Islamic Finance - Introduction

Course Outline:

Session 1: Introduction to Islamic Banking

• History of Islamic Banking.
• Basic Principles.
• Sharia Law
• The Quran, Sunnah and Hadith
• Sources of Islamic jurisprudence
• The role of Islamic Scholars and the Islamic Board
• The meaning of Riba, Gharar, Maysir, Haram, Halal, Fatwa.
• Waqf & Zakat….. Charitable giving and charitable tax.

Session 2: Islamic Law of Contracts

• Wa’d….. Promise.
• Muwaada or Mua’hida Agreement….. Bilateral promise.
• Aqd’….. Contract.
• Mudaraba Contract….. Profit Sharing.
• Musharaka Contract…… Profit & Loss Sharing contracts.
• Security Contracts:
• Wakala….. Agency Contract.
• Foreign Exchange (SARF).

• Hawala….. Transfer.
• Kafala….. Guarantee.
• Rahn….. Mortgage.

Exercise: Describe the element of offer and acceptance under Sharia.

Exercise: What is the difference between Mua’hida and Aqd?

Session 3: What is an Islamic Bank

• Definition - Fatwa
• Source of funds
• Use of funds
• Contractual relationships
• Profit and loss sharing
• Banking Services.
• Other Services.
• Types of Islamic Bank; wholly Islamic, windows or branches approach

Exercise: We will construct a typical Islamic balance sheet highlighting the key differences, especially the contractual and profit/loss sharing element.

Session 4: Sources of Funds – “Investments”

• Islamic current accounts
• Amanah, Wakala, Wadia – what are they?
• Investment accounts – Mudaraba,
• Restricted and Unrestricted Mudaraba
• Musharaka
• How are investors rewarded
• Shareholders funds.
• Trading & Investments.

Exercise: Although moral hazard probably makes this academic, consider who bears what losses in each of the different sources of Islamic funds

Case study: Explain the main differences between an Islamic bank and a conventional bank

Session 5: Use of funds – Most common products

• Murabaha, definition, description, examples, risks, challenges.
• Ijara as above.
• Istisn’a ditto
• Compare each product with their conventional banking counterparts

Exercise: You have a client looking to replace commercial vehicles and not wishing to lay out substantial cash up front, how might this be achieved using Islamic banking techniques.

Session 6: Use of funds – Less common products

• Mudaraba., definition, description, examples, risks, challenges
• Musharaka. As above
• Salam ditto
• Islamic mortgages ditto
• Islamic credit cards ditto
• Two tier Murabaha
• Two tier Mudaraba
• Compare each product with their conventional banking counterparts

Exercise: Why is Musharaka not more popular given that it enshrines Islamic principles completely?

Session 7:Islamic Asset & Fund Management

• Investors’ Objectives
• Capital preservation
• Maximise yields
• Incorporation of Islamic doctrines
• Link to Sharia precepts & ethics
• Legitimate goods
• Moral behaviour & social objectives

Exercise: Taking into account all of the above, name areas where you feel investment activity is unacceptable or prohibited.

Session 8: Islamic Bond Market (Sukuk)

• Conventional debt securities:
• Sukuk:

• Rights not linked to assets of company
• Holders do not incur damages & losses of company
• Share in financing through usurious practices
• Term not necessarily same as project
• No Sharia constraints

• Investment process
• Share of assets not right to revenues
• Profits & losses
• Proof of ownership
• Ownership costs
• Term matches project
• Lack of guarantee
• Subject to Sharia rules

Exercise: Using Dubai World as an example, consider how the recent problems might impact this important market.

Session 9: Islamic Insurance (Takaful)

• What is Takaful
• How does Takaful work.
• Re-Takaful
• Takaful products
• Takaful models

Exercise: Takaful is a controversial subject amongst some scholars. Why is this?

Exercise: What is the difference between a Mudaraba and Wakala arrangement in a two tier Takaful model?

Session 10: Course wrap up, summary and open forum