Islamic Introduction - Day1-2 2

Islamic Banking
Manohara Mathad
manohara.mathad@profinch.com
© Copyright 2020. All rights reserved.
DISCLAIMER
The information contained in this document is confidential, privileged and only for the information of
the intended recipient and may not be used, published or redistributed without the prior written
consent of Profinch Solutions.
© Copyright 2020. All rights reserved.
PROFINCH SOLUTIONS 2
DAY – 1
WELCOME TO THE ISLAMIC WORLD!!

INTRODUCTION
ISLAMIC ECONOMICS
• The knowledge and application of

injunctions and rules of the Shariah
• Shariah / Islamic Law prevents

injustice on the acquisition and
disposal of material resources
• To provide satisfaction to human

beings
• To enable them to perform their

obligations to the society
ISLAMIC ECONOMICS - PRINCIPLES
• The real owner of this world with all its resources,

wealth and factors of production
• Man & his position with in-built ability to chose b/w
the good and evil
• Wealth & resources to support man’s existence
• Economic trust and relationship
• Economic activities
• Trade & business with mutual consent
• Role and nature of money – a medium of exchange
and a measure of value
• Debt in Islam is based on asset or commodity
• Zakat & charity – in terms of TAX
• Savings in Islam for future needs
GENERIC - TERMINOLOGIES
• Bank • Creditor
• Financial Institution • Debtor
• Customer • Balance Sheet
• Business • Borrower
• Cash / Money • Commodity
• Savings • Goods & Services
• Interest • Exchange / Barter
• Loan • Sale
• Asset • Purchase
• Liability • Down-payment /
• Income Hamish Jiddaya
• Expense • Trade
• Loss • Transaction
• Profit • CBS / Flexcube
INTRODUCTION ISLAMIC BANKING - IB
• IB follows Shariah Board guidelines and differs from;
• From country to country
• Bank to bank within the country
• Fundamental principles of IB are;

• Sharing of profit and loss
• Prohibition of collecting interest or ‘Riba’
• It also called as ‘non-interest-banking’
• Banks makes profit through equity participation wherein the borrowers share
their profit with bank instead paying interest on the borrowed funds
• Banks operates in different sections of branches separately used for IB
• Ethical Investing – prohibited in business like, alcohol, gambling, pork, and other
forbidden items
• World’s existence – 300+ Islamic Banks across 50+ Countries
• History
• Beginning of IB in 7th century
• The Prophet Muhammad's first wife, Khadija, was a merchant. He acted as
an agent for her business - using many of the same principles used in
contemporary Islamic banking
• In the Middle Ages, trade and business activity in the Muslim world relied on
Islamic banking principles.
ISLAMIC BANKING – IB FINANCIAL STRUCTURE
• A contract is a legal & lawful in Islam only if it fulfils the
requirements prescribed by Shariah
• Islamic finance contracts evolvement is throughout the

development of Islamic civilization based on the
requirements of society
• Prior to the advent of Islam in Arabia, several types of

contract were commonly used by the Arabs to meet their
financial and business needs. After its emergence,
however, rather than abolishing those contracts
altogether, Islam looked into their subject matter and
practices
ISLAMIC FINANCE – STRUCTURE
• Customer needs certain goods and requests the Islamic bank
to finance
• Bank delivers the requested goods to the customer
• Customer pays the deferred price to the bank during the

agreed period either in different instalments or as a lump sum
at the end
• Application of Islamic Finance:

• Home financing
• Vehicle financing
• Goods financing
• How banks makes profit?
• Banks use equity participation instead of interest

