What is Islamic finance?

Islamic finance is a financial system that operates

according to Islamic law (which is called sharia) ,
main source of Sharia are: Holy Quran, Hadith,
Sunna, Ijma, Qiyas and Ijtihad.
-The holy Quran is the Muslims holy book from Allah.
-The Hadith is the statements said by prophet
Mohammed.
- Sunna is the prophet practices and behaviors during his
life.
-Finally Ijma, Qiyas and Ijtihad is different levels and
practices of Sharia decisions & opinions from Islamic
religious scholars and researchers.

Business framework
Islamic Banking (IB)

Conventional Banking (CB)

-Functions and operating

modes are based on Sharia,
and Islamic banks must
ensure that all business
activities are in compliance
with Sharia requirements

-Functions and operating modes

are
based on secular principles, not
religious
laws or guidelines.

Also ,Islamic Banking will not involve in transactions that

involve interest, gambling or significant uncertainty. They
will not finance wineries, weapons or entertainment
industries as these elements bring harm (mafsadah) to
society. They will, however, finance trade, manufacturing,
agriculture and services that bring benefits (maslahah) to
society.

INTEREST (RIBAA)
Since interest (ribaa) is the main different between
Islamic and conventional bank,I see the importance of
discussing it for the better understanding of it.Riba
literally means increase, addition, expansion or growth. It
is however, notevery increase or growth which has been
prohibited by Islam. In Shari'ah, Riba technically refers to
the premium that must be paid on a financial transaction
without any consideration

Types of Islamic Financial Products and

Services
Islamic finance covers a range of financial services and markets similar to
conventional finance, such as banking, capital markets, insurance, asset
management and advisory services. Key Islamic financial products and
services are as follows:

Islamic financial instruments

Islamic Financial Instruments are kinds of financial
instruments which are based & designed in
compliance with Shariah Rules & Regulations.

murabaha (Cost plus financing/ buy sell

arrangement ):
One of the most widely used instruments
- A method of asset acquisition finance.
- A contract between the bank and its client for the sale of goods
at a price that includes an agreed profit margin . either a
percentage of the purchase price or a lump sum .
- The bank will purchase the goods as requested by its client and
will sell them to the client with a markup .
-the profit mark-up is fixed before the deal closes and cannot be
increased ,even if the client does not take the goods within the
time stipulated in the contract .

Ijara(Leasing)
- A contract where the bank buys and leases out equipment required by the client
for a rental fee.
- Ownership of the equipment remains with the lessor bank , which will seek to
recover the capital cost of the equipment plus a profit margin out of the rentals
payable .

Musharaka (Equity participation contract)

- A partnership between two parties who both provide capital towards the financing
of new or established projects .
- Both parties share the profits on a pre-agreed ratio, with losses being shared on
the basis of equity participation .

Mudarabah (profit sharing)

-A profit sharing contract .with one party
providing 100 percent of the capital and the
other party (the mudarib) providing its
expertise to invest the capital . manage the
investment project .
- Profit generated distributed according to a
predetermined ratio . but cannot be
guaranteed .
- Losses accrued are borne by the provider of
capital . who has no control over the
management of the project .
- Often used for investment funds . with
investors providing money to the Islamic bank
,which it invests as mudarib . taking a

management fee .

Under this arrangement , a finance is given for a fixed period on

a goodwill basis and the borrower is only required to repay the
amount borrowed . However, the borrower may , if he so
wishes, pay an extra amount (without promising it ) as a way to
thank the lender.

Salam ( Future delivery )

Salam is essentially a transaction where two parties agree to
carry out a sale/purchase of an underlying asset at a
predetermined future data but at a price determined and fuuly
paid for today .
Example
Salam can use
To meet needs of small farmers who need money to grow their
crops and to feed their family up to the time of harvest .
To meet the need of working capital .

Istisna can be used for providing the facility of

financing the manufacture or construction of houses,
plants, projects, building of bridges , and roads.

Al kafalah (Guarantee):
Al kafalah is contact made between the bank and another party
whereby the bank agrees to discharge the liability of a third
party in the case of default by the third party .
- Islamic banks use Al Kafalah to issue bank and shipping
guarantees .

A Wakala
A Wakala is an arrangement whereby a principal investor appoints an agent
(wakeel) to carry out a specific task on its behalf.
The principal (the investor) typically appoints the agent to invest funds
provided by the principal into investments or assets and the agent lends it
expertise and manages those investments on behalf of the principal for a
particular duration, in order to generate an agreed profit return.

A contract of agency in which one party appoints another party to perform a certain
task on its behalf, usually for payment a fee or commission.

In the wakala or agency model, the bank acts as an agent

or wakeel for and on behalf of the investor-depositors and
investment deposits on a fixed fee basis.

Definition of sukuk (Islamic bonds)

Islamic bonds, structured in such a way as to generate returns to investors
without infringing Islamic law (that prohibits riba or interest).
Sukuk represents undivided shares in the ownership of tangible assets relating to
particular projects or special investment activity. A sukuk investor has a common
share in the ownership of the assets linked to the investment although this does
not represent a debt owed to the issuer of the bon

Sukuk commonly refers to the Islamic equivalent of bonds. However, as opposed to

conventional bonds, which merely confer ownership of a debt, Sukuk grants the investor a share
of an asset, along with the commensurate cash flows and risk. As such, Sukuk securities adhere
to Islamic laws sometimes referred to as Shariah principles, which prohibit the charging or
payment of interest.
Certificates that represent the holders proportionate ownership in an undivided
part of the underlying asset, where the holder assumes all rights and obligations to
such asset.

Global Sukuk Issuance Historic Trend for Top Sukuk

Structures (2008-YTD Q3 2014, in USD billion)

Global Aggregate Sukuk Issuance Historical Trend

(1996-Q3 2014, in USD billion)