CHAPTER 7: Practices Of Financing In IFIs
•Finance is a science of money management
•Also a field within economics that deals with the
allocation of assets and liabilities over time under
conditions of certainty and uncertainty
•A key point in finance is the time value of money,
( one unit of currency today is worth more than one
unit of currency tomorrow) aims to price assets
based on their risk level and their expected rate of
•Finance can be broken into three different sub-
categories: public finance, corporate finance and
For islamic banking line,
• Fund raised from people (workers, student, pensioners) and
entrepreneurs who save, besides other financial institutions and
• Then, use the sources of fund to finance people and entrepreneurs
who need it.
• Finance various investment activities such as card service, trade
financing, money market and others which approved by shariah.
• Example: Deposits from customers, for financing transaction such as
house financing and car financing
• More than 75% of islamic banks fund obtain from deposits and the
financing transactions of most Islamic banks represent 50-80 % of the
total Islamic bank assets
SHARIAH PRINCIPLES IN
Allah (God) is the owner of all wealth
Materials pursuits must be balanced with an
individual’s spiritual needs.
An individual’s needs must be balanced with
Economic transactions should take place within a
just, responsible, free-market economy
Prohibited Business Transaction
Prohibited products and industries
Application goes to the Credit Department
(1) Prospecting or customer seeks
(11) All litigation cases will be
under the administration of the
Credit Administration Officer:
(8) attends to the documentation and
follow-up for the disbursement.
(9) once disbursed, the file and the duly
registered documents will be transferred
to Credit Administration /
(10) Account will be monitored/placed
under the supervision of the Credit
Control Department when the customer
(2) scrutinize the application and credit worthiness
of the prospect.
(3) attends to loan origination or Application
(4) evaluates the applicant.
(5) recommends approval or rejection of the
(6) The Authorized Credit Officer or
Officer with Discretionary Lending
Power will decide whether to reject
(7) Issuance of the Letter of Offer or
Letter of Rejection.
Modus operandi of BBA
(4) Sells the asset
(2) Signing to purchase asset
(5) Pays the selling price by
o Islamic bank may finance the customer who wishes to acquire a
given asset under a bank’s property purchase agreement (PPA). The
bank will buy the asset from the developer.
o The bank would then sell the same property to the purchaser under
a bank’s property sale agreement (PSA).
o The bank’s selling price of the property would include the bank’s
profit margin as agreed to by the parties and its repayment is
monthly installments of a specified sum over a certain period.
o As a security, the purchaser is required to execute a charge or an
assignment of the property to the bank. Installments remain fixed
over the period of the contract and no adjustment is made if interest
Modus operandi of Ijarah
(3) Leases the
(4) Pays the
o The bank is not a natural owner of the asset. It acquires ownership
upon receiving a request from its customer.
o Ijarah rentals are paid in installments over time to cover the cost of
the asset or value of investment for the bank plus a fair return on
o Ownership of property is not transferred throughout the Ijarah
period while the customer receives the benefits of using the asset.
o Risks associated with ownership of the asset remain with the bank
and the asset is supposed to revert to the bank at the end of the
Modus operandi of Mudharabah
Set up the
• One party, the Rab-Ul-Mal or financier, provides the capital, while
the other party, the Mudarib, provides the entrepreneurship and effort
to run the business.
• Profits derived from the business or investment are shared by the two
parties according to a predetermined profit-sharing ratio (PSR). This
could be, say, 70:30, or 80:20, with the larger portion accruing to the
• In the event of losses, the Shariah stipulates that all losses must be
borne by the financier. Any party may terminate theMudarabah
agreement at any time. Finally, in a Mudarabah arrangement, the
financier is not allowed to interfere in the running of the business.
Modus operandi of Musharakah
capital RM 4
Profit Sharing Ratio
o Customer and bank discuss business plan and jointly contribute to
capital of the venture.
o Customer and bank jointly set up the business venture and manage
its operations, sharing the responsibilities as per pre-agreed terms as
the business generates positive or negative profits.
o If the business generates profits, it will shared as a pre-agreed ratio.
o If the business suffer losses, the loss suffered by each partner must
be exactly in the proportion to capital contributions.