• Banks participate in business by rendering equity
• Business / borrowers shall repay equity + profit share
• If business incurs loss; bank doesn’t get any benefits
• Islamic Banking V/s Islamic Window
• Islamic banks are based and managed with Islamic principles (Al Yaqeen and
Al-Andalus Libya are our client banks)
• Whereas, Islamic Window refers to the service provided by conventional
banks but based on the Islamic principles(e.g. Al Izz Islamic Bank Oman &
Ethiopia Banks are our client banks which are serviced thru dedicated
windows / sections)
CONVENTIONAL V/S ISLAMIC BANKING
Conventional banking Islamic Banking
Based on fully man-made principles Based on principles of divine law
Profit shared based on the agreed ratio
Depositors are guaranteed a pre-
b/w bank and customers, ROI is
agreed ROI
predetermined
Motive to maximize profit with only Maximizing the profit buy subject to
legislative restrictions Shariah & legislative restrictions
Banks participates in P'nip & JV with
Banks lends money with the
customers, share in profit and assume
predetermined ROI
losses
Relation b/w bank and customer is
Relation b/w bank and customer is
'Partners, investors & entrepreneur, buyer
'Creditors and Debtors'
& seller'
Invests in all sectors freely Restricted business
FI's with Islamic norm & directive defined
Limited to monetary affairs & markets for socio-economic dvpt. With the
with the purpose of gain monetary commercial visibility of monetary affairs,
benefits in rightly / wrongly venture, TXN in gaining and disposal of
basic need and resources
ISLAMIC BANKING – IB AT GLANCE
• Murabaha - form of financing is used in Islam in place of traditional loans. An
institution provides the cost and profit margin of an asset
• Musharakah - a joint enterprise or partnership structure in Islamic finance in

which partners share in the profits and losses of an enterprise
• Riba - is a concept in Islamic banking that refers to and forbids the charging of
interest
• Sharia - is an Islamic religious law that governs religious rituals and aspects of
day-to-day life including investment strategy
• Zakat (Mandatory charity / form of TAX) and Sadaqat (Optional charities
Source :: www.investopedia.com
ISLAMIC BANKING – IB AT GLANCE
• Mudarabah Liabilities - The term refers to a form of business contract in which
one party brings capital
• Mudarabah Assets - The financier is known as ‘rabal-maal’ (Bank) and the

entrepreneur as ‘mudarib’ (Borrower)
• Profit Distribution Management / PDM

• It is a process of distributing profit to the various investment products offered
by the bank (say Term Deposits, Savings accounts)
• This is the concept where income generated from all the assets of the bank
contribute towards a common pool, and
• Based on each account class / product type’s contribution, profit is distributed
on various basis like eligibility, % of profit declared etc.
ISLAMIC FINANCE
• Ijarah – Leasing is an agreement that permits one party (the lessee) to use an
asset or property owned by another party (the lessor) for an agreed-upon price
over a fixed tenor
• Operation Ijarah
• Financial Ijarah
• Salam Sale (Bai’ Al Salam) - : It is also known as Bai-salaf or Bai-mafalisa is the

purchaser of a commodity for deferred delivery in exchange for immediate
payment (majorly used in Agriculture based finance)
• Account Categories
• Savings
• Current
• Mudarabha Deposits
• Qard Hassan – Profit free deposits by customer
• / loans from banks
MURABAHA ISLAMIC BANKING - IB
• It is one of the most widely used
contracts at present in Islamic Banking
and the investment sector
• The various products where Murabaha

is applied are as follows:-
• Home financing
• Vehicle financing
• Working capital financing
• Goods financing
• Trade financing - LC based on
Murabaha
MURABAHA ISLAMIC BANKING - IB
Murabaha Calculations – examples
Equations /
Particulars Unit Value
Formulas
Cost of the House / Goods C USD 500,000
Down Payment from customer D USD 0
Amount Financed (100%) F=C-D USD 500,000

Profit Margin (Fixed Rate) %
R % 5%
p.a.)
Term of Financing T Months 60
Total Profit Amount P=F*R*(T/12) USD 125,000
Total Murabaha Sale Price SP = F+P USD 6,25,000

Monthly Instalment I=SP/T USD 10,416
Cost portion of Instalment IC=F/T USD 8,333
Profit portion of Instalment IP=P/T USD 2,083
MUDARABA ISLAMIC BANKING - IB
• Customer & the bank initiate a Mudaraba
Enterprise
• As per the contract, the bank (as Rab-al-

