a forward contract where delivery is in
the future in exchange for spot payment. To
mitigate the asset risk a financier can enter into
parallel Salam
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The structure of a Istisna` Contract
Delivery of asset
At future date
Delivery of asset
at future date
CUSTOMER
ISLAMIC
BANK
MANUFACTURER
Payment of
Progress payment
purchase price
on
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BY MOULANA
of purchase price
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delivery
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• Istisna` is primarily a deffered delivery sale
contract similar to salam. It is similar to
conventional work in progress financing
for a capital project. In practice it is usually
used for construction and trade finance
such as pre shipment export finance.
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• Four fundamental Principles
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The structure of a Sukuk Contract
ISSUE OF
SUKUKS
TRANSFER OF
ASSETS
ISLAMIC
BANK
CUSTOMER
CASH
INVESTORS
CASH
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• Sukuks represent proportionate beneficial
ownership. For a defined period the risk
and returns associated with the cash flows
generated from the assets belong to the
sukuk holder. The characteristics of a
sukuk are similar to a conventional bond
with the difference being that they are asset
backed.
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