Islamic Financial System

Course Outline

1. Financial System: Concept, Structure, Role, Financial Institutions, Instruments and Markets, Islamic
Financial System & its Principles, Distinguish between Conventional and Islamic Financial System.

2. Islamic Banking: Definition, Goals, Objectives, History and Present Status in Bangladesh and around
the world.

3. Islamic Economics: Concept, Definition, Principles, Goals, Objectives, Worldview and Strategies.

4. Shariah: Concepts, Principles, Goals, and Objectives (Maquasid-al-Shariah), Characteristics, Sources

of Shariah, Shariah Vs Man-made Law, Role of Shariah in Islamic Financial Institutions.

5. Commercial Banking Operations under Islamic Framework: Rational of Islamic Banking, Deposit
Mobilization Principles, Deposit Products, Weightage, Mechanism of distribution of Profit among
Mudaraba Funds and Calculation thereof.

6. Riba: Meaning, Definition, Classification, Prohibition of Riba’s in the Quran, Hadith & Fiqh, Socal-
Economic Impact of Riba, Concept of Bai, Rent, Profit and Differences thereof.

7. Modes of Investment under Islamic Mechanism: Conventional Loans & Advances, Investments
Products under Islamic Banking, Bai, Ijara and Shirkat and Differences among various Investment
Mechanism. Ethics in Islamic Business.

8. Export and Import Financing under Islami Framework.

9. Superiority of Islamic Banking over the Conventional Banking- Conventional Banking Vs Islamic
Banking- Misconceptions about Islamic Banking and how to address these.

10. Accounting: Philosophy, Ethics and Principles: Islamic Perspective, Cash and Accrual Basis of
Accounting, Islamic Accounting System Vs Conventional, Capital Adequacy Ratio and Risk
Weighted Assets.

11. Islamic Financial Instruments and Institutions: Instruments: Mudaraba Perpetual Bond (MPB),
Bangladesh Government Islamic Investment Bond (BGUB) and Institutions: Islamic Development
Bank (IDB), Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI),
International Association of Islamic Banks (IAIB), Central Shariah Board for Islamic Banks of
Bangladesh (CSBIB/CSB), Islamic Banks Consultative Form (IBCF), Islamic Finance and
Investment Companies Ltd.

12. Central Banking and Monetary Management under Islamic Framework: Role of Central Bank in an
Islamic Economy. Monetary Policy and Fiscal Policy in Islam, Objectives and Instruments,
Comparison between Islamic and Conventional System of Fiscal Policy.

13. Islamic Insurance (Takaful): Definition, Salient Features, Differences between Islamic Insurance and
Conventional Insurance, Re-Insurance, Prospect and Problems of Takaful in Bangladesh.
 Concept of Financial System:

It is a set of organised institutional set-up through which surplus units transfer their fund to deficit units.
An efficient financial system performs the function of financial intermediation allocating resources in line
with national priorities at lower cost.

Structure of Financial System

• Financial Institutions/ Intermediaries:

o Bank : Commercial: Nationalized, Private; Specialized Banks and Foreign Banks
o Specialized Financial Institutions: BSB, BSRS, BKB, RAKUB, Ansar VDP Unnoyan
Bank, Bangladesh Cooperative Bank, Employment Bank.
o Non-bank financial intermediaries:
 Investment Intermediaries (Investment Banks, Securities Brokers, Mutual Funds)
 Contractual Savings Institutions (Insurance companies, and pension funds).
 Non-bank financial institutions of Bangladesh: ICB, Merchant banks. Leasing
Companies, HBFC, SABINCO, VANIK and other finance companies mutual
funds.
• Financial Instruments (Two types):
o Primary (bills, bonds, loans and advance, shares, debentures etc.)
o Secondary ( bank deposits, life insurance policies, mutual fund unit certificates)
o In addition may be classified into Money Market (The instruments: Treasury Bills,
Certificate of Deposit etc.) and Capital Market (The instruments: Stocks, Corporate
Bonds, Govt. Securities and Consumer and Bank Commercial Loans.)

• Financial Markets: (Two types)

o Money Market: Bill of exchange, Treasury bills and Short-term government
bonds.
o Capital Market: Shares and debentures of industrial concerns, debentures and
bonds of quasi-government organizations and bonds and promissory notes of the
government are used in capital market.

Composition of Money Market: It is composed of several sub markets are as follows;

• Call money market: To cover the short term liquidity obligation banks prefer this kind of
investment from other banks in terms of interest.

• Acceptance Market: It refers to the market for banker’s acceptances which arise out of trade-both
inland and foreign.

• Bill Market and Discount Market: It refers to the market where short-dated bills and other paper
are discounted.

Institutions in the Money Market

• The Central Bank: It is the lender of last resort. It lends money to CBs at the time of fund Crisis.

• Commercial Banks: They invest money in various forms of assets (which comes from the public
in the form of deposits repayable on demand) which are considered the secondary reserve for the
bank are closely linked with the money market.

• Institutional Investors: They include savings banks, insurance companies, trust companies and
investments trusts.
• Private individuals, Partnerships and Companies: If the interest rates become attractive, they may
divert a portion of their funds kept invested liquid assets finds its way into the money market.