A brief view on islamic finance

A Brief view on Islamic A Brief view on Islamic FinanceFinance

University of Medical Sciences University of Medical Sciences & Technology& Technology

SUDANSUDANMBA PROGRAMMEMBA PROGRAMME

October - 2011October - 2011

Prepared by:Student:- Abdalla Elshiekh IdrisStudent:- Abdalla Elshiekh IdrisSupervised by:Us.:- Mohamed EisaUs.:- Mohamed Eisa

ContentsContents

What is Islam? What is Islam? Islamic FinanceIslamic FinanceIndustry SpotlightIndustry SpotlightPrinciples of Islamic financePrinciples of Islamic financeIslamic Finance Products & Islamic Finance Products &

ServicesServices

What is Islam?What is Islam?

The religion of Islam is the acceptance of The religion of Islam is the acceptance of and obedience to the teachings of God and obedience to the teachings of God which He revealed to His last prophet, which He revealed to His last prophet, Muhammad (PBUH).Muhammad (PBUH).

What is Islam?What is Islam?

Islam prescribes codes of conduct for Islam prescribes codes of conduct for everyday lifeeveryday life, , commercial interactions, and commercial interactions, and underlying principles of behavior, conduct underlying principles of behavior, conduct and dealings in certain products which are and dealings in certain products which are acceptable – i.e., denoted as Halal. acceptable – i.e., denoted as Halal. Prohibited behavior and dealings are Prohibited behavior and dealings are denoted as Haram.denoted as Haram.

Islamic FinanceIslamic Finance

Islamic finance is the financial services Islamic finance is the financial services industry which offers finance compliant industry which offers finance compliant with Shari’a, the underlying principles and with Shari’a, the underlying principles and codes of conduct of the religion of Islamcodes of conduct of the religion of Islam..Islamic finance has commonly been Islamic finance has commonly been recognized as an interest-free financing recognized as an interest-free financing system, or a form of ethical financesystem, or a form of ethical finance..

Industry SpotlightIndustry Spotlight

Such association has emerged from two Such association has emerged from two perspectivesperspectives::

Firstly the interpretation of the prohibition on Firstly the interpretation of the prohibition on Riba, essentially a prohibition on an unjust Riba, essentially a prohibition on an unjust increment or increase. Interest charged for increment or increase. Interest charged for loan repayments is commonly associated loan repayments is commonly associated with Riba.with Riba.


In addition to Riba, Shari’a also prohibits In addition to Riba, Shari’a also prohibits Gharar and Maisir which should also be Gharar and Maisir which should also be excluded from Islamic financial excluded from Islamic financial transactions.transactions.

Secondly, the analogy with ‘ethical finance’ Secondly, the analogy with ‘ethical finance’ and Islamic finance is often drawn based and Islamic finance is often drawn based on the restrictions on engaging in on the restrictions on engaging in transactions which are ‘Haram’transactions which are ‘Haram’


The underlying principles of Islamic finance The underlying principles of Islamic finance involve equity, fairness, justice, and social involve equity, fairness, justice, and social responsibility and morality. These responsibility and morality. These principles are derived from the Qur’an, and principles are derived from the Qur’an, and Sunnah (Hadith), and supported by Ijma Sunnah (Hadith), and supported by Ijma and Qiya’s (as well as Ijtihad in certain and Qiya’s (as well as Ijtihad in certain markets). markets).

Principles of Islamic financePrinciples of Islamic finance

These principles underpin the Islamic These principles underpin the Islamic finance industry, and their application in finance industry, and their application in modern day finance requires persons modern day finance requires persons appropriately skilled in both Islamic appropriately skilled in both Islamic jurisprudence (‘fiqh’) and finance to jurisprudence (‘fiqh’) and finance to interpret and apply them to financial interpret and apply them to financial structures to ensure that they accurately structures to ensure that they accurately conform to Shari’a compliance.conform to Shari’a compliance.


Such persons are referred to as Shari’a Such persons are referred to as Shari’a scholars and their role is key to the current scholars and their role is key to the current and future direction of Islamic Finance. and future direction of Islamic Finance.


1- Principles of Profit and Loss Sharing: 1- Principles of Profit and Loss Sharing: Islamic Finance requires participation in Islamic Finance requires participation in and sharing of profit and potential losses and sharing of profit and potential losses in financial enterprise.in financial enterprise.

2- Prohibition on Riba: Riba is translated as 2- Prohibition on Riba: Riba is translated as an ‘excess’ or ‘unjust increment’ and is an ‘excess’ or ‘unjust increment’ and is classified in two forms:classified in two forms:


a- Riba Al Fadl - which is described as a- Riba Al Fadl - which is described as excess compensation or an unequal excess compensation or an unequal exchange or sale of goods, usually relating exchange or sale of goods, usually relating to the exchange or sale of specified to the exchange or sale of specified commodities including gold, silver, barley, commodities including gold, silver, barley, wheat, salt and dates. Historically these wheat, salt and dates. Historically these commodities were treated as money and commodities were treated as money and therefore the exchange of these therefore the exchange of these commodities had to be in equal amounts. commodities had to be in equal amounts.


Any excess in the exchange of one or more of the commodities would be unfair to one party and was prohibited.

b- Riba Al Nasiah- is described as any excess over the principal amount paid which is charged for the delay in repayment. It is Riba Al Nasiah which is associated with the prohibition on interest.


3- Avoidance of speculation and 3- Avoidance of speculation and uncertainty sales (Gharar): transactions uncertainty sales (Gharar): transactions have to be real and be certain and not have to be real and be certain and not based on uncertainty or speculation.based on uncertainty or speculation.

