Introduction to Islamic Banking and Finance

Chapter 1. Muslim beliefs
Five pillars of faith
1. Profession of Faith
2. Five Daily Prayers
3. Zakat or almsgiving
4. Sawm or fasting
5. Pilgrimage to Mecca
Six Islamic Creeds
Definition of Iman
Iman as basis of righteous deeds
1. Belief in Allah and his attributes
2. Belief in Destiny (Qada'ar)
3. Belief in angels
4. Belief in apostles
5. Belief in the Revealed Books
6. Belief in the Hereafter

Chapter 2. Sources of Sharia'a law: legal basis for Islamic banking
Definition of the Sharia'a
Allah is the law giver
Sources of the Sharia'a
Qur'an: the primary source of the Sharia'a
Sunnah: the second primary source of Sharia'a

Chapter 3. Definition of Islamic banking
Conventional bankers and Islamic banking
Six key Islamic banking principles
1. Predetermined payments are prohibited
2. Profit and loss sharing
3. Making money out of money is not acceptable
4. Uncertainty is prohibited
5. Only Sharia'a approved contracts are acceptable
6. Sanctity of contract
Definition of asymmetric information
Adverse selection
Moral hazard
Origins of asymmetric risk within Islamic banking
Riba in the Qur'an and Sunnah or hadith
Textual evidence for the ban on interest
Source of the ban on interest
Islamic rationale for banning interest (riba)
Five reasons for the prohibition of riba
1. Interest is unjust
2. Interest corrupts society
4. Interest-based systems result in negative growth
5. Interest demeans and diminishes human personality

Chapter 4. Murabaha as a mode of Islamic finance
Murabaha transactions
Definition of Musawama
Some terminological issues
What makes Murabaha Sharia'a compliant?
Islam treats money and commodities differently
Commodity transactions with credit can involve an excess
Murabaha and the Sharia'a
Practicalities of implementing Murabaha
Sharia'a rules concerning Murabaha
Reasoning behind Sharia'a rules
Important exceptions to Sharia'a rules
Practical examples of the application of Murabaha
1. Mortgages
2. Provides working capital
3. Murabaha and syndicated credits
4. Financing of GSM licences
5. Murabaha used with letters of credit
6. Murabaha used for car and house purchase
Key issues associated with Murabaha
1. Use of interest rate as a benchmark
2. Gharar issues
3. Collateral provisions against the Murabaha payment
4. Guaranteeing the Murabaha
5. Penalty of default
6. No roll-over in Murabaha
7. Rebate on earlier payment
8. Subject matter of Murabaha
9. Rescheduling of the payments in Murabaha
10. Securitisation of Murabaha
Comparison of Murabaha with interest-based finance
Murabaha differences from the other Islamic financing techniques
1. Islamically permissible deferred sales
2. Profit and loss share (PLS) contracts
Summary

Chapter 5. Mudaraba as a mode of Islamic finance
Definition of Mudaraba
Types of Mudaraba
Two-tier Mudaraba and the asset and liability structure of an Islamic bank
Sources of finance for an Islamic bank
Mudaraba as limited recourse debt finance
What makes Mudaraba Sharia'a compliant?
Origin of the term Mudaraba
Practicalities of implementing Mudaraba
Sharia'a rules concerning Mudaraba
Practical examples of Mudaraba
Target profit rates and Mudaraba
Key issues associated with Mudaraba
Comparison of Mudaraba with the conventional banking equivalent
Mudaraba: differences from the other Islamic financing techniques
1. Profit and loss share (PLS) contracts
2. Islamically permissible deferred sales
Summary
References

Chapter 6. Musharaka as a mode of Islamic finance
Definition of Musharaka
What makes Musharaka Sharia'a compliant?
Practicalities of implementing Musharaka
Sharia'a rules concerning Musharaka
Practical examples of Musharaka
Application of diminishing Musharaka
Application of Musharaka in domestic trade
Application of Musharaka for the import of goods
Letters of credit on a Musharaka basis
Application of Musharaka in agriculture
Securitisation of Musharaka: Musharaka Sukuk
Problems associated with Musharaka
1. Confidence of depositors
2. Dishonesty: asymmetric risk
3. Secrecy of the business
Comparison of Musharaka with the conventional banking equivalent
1. Profit and loss share (PLS) contracts
2. Islamically permissible deferred sales
Summary
References

