Islamic financial instruments


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Islamic financial instruments

  1. 1. Islamic Financial Instruments<br />Dr. Mohamed Jamaldeen<br />For more presentation in Islamic Finance visit<br /><br />Islamic Finance Expert Blog<br />
  2. 2. Objectives + New Financial <br /> Principals of Islamic Instruments by<br /> Banks Islamic According to Shar’ia<br />Development of Islamic Financial Instruments<br />
  3. 3. Principals of Islamic Banks<br />Prohibition of Interest <br />Business activities based on fair & halal profits<br />Giving Zakat (The poor due)<br />Prohibition of monopoly<br />Co-operation in the development by ethical investing<br />
  4. 4. The objectives of Islamic Banks<br />To promote and development of financial and banking transaction according to Islamic prinicipal<br />To promote investment and enterprises that are engaged in ethical economic activities<br />Returns for the investment based on Profit-Loss-Sharing<br />
  5. 5. Types of instruments<br />Instruments for mobilising fund<br />Same as conventional dealings but different in principal - No interest & No predetermined return of savings <br /> ( E.g.. Savings and Current Account)<br />Instruments for utilizing fund<br />New concepts similar to entrepreneurship in Banking <br /> (E.g.. Musharaka, Mudaraba, Ijaara etc.)<br />
  6. 6. Instruments for Mobilising Funds<br />Current Accounts<br />Savings Accounts<br />Investment Accounts<br />Sukuk (Islamic Bonds)<br />
  7. 7. Current accounts<br />Islamic Banks Conventional Banks <br />In terms of withdrawing and depositing the funds<br />Islamic Banks Conventional Banks<br />In terms paying interest to the currents accounts<br />
  8. 8. Savings account<br />Islamic Banks Conventional Banks<br /> Deposits are repayable on demand<br /> Islamic Banks Conventional Banks<br /> Return Profit/Loss Return - Interest<br />
  9. 9. Investment account <br />Alternative to the Fixed Account of conventional Banks <br />Return – Depends upon the dealing of business project of the banks<br />Types of Investment Account <br />- With Authorization – The depositor authorises the bank to invest in any project return as profit or loss<br />- Without Authorization - The depositor select the project and invest the money in specified project return as profit or loss<br />
  10. 10. Sukuk (Islamic bond)<br />The issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.<br />Sukuk constitutes partial ownership in a debt (Sukuk Murabaha), asset (Sukuk Al Ijaara), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or investment (Sukuk Al Istithmar).<br />Sukuk structures are listed in the stock exchange or in secondary market<br />Some scholar does not agree with the concept of Sukuk as they effectively requires time value for money<br />
  11. 11. Instruments for Utilising Fund<br />Mudaraba (Partnership)<br />Musharaka (Equity Participation)<br />Murabaha ( Mark-up on sales)<br />Ijara ( Leasing)<br />
  12. 12. Mudaraba ( Partnership)<br />Bank - Capital <br />Entrepreneur – <br />Knowledge and Experience <br />Profit /<br />Loss<br />Profit <br />Entrepreneurship <br />Return – Profits or Loss<br />Arrangement can be made for the money to be gradually paid back to the bank with the bank taking decreasing share of profits <br />
  13. 13. Musharaka (joint venture)<br />Bank <br />Working capital, Assets, <br />Technical and Managerial <br />experiences <br />Client <br />Working capital, Assets, <br />Technical and Managerial <br />experiences <br />Joint Venture<br />Return <br />Profit / Loss (shared according to the agreement)<br />Arrangement can be by bank to gradually receives its part of capital back in agreed instalment together with the profits ex. Letter of credit<br />
  14. 14. Murabaha (Mark-up on sales)<br />Bank – buy the good requested by the client <br />Ex. Machinery, Raw Materials <br />Cost + <br />Mark up<br />(Agreed by higher price)<br />Client <br />With the option to purchase the good <br />Buy<br />Sale<br />Mark-up the bank – There is a risk element when the client not to fulfilling the promise<br />Client payment – May pay on delivery or instalement agreed<br />
  15. 15. Ijaara (Leasing)<br />Purchase order and Asset price<br />SUPPLIER <br />LEASSOR<br />Asset Title<br />Lease <br />Payment<br />Asset Specification & Negotiation. <br />Asset <br />Client ( Lessee ) <br />The lessee has benefits of using an asset without the requirements ownership. Leasing can cover all types of movable and immovable assets, such as real estate, machineries and heavy equipment <br />
  16. 16. Various other financial instruments<br />Short term transaction between Islamic Banks<br />Lines for financing working capital<br />Redeemable participation<br />
  17. 17. The End <br />