Islamic Finance - Introduction

Course Overview:

Islamic finance in its modern form is barely 30 years old yet it is a rapidly growing part of the financial sector and has survived the recent global banking crisis almost untouched. The size of the market is huge and demand for Islamic services exists wherever there is a significant Muslim community.

It is reckoned that nearly 500 financial institutions in more than 50 countries practice some kind of Islamic finance and the market has been growing at more around 10-15% per annum. Latest estimates place total assets at around US$1 trillion.

The main attraction of Islamic finance is that it offers Shariah compliant banking to its clients and is the closest yet that any banking institution has managed to get to genuinely ethical and moral banking. It is underpinned by pure principles, with integrity at the forefront and a genuine sharing of profit and losses as its credo. This has all been achieved with remarkable speed and the sector’s popularity continues unabated.

This course explains in clear terms the basic principles of this increasingly important sector and shows how these and its products differ from the conventional banking models. It is designed to teach delegates the principles of Islamic Banking and to highlight the differences between Islamic and conventional banking.

It explores the different products and services commonly found in both the GCC and the Islamic market globally and it assesses the relative advantages and disadvantages of each. By the end of the course delegates will have a full understanding of the products and principles involved in Islamic Banking and how they differ from Western banking models.

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:
• Hawala….. Transfer.
• Kafala….. Guarantee.
• Rahn….. Mortgage.
 Wakala….. Agency Contract.
 Foreign Exchange (SARF).

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:
• 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
 Sukuk:
• 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

Discounts available for multiple participants:

3-4 participants: 15% discount per participant
5-6 participants: 20% discount per participant
7-8 participants: 25% discount per participant
9 or more participants: 30% discount per participant

Delivering this course in-house for you to a number of participants could be very cost effective.