TOPIC 6

Is Islamic finance a sustainable finance ?

 What are we going to analyze?
In the Topics 6 - Main skills/competences targeted: Cultural & financial adaptability and
openness

• Islamic Finance principles: Riba & Gharar and Saint Thomas Aquinas (1265-1274) ethics
• Difference between Islamic and conventional finance
• The 3 main contracts: Musharakah, Mudharabah, Mourabaha
• Global Islamic finance size
Is Islamic
finance:
a non-interest
Finance
 Key Principles of Islamic Finance
What we can do and what we must avoid

1. The avoidance of Riba (interest)

2. The avoidance of Gharar (uncertainty, hazard, ambiguity)
3. The avoidance of transactions involving Maysir (gambling)
4. The avoidance of transactions involving prohibited
commodities
5. Profit and Loss Sharing (PLS)
6. Asset backed financing

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 WHAT TO BE AVOIDED?
The avoidance of RIBA
 Literally: excess, expand, increase, growth
 Any unjustified excess above and over the capital, whether in
loans (between creditor and debtor) or in trade (with similar
commodities)
• money + money = 2 conditions: Equality/Hand-to-hand
• food + food = 2 conditions: Equality/Hand-to-hand
• money + food = No condition – free trading
• others + others = No condition – free trading

For Saint Thomas Aquinas (1265-1274), if money is used to acquire goods, then it is not
fair to ask for more money than is worth the service or good itself.

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 WHAT TO BE AVOIDED
The avoidance of GHARAR
 Meaning of GHARAR:
- Literally: uncertainty, hazard, ambiguity
- The sale of items whose existence or characteristics are not certain,
which makes the trade similar to gambling.

 Examples: the prohibition of sale of goods that do not yet exist, or

which are not tangible.,

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 WHAT TO BE AVOIDED
The avoidance of transactions involving prohibited commodities

It is also not allowed to conclude contract on illegal

commodities such as financial services based on interest
rate*, Weapons, tobacco, alcohol, new slavery, degrading
labor to human...etc.

* “Main use of money is its consumption or investment”

Saint Thomas Aquinas (1265-1274)

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DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL
FINANCE
Conventional Finance Islamic Finance

1. Creditor (Lender)-Debtor 1. Strong relationship between

(Borrower) relationship partners (entrepreneur&banker
Hand in Hand).
2. Interest based
2. Non-Interest based
3. Based on money trading.
3. Based on commodity trading
(real
economy/tangibility/traceability/
“Concrete&Clay”)
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 BANKING PRODUCTS
Participatory products MUSHARAKAH

 It literally means sharing. Financial Partnership.The sharing may be of

money, labor, or anything else.
 It is defined as a contract between partners on both capital and profit.
 Distribution of profit: The proportion of the profits to be divided
between the partners must be agreed at the time of the conclusion of
the contract.
 In the case of loss each partner shall suffer the loss exactly according to
the ratio of his investment.
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 BANKING PRODUCTS
Participatory products MUDARABAH
1. The word MUDARABAH comes from the Arabic root which means
“working to obtain subsistence”.
2. A special kind of partnership where one partner provides work
(effort/Know How) in trade/production and the other side provides the
capital (funds).
3. The first partner is called “MUDARIB,” and the second partner is called
“RABB UL-MAL.”
4. The parties agree at the start on the proportion of the profit which
each returns 50%-50% or another proportion. An agreement must be
decided before the start of the business.
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 Banking products
Sale based product MURABAHAH

1. It is Purchase (Buy)-Resale (Sale) contract. with an increase of the original

price, agreed upon by the two parties.
2. It is a particular kind of sale where the seller expressly mentions the
cost of the sold commodity he has acquired and sells it to another
person by adding some profit.

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 Relative size of sub-markets
Islamic financial Assets (1.2 trillion USD)

* Including: Iran, Pakistan, Sudan and Turkey

North of America: Europe: Middle East*: Southeastern Asia:

<$40 bn <$160 bn $755 bn $300 bn
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 The Presence of Islamic Finance: About 1100 institutes
offering Islamic Products around the world
UAE: 9
Germany: 3 - Dubai Islamic Bank
United States: 20 - Bank Sepah - Abu Dhabi Islamic Bank
Bahrain: 26
- Al Manzil Financial - Commerz Bank - HSBC Amanah Kuwait: 5
Services - Deutsche Bank - Bahrain Islamic Bank - Kuwait Finance
- American Finance House Switzerland: 6 - Al Baraka House
- ABC Islamic Bank Qatar: 4
- Failaka Investments
- HSBC - CitiIslamic Investment Bank - Qatar Islamic Bank
- Qatar International Islamic
- Ameen Housing
UK: 26 (primarily branches of
Cooperative Iran: 8 Pakistan: 5
Gulf and global banks)
- HSBC Amanah Finance India: 3
- Al Baraka International Ltd
Turkey: 7 Bangladesh: 3
- Takafol UK Ltd
- The Halal Mutual Investment - Faisal Finance
Company Sudan: 9 Institution
-J Aron & Co Ltd (Goldman - Ihlas Finance Malaysia: 49
Sachs) House 2 - Pure Islamic Banks
-Britain Islamic Bank Egypt: 7 Saudi Arabia: 10 (Bank Islam, Bank
- Alwatany Bank of Egypt - Al Rajhi Muamalat)
- Egyptian Saudi Finance - SAMBA Rest - conventional banks
- Saudi Hollandi
Indonesia: 4
- Riyadh Bank
Yemen: 5
Planning to go for Islamic
Banking

Note: Figure indicates number of Islamic FIs in the country. Only some of the key FIs are shown for each country
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TO CONCLUDE

GLOBAL ISLAMIC FINANCE SIZE

The global Islamic Finance market size was valued at USD 4 000 billion
in 2022 (4 trillion) and is expected to expand at 12.67% during the
forecast period, reaching USD 5 000 billion by 2028 (5 trillion)
Today, Islamic finance represents about 0.2% of conventional finance
As a reminder:
- the global financial services market is
worth $23 trillion as of 2021
- Global finance = all credits, bonds,
stocks and monetary assets = $400
trillion
- The global GDP (Gross domestic
product) is worth $100 trillion as of
2021
Charity Bank
Islamic banks
What did we learn from the lesson (TOPIC 6)?
Identify and restore the points retained from the course.

Is Islamic finance a sustainable finance ?

Is Charity Bank different from an Islamic Bank ?