Maal) contributes 100% capital
• Whereas the customer (as the Mudarib)

contributes the management or skills
• As per the agreement they decide to share

the Net Profit in the ratio of 40:60
• Losses if any, shall be borne only by the

Islamic bank, the rab-al-maal
• As per the Mudarabaha contract, the Mudaraba
asset is, either periodically or at the end of
Mudarba, liquidated to Determine the profit or the
loss
• At agreed 40% of the realized profit is given to

the rabal-maal and 60% is retained by the
Mudarib while any loss is borne only by the rab-
al-mall
• On expiry of the contract the assets are disposed

off either by selling them in the market or
purchased by the Mudarib on their market value.
Application of Mudaraba
• Mudaraba contract is applied to various

Islamic deposit and finance product
• Some of them are mentioned below

• Saving account
• Investment account
• Project financing
• Takaful products
• Mudaraba Sukuk
• Islamic funds
DAY 1 BR/E-AK
RE-CAP DAY1
• Introduction to Islamic banking and Islamic Economics
• History, difference b/w Conventional and Islamic
• General terminologies used
• Finance Structure
• Types of liabilities, Introduction to PDM
• Types of finance – Murabaha / Mudarabah
• Welcoming any contributions on Day-1 Coverage from participants
ISTISNA ISLAMIC BANKING - IB
• Customer wants to purchase certain assets to be
manufactured or constructed and approaches bank
• Bank as seller and the customer as purchaser
execute an Istisna contract
• After completion of the manufacturing process, the
Islamic Bank delivers the assets to the customer
on agreed upon delivery date
• The customer makes the payment to the seller
pursuant to the terms agreed upon in the Istisna
contract either in various installments or, as the
case may be, at the delivery of the asset.
• Applications of Istisna in Islamic Finance:

• Home financing
IJARAH ISLAMIC BANKING - IB
ISLAMIC LEASE
(IJARAH MUNTAHIA BITTAMLEEK)
The term Ijarah means leasing of property

pursuant to a contract
A specified permissible benefit for the

specified period in return for a specified
permissible consideration
Ijarah Types
1. Operational
2. Financial with asset
3. Financial without asset
IJARAH CALCULATIONS ISLAMIC BANKING - IB
Particulars Equations Unit Value

Total Cost of the Car C USD 5,00,000.00
Lease Deposit (down

D USD 50,000.00
payment)
Bank’s Share (Finance

F = C-D USD 4,50,000.00
Approved)
Total Lease Period in Months T NOS 60
Bank’s Profit Rate r

% 5
(fixed % p.a. on finance)
Bank’s Total Profit P = F*r*T/12 USD 1,12,500
Bank’s Monthly Profit M = P/T USD 1,875
Monthly Lease Rent/EMI R=(F+P)/T USD 9,375
SALAM ISLAMIC BANKING - IB
• A customer wants financing and approaches the Bank
• The customer (as seller) enters into a Salam sale

contract with the Bank (as purchaser)
• The Islamic bank pays the full purchase price in advance

to the customer for the specified commodity to be
delivered in future
• On the delivery date which is predefined, the customer

delivers the commodity to the Bank
• Application of Salam:
• Working capital financing
• Financing for agriculture production
• Personal Finance
MUSHARAKA ISLAMIC BANKING - IB
• The customer and the bank are the partners in
a Musharaka Enterprise or project
• Both the parties contribute money capital in a

ratio, say, 20:80
• As per the agreement they decide to share the
Net Profit in the ratio, say 40:60
• If the Musharaka Enterprise realises any profit,

then it is hared between both the parties in the
agreed profit sharing ratio i.e. 40:60
• The loss, if any, shall be shared only in the

