SESSION 1

INTRODUCTION TO
ISLAMIC BANKING & FINANCE
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At the end of this module, you

should be able to achieve the
following:
➢Define & Understand the Features
of Islamic Banking and Finance;
Beginning with ➢Understand the Differences
the end in mind between Islamic Banking and
Conventional Counterpart.
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Presentation
outline
 SECTION 1

DEFINITION & SALIENT

FEATURES OF ISLAMIC
FINANCE
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 An Overview
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➢ Islamic finance, despite its name, is not a religious
product. It is however a growing series of financial
products developed to meet the requirements of a specific
group of people.
➢ Islamic finance is a term that reflects financial business
that is not contradictory to the principles of the Shari’ah.
➢ In addition to observing the above-mentioned features,
Islamic financial products and services must not contain
any principles, terms and conditions which are
Introduction to contradictory to established legal maxims or legal
principles.
Islamic Finance ➢ In short, Islamic finance, unlike conventional finance,
must be distinctive in its contractual and transactional
features to render it different from conventional finance
although ultimately, both may achieve the same economic
benefits.
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Overview of Islamic Finance – Cont.’
➢ Islamic financing is working within the Shari’ah
frame work following certain restrictions
including following:
1) First IFIs cannot provide finance for an
activity which is prohibited by Shari’ah
(Islamic law) irrespective of its profitability
Introduction and economic viability e.g. business of liquor,
pork and pornography.
to Islamic 2) Second IFIs cannot lend any amount in cash
Finance for interest however need is fulfilled either
through supply of required asset.
3) Third, through profit and loss sharing.

Components of the Islamic Financial Services
Industry
Islamic Bank (IB)
Islamic banking refers to a system of
banking or banking activity that is
consistent with the principles of the
Shari'ah (Islamic rulings) and its
practical application through the
development of Islamic economics.
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Islamic Insurance (Takaful) Islamic Capital Market (ICM)
Islamic capital market refer to capital
In practical terms, takaful means a
markets where Shari'ah complaint
mutual guarantee provided by a group
financial assets are transacted. ICM
of people in the community against a
trades in Shari'ah compliant equity
defined risk befalling one’s life,
securities (shares) and debt securities
property or any form of valuable
(bonds), in order to raise medium to
things.
long-term financing.
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Definition of
Islamic Banking
➢ Islamic Banking refers to a system of
financial management that is guided by
the principles of Islamic rules.
➢ Banking in Islam is a framework of
saving & investing money governed by
Islamic law standards, also known as
the Shari’ah law.

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 The Key Features of Islamic Banking

Interest-free Needs for Free from Uncertainty Free from Gambling Profit & Loss Sharing
Underlying Asset
All Islamic
Banking business Islamic Banks All transactions made All transactions IBs share the profit
and other activities requires that all by Islamic Banks (IBs) made by Islamic made with their
are free from any business based on are free from elements Banks (IBs) are free customers either on a
element of interest. sale, partnership or of uncertainty from elements of proportionate basis or
lease must have an (Gharar). gambling (Maisir). on an agreed profit
underlying asset.
sharing ratio.

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 Overview of Islamic Banking 10

➢ Islamic banking is not as foreign to business world as

it is perceived by certain quarters.

➢ It is a business very much like conventional banking

within certain restrictions imposed by Islamic law.
Introduction
Loan
to Islamic
Banking Invest
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Overview of Islamic Banking (Cont.’)

➢ It has its own way of doing business and all operations
are duly certified by Shari’ah experts ranging from
Shari’ah advisors to Shari’ah boards and finally
Islamic Fiqh Academy (IFA).

Introduction
to Islamic
Banking

Islamic Banking Operating Models
Islamic Window
This model relies on the existing
conventional infrastructure where all
the processes, operations, sales,
channels, finance, branches,
compliance, audit and all functions are
provided by the conventional bank. It is
a leverage model where the Islamic
Banking Windows are more like a
“manufacturer” of products.
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Islamic Subsidiary
Islamic Subsidiary rides on the
strength of the Parent Bank, which
is the conventional bank. The idea
of a Subsidiary is to be
independent, so all cost
consideration must be taken into
account. Examples: Bank
Meethaq, HSBC Amana, etc.
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Full Fledged Islamic Bank
These are standalone banks that
generally are not under any
conventional banking influence.
Full Fledged Islamic Banks have
the capacity to offer new-to-market
products, based on the approvals
obtained from Shariah Committee.
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 SECTION 2
DIFFRENCES BETWEEN
CONVENTIONAL & ISLAMIC
BANK
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 Differences between Conventional and Islamic Banking
Major Differences ((Current Accounts)) Islamic

Convectional Banking Islamic Banking

No specific underlying mode is Underlying Mode Current Account is based on
used in Current Account. Qard contract where the Bank is
liable to pay depositor’s money
back on demand.