Chapter 7. Ijara as a mode of Islamic finance
Definition of Ijara
Definition of usufruct
Ijara and Ijara wa Iqtina (Ijara Muntahia Bittamleek)
Definition of an Ijara Muntahia Bittamleek
Leasing as a mode of financing
What makes Ijara Sharia'a compliant?
Practicalities of implementing Ijara
Sharia'a rules concerning Ijara
Basic rules of Islamic leasing
Benchmarking against LIBOR is permitted with Ijara
Practical examples of Ijara
Lease purchase transactions
Key differences between an Ijara contract and a conventional lease
1. Rental payments based on interest
2. Penalty interest with a default
3. Insurance and maintenance issues
4. Sharia'a board issues
Comparison of Ijara with the conventional banking equivalent
Ijara: differences from the other Islamic financing techniques
1. Islamically permissible deferred sales
2. Profit and loss share (PLS) contracts
Summary
References

Chapter 8. Istisna'a as a mode of Islamic finance
Definition of Istisna'a
Istisna'a and Parallel Istisna'a
What makes Istisna'a Sharia'a compliant?
Practicalities of implementing Istisna'a
Sharia'a rules concerning Istisna'a
Practical examples of Istisna'a
Key issues associated with Istisna'a
Guarantees
Other issues relating to Istisna'a
1. Delay in delivery
2. Insurance
3. Events of default
Comparison of Istisna'a with the conventional banking equivalent
Istisna'a: differences from the other Islamic financing techniques
1. Islamically permissible deferred sales
2. Profit and loss share (PLS) contracts
Differences between Istisna'a and Salam
Differences between Istisna'a and Ijara
Summary
References

Chapter 9. Salam as a mode of Islamic finance
Definition of Salam
What makes Salam Sharia'a compliant?
Practicalities of implementing Salam
Sharia'a rules concerning Salam
Sharia'a rules concerning parallel Salam
Practical examples of Salam
Benefits of the Salam contract
Problems associated with Salam
Comparison of Salam with the conventional banking equivalent
Salam: differences from the other Islamic financing techniques
1. Islamically permissible deferred sales
2. Profit and loss share (PLS) contracts
Differences between Salam and Istisna'a
Summary
References

Chapter 10. Takaful: Islamic insurance
Case for Islamic insurance
Islamic issues with conventional insurance
Issues in conventional insurance
Definition and concept of Takaful
How Tabarru' eliminates the problems of conventional insurance
Derivation of the term Takaful or Islamic insurance
Islamic origins of Takaful
Where insurance fits within Islam
Definition of the parties to a Takaful
Takaful in practice
Takaful and conventional insurance
Alternative models of Takaful
1. Ta'awun model
2. Non-profit model
3. Mudaraba model
4. Wakala model
Applying the relevant model
Sharia'a law as applied by Takaful companies
1. Principles of contract
2. Principles of liability
3. Principle of utmost good faith
4. Principles of Mirath and Wasiyah
5. Principles of Wakala (agency)
6. Principles of Dhaman (guarantee)
7. Principles of Mudaraba and Musharaka
8. Principles of rights and obligations
9. Principles of humanitarian law
10. Principles of mutual co-operation
Takaful companies
Definition of ReTakaful or reinsurance
ReTakaful
Role of the Sharia'a board in Takaful
Legal basis for assigning the Sharia'a board
Nature of Sharia'a board's decisions
Sharia'a board's general duties
Sharia'a board's detailed duties

Chapter 11. Sharia'a law and Sharia'a boards: roles, responsibility
and membership
Objectives of the Sharia'a
Sharia'a: the framework of Islamic banking
Compliance with the scheme of Sharia'a laws
Sharia'a Islamic investment principles
Conditions for investment in shares
Sharia'a supervisory board (SSB)
Function and responsibilities
Sharia'a boards: roles and scope of responsibilities
Dubai Islamic Bank (DIB)
Sharia'a board scholar qualifications
Dr Hussain Hamid Hassan
Dr Ali AlQaradaghi
Dr Mohamed Elgari
Dr Mohd. Daud Bakar
Sheikh Nizam M.S. Yaquby
Sheikh Muhammed Taqi Usmani
Sheikh Abdullah Bin Suleiman Al-Maniya
Sheikh Dr Abdullah bin Abdulaziz Al Musleh
Sheikh Dr Muhammad Al-Ali Al Qari bin Eid
State Bank of Pakistan (SBP): proper criteria for appointment of Sharia'a advisors
Solvency and financial integrity
Integrity, honesty and reputation

Appendix 1. World's 100 largest Islamic banks
Appendix 2. Top 500 Islamic Financial Institutions

Glossary
References and bibliography