capital contribution ratio, which is 20:80
MUSHARAKA ISLAMIC BANKING - IB
Diminishing Musharaka - one of the
partners, say the customer, would buy the
share of the Islamic bank over a period of
time and at a certain period in future would
become the complete owner of the
Enterprise
Application of Musharaka contract:
• Home financing
• Trade financing - Musharaka LC
• Shares and equity products
WAKALA ISLAMIC BANKING - IB
• Bank is appointed as customer’s agent
(Wakil) to carry out certain activities on
customer’s behalf
• Bank as the agent of the customer is paid
a Fee, i.e., Wakala fee for performing the
activities
• Profits as well as losses solely belong to
the customer.
• Application of Wakala
• Letter of Credit
• Takaful products
• Islamic funds
• Islamic Syndicated financing
• Islamic Retail / Corporate products
HAWALA ISLAMIC BANKING - IB
• Customer takes finance from the Islamic bank
• Before the maturity of the finance, the customer

transfers the finance / debt obligation owed to the
Islamic bank to a third party
• On maturity, the third party pays the finance to the

Islamic bank
• There may be a transfer of debt collection rights

similar to the transfer of debt payment
• Application of Hawala
• Bills of Exchange
• Transfer of money - Remittance
TAWARRUQ ISLAMIC BANKING - IB
• Customer needs cash, requests the bank to
finance
• Instead of financing in cash, the bank

purchases the commodity from the seller &
sells it to the customer through Murabaha
contract
• Purchaser of commodity from the bank will sell

the commodity to a third-party purchaser on
spot payment basis
• The price paid by the third-party purchaser on

the spot fulfills the need of liquid cash of the
customer
• Customer pays the deferred price to the bank

pursuant to the agreed upon terms
GUARANTEE ISLAMIC BANKING - IB
• An Importer purchases certain goods or services from
an Exporter
• As per the sale and purchase contract the Purchaser is

obliged to make the payment to the Seller
• On the Seller’s demand, the customer applies for the

Letter of Guarantee to the bank for the payment of the
purchase price
• Bank issues the Letter of Guarantee for he customer in

favour of the Seller/ Exporter
• As per the guarantee, the seller has the right to

payment towards sale proceeds equally from the
customer / and the bank
• In a case where customer defaults the bank will make

the payment to the seller
MURABAHA LC ISLAMIC BANKING - IB
• Bank import the goods from the exporter, by establishing an LC on its own behalf,
• As per the contract, customer to purchase the imported goods from the bank under
Murabaha sale contract after the bank’s possession thereof
• Once the bank receives the goods or the shipping documents including original
commercial invoices and Bill of Lading in its name,
• Bank sells the goods to the customer on cost plus profit basis executing a Murabaha
Sale agreement.
• Bank pays the beneficiary bank on the due date 100% of the cost of imported goods
using its own funds and delivers the documents duly endorsed to the customer
• If the goods arrives before the shipping documents, bank must inspect the goods
and take the physical possession before selling them to the customer under
Murabaha
• The Murabaha Sales price (deferred amount) shall be paid on a deferred payment
date (s) to the Islamic bank by the customer
MURABAHA LC MECHANISM - IB
• Customer promises to buy the specific goods on Murabaha from the Islamic Bank, if the Islamic Bank purchases
the goods (to be imported) from the Supplier and takes the possession thereof
• The Islamic Bank may ask the customer to make the payment of Hamish Jiddiyyah (Earnest Money) which is
converted into Down Payment at the time of Murabaha Sale execution
• Bank establishes the LC on its own behalf to the name of the Exporter and sends it to Beneficiary Bank
• Supplier forwards the Shipping Documents of imported goods to the Beneficiary Bank
• Beneficiary Bank forwards the Shipping Documents of the imported goods to the Islamic Bank
• Customer ships the goods to Islamic Bank
• After receiving the consignment the Islamic Bank sells the goods to its Customer under Murabaha Sale Contract
• On the due date, the Bank pays the cost price to the Beneficiary Bank
• The Beneficiary Bank pays the amount so received from the Bank to the Exporter
• Customer makes the deferred payment to the Bank in future installments towards the purchases of imported
goods through Murabaha Sale.
CASH BASED LC ISLAMIC BANKING - IB
• Customer will import the
goods under LC against
placing 100% cash margin
with the bank (which is equal
to the full amount of the price
of goods)
• Bank as the customer’s agent