Funds Investment The Bank can use these funds for

The Bank can use these funds for
investment and other purposes
regardless Shariah prohibition.
investment and other purposes. It
allows satisfaction of having the money
safely deposited with a bank with the
additional assurance that the Bank is
not investing it in activities that
contravene Shari’ah principles.

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 Differences between Conventional and Islamic Banking
Major Differences ((Saving Accounts)) Islamic

Convectional Banking Islamic Banking

No specific underlying mode is
used in Saving Account.
Underlying Mode Islamic Saving Account is an
“investment for profit” account
governed under the rules of
Mudarabah with an objective to
provide return on the investment.

The Bank can use these Fund Investments The Bank can use these funds
funds for investment and for investment and other
other purposes regardless purposes which are Shari’ah
Shari’ah prohibition. compliant.

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 Differences between Conventional and Islamic Banking
Major Differences ((Lending/Financing)) Islamic

Convectional Banking Islamic Banking

Conventional banks are in the Underlying Mode Islamic Banks are not money
business of lending & borrowing lending institutes but they work
money based on interest. as a trading/ investment house.

In Conventional banks, we see no
such restrictions. Interest is the
back-bone of this system and short
selling, sale of debts and
speculative transactions are
common.
Investment Restrictions Islamic Banks work under the socio-
religious guidelines that prohibit
charging and paying interest and
avoid all impermissible transactions
like gambling, speculation, short
selling & Sale of debts & receivables.

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 Differences between Conventional and Islamic Banking
Major Differences ((Lending/Financing)) Islamic

Convectional Banking Islamic Banking

In Conventional Banks, all types Types of Business Islamic Banks do not permit
of industries are financed, only financing to industries that cause
businesses deemed illegal by the harm to the society such as
law of the land are not supported. alcohol, tobacco, etc.

Generally Conventional Banks do Investment Restrictions One of the Islamic Bank business
not involve themselves in trade model is based on trade, thus it
and business as they act only as needs to actively participate in trade
money lenders. and production process and activities.

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 Differences between Conventional and Islamic Banking
Major Differences ((Lending/Financing)) Islamic

Convectional Banking Islamic Banking

In Conventional Bank, no
Shari’ah Governance framework
is present.
Shari’ah Framework Islamic Banks have strong
Shariah governing framework in
terms of Shariah Board, who
approves the transactions and
products in the light of the
Shariah rulings.

Conventional Bank treats money Money Treatment Islamic banking products are usually
as a commodity and lend it against asset backed and involves trading of
interest as its compensation. assets, renting of asset and
participation on profit & loss basis.

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 Differences between Conventional and Islamic Banking
Major Differences ((Ijarah/Leasing)) Islamic

Convectional Banking Islamic Banking

Lease commences the very day Lease Commencement Rentals start after the delivery of
on which the price is paid by the asset, not from the day the price
Bank, whether the Customer has has been paid by Bank.
taken the delivery or not.

Lease does not differentiate
between wear & tear or losses
caused by the negligence of
Customer and Customer is liable
for cost incurred due to natural
disasters.
Customer Liability The Customer is responsible only for
misuse and negligence, but not for
events beyond control. In Auto Ijarah,
each situation is treated separately.

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 Differences between Conventional and Islamic Banking
Major Differences ((Others)) Islamic

Convectional Banking Islamic Banking

Islamic
Sharing in Losses

Lender suffers losses, not Loss is shared as an

shared by the bank. investment partner.

Inflation

Expansion of money creates No expansion of money.

inflation. No inflation is created.

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a) Both are commercial entities licensed by the central bank,

involved in collecting deposits from the surplus units in
society and applying the funds to borrowers,
entrepreneurs or deficit units.
b) Both types of banks offer current accounts for the
safekeeping of funds, payment facilities, cheque books,
debit cards and without any interest or profit.
Similarities c) In fixed deposits of conventional banks and investment
accounts of Islamic banks the customers agree to deposit
Between their funds for a fixed period, though the return with
conventional banks is a fixed interest while for Islamic
Conventional & banks it is a pro-rata share in the profit.
d) Both types of banks use the interbank market for liquidity
Islamic Banks management.
THANK YOU