Islamic Finance is essentially about real Islamic Finance is essentially about real transactions which are based on transactions which are based on identifiable assets and transparent identifiable assets and transparent contractual terms. Derivatives are often contractual terms. Derivatives are often prohibited where the transaction is purely prohibited where the transaction is purely speculative.speculative.


4- Prohibition on dealing in items which 4- Prohibition on dealing in items which are Haram and the requirement to deal are Haram and the requirement to deal only in Halal items: all dealings, only in Halal items: all dealings, commercial or otherwise in prohibited commercial or otherwise in prohibited items, i.e. those denoted as ‘Haram’ are items, i.e. those denoted as ‘Haram’ are strictly prohibited, which include:strictly prohibited, which include:

Riba, Pork, Pornography that Corrupting Riba, Pork, Pornography that Corrupting moralities, (ventures, lottery & gambling), moralities, (ventures, lottery & gambling), Tobacco and Alcohol (any form of Tobacco and Alcohol (any form of intoxication which impairs the senses intoxication which impairs the senses removing responsibility.removing responsibility.


Weapons and arms (Islam is a religion Weapons and arms (Islam is a religion which promotes peace, tolerance and which promotes peace, tolerance and acceptability, unjust wars are prohibited). acceptability, unjust wars are prohibited). Conventional financial services (as Conventional financial services (as conventional financial services may deal in conventional financial services may deal in prohibited or Haram items, such as prohibited or Haram items, such as interest and debt).interest and debt).

Speculation and uncertainty (including Speculation and uncertainty (including casinos).casinos).


5- Requirement for fair and transparent 5- Requirement for fair and transparent dealings: Islam requires that commercial dealings: Islam requires that commercial dealings are fair and transparent to ensure dealings are fair and transparent to ensure that all parties are aware of their that all parties are aware of their respective rights and obligations.respective rights and obligations.

Islamic Finance Products & ServicesIslamic Finance Products & Services

Ijara:-Ijara:-Ijara is commonly referred to as a leasing Ijara is commonly referred to as a leasing

structure. An asset is leased out by the structure. An asset is leased out by the owner of the asset for a rental income. owner of the asset for a rental income.

Istisna’a:-Istisna’a:-Istisna’a is one of few Islamic contracts Istisna’a is one of few Islamic contracts

where the asset which is the subject matter where the asset which is the subject matter of the transaction does not exist at the time of the transaction does not exist at the time of contracting.of contracting.

Islamic Finance Products & ServicesIslamic Finance Products & Services MudarabaMudaraba

Mudaraba is a contract where the provider Mudaraba is a contract where the provider of capital ( Rabb Ul Maal) provides funds of capital ( Rabb Ul Maal) provides funds to the manager (Mudarib) for the purpose to the manager (Mudarib) for the purpose of investment. The return on the of investment. The return on the Investment, (the profit), is allocated Investment, (the profit), is allocated between the Mudarib and Rabb Ul Maal between the Mudarib and Rabb Ul Maal in accordance with a predeterminedin accordance with a predetermined

ratio agreed at the outset of the contract.ratio agreed at the outset of the contract.


Murabaha:-Murabaha:-

A cost plus mark-up structure where the A cost plus mark-up structure where the Islamic financial institution acquires an Islamic financial institution acquires an asset for resale to the client at a price asset for resale to the client at a price which includes the original acquisition price which includes the original acquisition price plus a mark-up. plus a mark-up.


Musharaka:-Musharaka:-

Musharaka is a form of equity partnership Musharaka is a form of equity partnership where both partners contribute capital and where both partners contribute capital and effort. This is distinct from a Mudaraba effort. This is distinct from a Mudaraba where the provider of capital (referred to where the provider of capital (referred to as Rabb Ul Maal) does not contribute to as Rabb Ul Maal) does not contribute to the management of the partnership.the management of the partnership.


Salam:-Salam:-

Salam is another Islamic contract where the Salam is another Islamic contract where the asset which is the subject matter of the asset which is the subject matter of the transaction does not exist at the time of transaction does not exist at the time of contracting. It used to be a method of contracting. It used to be a method of raising funds to grow agricultural products. raising funds to grow agricultural products.


SukukSukuk-:-:Sukuk is commonly referred to as an Islamic Sukuk is commonly referred to as an Islamic

bond, which is not an accurate reflection of bond, which is not an accurate reflection of a Sukuk. A Sukuk is a way of raising funds a Sukuk. A Sukuk is a way of raising funds where there is an identifiable asset which where there is an identifiable asset which generates an income stream.generates an income stream.


TakafulTakaful-:-:This is a scheme of mutual support which is This is a scheme of mutual support which is often structured as charitable collective often structured as charitable collective pool of funds. An individual becomes a pool of funds. An individual becomes a participant by paying a participative participant by paying a participative contribution (tabarru’), to a common contribution (tabarru’), to a common takaful fund whereby the individual allows takaful fund whereby the individual allows his / her contributions to be used to help his / her contributions to be used to help othersothers . .


Takaful provides mutual protection of assets Takaful provides mutual protection of assets and property and offers joint risk-sharing in and property and offers joint risk-sharing in the event of a loss by one of the the event of a loss by one of the participants. Takaful is similar to mutual participants. Takaful is similar to mutual insurance in that members are the insurance in that members are the insurers as well as the insured. Takaful is insurers as well as the insured. Takaful is sometimes termed as ‘Islamic Insurance.sometimes termed as ‘Islamic Insurance.

THE ENDTHE END

Any clarification?Any clarification?

MANY THANKS!!! MANY THANKS!!!

A brief view on islamic finance

Economy & Finance

finance compliant

islamic contracts

islamic financial transactions

form of ethical finance

modern day finance

islamic jurisprudence

principles of profit

financial services industry