will pay the beneficiary bank
from the customer’s deposit or
by debiting his account
• The beneficiary bank is

required to present the
compiled documents to
receive the payment
MURABAHA LC CALCULATION - IB
Particulars Formula Unit Value
Cost of the Goods C USD 2,00,000
Down Payment from customer D USD 0
Amount Financed (100%) F=C-D USD 2,00,000
Profit Margin (Fixed Rate) % p.a.) R % 5%
Term of Financing T Months 36
Total Profit Amount P=F*R*(T/12) USD 30,000
Total Murabaha Sale Price SP = F+P USD 2,30,000
1st of last installment amount USD 6,420
Monthly Installment I=SP/T USD 6,388

Cost portion of Installment IC=F/T USD 5,555
Profit portion of Installment IP=P/T USD 833
References
• www.marifaacademy.com
• www.investopedia.com
• www.islamic-banking.com
• www.islamic-sharia.org
• https://www.oracle.com/industries/financial-services/banking/flexcube-isl
amic-banking/

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Islamic Banking

© Copyright 2020. All rights reserved.

WELCOME TO THE ISLAMIC WORLD!!

• The knowledge and application of

• Shariah / Islamic Law prevents

• To provide satisfaction to human

• To enable them to perform their

• The real owner of this world with all its resources,

• Fundamental principles of IB are;

• It also called as ‘non-interest-banking’

• World’s existence – 300+ Islamic Banks across 50+ Countries

• Islamic finance contracts evolvement is throughout the

• Prior to the advent of Islam in Arabia, several types of

• Bank delivers the requested goods to the customer

• Customer pays the deferred price to the bank during the

• Application of Islamic Finance:

• Banks use equity participation instead of interest

• Islamic Banking V/s Islamic Window

• Musharakah - a joint enterprise or partnership structure in Islamic finance in

• Zakat (Mandatory charity / form of TAX) and Sadaqat (Optional charities

• Mudarabah Assets - The financier is known as ‘rabal-maal’ (Bank) and the

• Profit Distribution Management / PDM

• Salam Sale (Bai’ Al Salam) - : It is also known as Bai-salaf or Bai-mafalisa is the

• The various products where Murabaha

Amount Financed (100%) F=C-D USD 500,000

Total Murabaha Sale Price SP = F+P USD 6,25,000

Profit portion of Instalment IP=P/T USD 2,083

• As per the contract, the bank (as Rab-al-

• Whereas the customer (as the Mudarib)

• As per the agreement they decide to share

• Losses if any, shall be borne only by the

• At agreed 40% of the realized profit is given to

• On expiry of the contract the assets are disposed

• Mudaraba contract is applied to various

• Some of them are mentioned below

• History, difference b/w Conventional and Islamic

• General terminologies used

• Types of liabilities, Introduction to PDM

• Types of finance – Murabaha / Mudarabah

• Welcoming any contributions on Day-1 Coverage from participants

• Applications of Istisna in Islamic Finance:

The term Ijarah means leasing of property

A specified permissible benefit for the

Particulars Equations Unit Value

Lease Deposit (down

Bank’s Share (Finance

Total Lease Period in Months T NOS 60

Bank’s Profit Rate r

• The customer (as seller) enters into a Salam sale

• The Islamic bank pays the full purchase price in advance

• On the delivery date which is predefined, the customer

• Both the parties contribute money capital in a

• If the Musharaka Enterprise realises any profit,

• The loss, if any, shall be shared only in the

Application of Musharaka contract:

• Before the maturity of the finance, the customer

• On maturity, the third party pays the finance to the

• There may be a transfer of debt collection rights

• Instead of financing in cash, the bank

• Purchaser of commodity from the bank will sell

• The price paid by the third-party purchaser on

• Customer pays the deferred price to the bank

• As per the sale and purchase contract the Purchaser is

Total Profit Amount P=FR(T/12) USD 30,000