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Islamic Finance and Banking: Modes of Finance

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Islamic Finance and Banking: Modes of Finance Islamic Finance and Banking: Modes of Finance Power point and Assessments Khalifa M Ali Hassanain Copy Rights Notice © Islamic research and Training Institute 2016 All rights reserved. All parts of this work are subject to sole ownership of Islamic research and Training Institute (hereinafter referred to as ‘Copyright Holder’) and remains exclusive property of the Copyright Holder. No part of this work may be copied, reproduced, adapted, distributed, modified or used in any other manner or media without prior written authorization of the Copyright Holder. Any unauthorized use of this work shall amount to copyright infringement and may give rise to civil and criminal liability. Enquiries and communications concerning authorization of usage may be made to the following: Islamic Research and Training Institute Member of the Islamic Development Bank Group P.O.Box 9201 - 21413 Jeddah Kingdom of Saudi Arabia E-Mail:[email protected] Disclaimer The content of these course have been developed solely for educational and training purposes. They are meant to reflect the state of knowledge in the area they cover. The content does reflect the opinion of the Islamic Development Bank Group (IDBG) nor the Islamic Research and Training Institute (IRTI). Acknowledgement This textbook was developed as part of the IRTI e-Learning Program (2010), which was established and managed by Dr. Ahmed Iskanderani and Dr. Khalifa M. Ali. Table of Contents Chapter 5 ....................................................................................................................................................... 6 Chapter Introduction .................................................................................................................................... 7 Learning Objectives ....................................................................................................................................... 7 Leasing or Ijarah Contracts ........................................................................................................................... 8 Ijarah vs Bai’ Contracts ................................................................................................................................. 8 Ijarah Structures: Operating Lease ............................................................................................................... 9 Ijarah Structures: Financial Lease ............................................................................................................... 10 Two More Types of Ijarah Structures ......................................................................................................... 12 Issues in Ijarah Contracts ............................................................................................................................ 13 Modern Mode of Leasing ............................................................................................................................ 15 Conventional vs Islamic Leasing .................................................................................................................. 17 Sale After Ijarah .......................................................................................................................................... 17 Ijarah Muntahia-bi-Tamleek ....................................................................................................................... 18 Issues in Modern Ijarah Contracts .............................................................................................................. 19 The Concept of Ijarah Sukuk ....................................................................................................................... 21 Deferred Delivery or Salam Contracts ........................................................................................................ 21 Essential Elements of a Salam Contract...................................................................................................... 21 Application of Salam Contracts ................................................................................................................... 23 The Istisna‘a Contract ................................................................................................................................. 24 The Istijrar Contract .................................................................................................................................... 25 Chapter Summary ....................................................................................................................................... 25 Key Terms .................................................................................................................................................... 26 Chapter 6 ..................................................................................................................................................... 29 Chapter Introduction .................................................................................................................................. 30 Learning Objectives ..................................................................................................................................... 30 Shirkah and its Two Categories ................................................................................................................... 30 The Concept of Mudarabah ........................................................................................................................ 31 Raising Capital for Mudarabah ................................................................................................................... 31 Types and Conditions of a Mudarabah Contract ........................................................................................ 31 Profit and Loss Under Mudarabah .............................................................................................................. 32 The Concept of Musharakah ....................................................................................................................... 33 Capital Under Musharakah ......................................................................................................................... 34 Profit and Loss Under Musharakah ............................................................................................................ 35 Comparison of Musharakah and Mudarabah ............................................................................................ 36 Mudarabah and Musharakah ..................................................................................................................... 37 The Wadiah Wad Dhamanah Deposit ........................................................................................................ 38 The Qard-ul-Hasan Deposit ........................................................................................................................ 39 The Concept of Wakalah (Agency) ............................................................................................................. 39 The Concept of a Tawarruq Contract .......................................................................................................... 41 The Concept of a Ju’alah Contract .............................................................................................................. 42 Chapter Summary ....................................................................................................................................... 43 Key Terms .................................................................................................................................................... 43 Chapter 7 ..................................................................................................................................................... 45 Chapter Introduction .................................................................................................................................. 46 Functions of Financial Intermediaries ......................................................................................................... 47 Intermediation Contracts Permitted by the Sharī‘ah ................................................................................. 47 Historical vs. Modern Mudarabah .............................................................................................................. 49 Trust-based Intermediation Contracts ........................................................................................................ 50 Security-Based Intermediation Contracts ................................................................................................... 51 Business Models for Islamic Financial Institutions (IFIs) ............................................................................. 52 The Two-windows Business Model In the two-windows business model, liabilities and assets of the bank balance sheet are divided into two windows. ............................................................................................ 52 Risks and Mitigation .................................................................................................................................... 53 Conceptual Balance Sheet of an IFI ............................................................................................................. 53 The Types of Investment Accounts at an IFI ..............................................................................................
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