Banking plays an important role in modern economies by facilitating investment opportunities for individuals and businesses. Islamic finance provides alternatives to conventional banking that are compliant with Shariah principles such as prohibitions on riba (interest) and gharar (excessive uncertainty). Some of the main Islamic finance contracts and instruments discussed include mudaraba, musharaka, murabaha, ijara, sukuk, and istisna/salam which are based on principles of profit/loss sharing and asset-backed transactions.

1. Oman | Wednesday, 13th January 2016
Mr. Arsalan Tariq Buriro, Senior Associate

2. Banking and Finance
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3. Banking and Its Importance
● Banking is a very important sector of the modern day economy.
● It provides an opportunity to the household with surplus capital to
select the best mix of investments in terms of return and tenors &
security.
● It provides an opportunity to businesses and Governments to finance
their activities through obtaining surplus funds.
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4. Issues in Banking
● Lending money and getting it back with compounding interest is the
fundamental function of the conventional banks.
● Functions and operating modes of conventional banking are based on
fully man made principles.
● The investor is assured of a predetermined rate of interest.
● It aims at maximizing profit without any restriction.
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5. Islamic Finance
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6. What is Islamic Finance
Islamic Finance means doing banking and finance transactions in
accordance with Shariah Principles. No banking or financial institution
can be called an Islamic bank or an Islamic financial institution if it does
not adhere to or is not governed by the Shariah Principles.
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7. Islamic Banking In Oman
● Islamic Banking in Oman is governed by the Islamic Banking
Regulatory Framework issued by the Central Bank of Oman.
● Islamic Banking Regulatory Framework provides for the rules
regulating the operations of Islamic banks and Islamic windows
operating in Oman.
● In Particular one should note that Islamic Banking Regulatory
Framework prohibits Tawarruq transactions in Oman which are
allowed in other jurisdictions e.g Malaysia and UAE. Tawaruk or as
commonly known as Commodity Murabaha is seen to have an element
of riba by some scholars and hence have been termed as unislamic.
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8. What are the key Principles of Islamic Finance
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9. Riba – Interest
Definition:
● The word “Riba” means excess, increase or addition which correctly
interpreted according to Shariah terminology implies any excess
compensation without due consideration.
Some examples of transaction having an element of "Riba"
● Advancing a term loan with an increase over and above the principle
amount and thereby earning interest which is Riba.
● Periodic payment of increase, principle payment at maturity or rescheduling
with new increase is other form of Riba transaction.
● Allowing additional time against additional amount in deferred payment
sale is another form of Riba transaction.
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10. Why Riba is Haram?
An Example:
"All that we had borrowed up to 1985 or 1986 was around $5
billion and we have paid about $16 billion yet we are still being
told that we owe about $28 billion. That $28 billion came about
because of the injustice in the foreign creditors' interest rates. If
you ask me what is the worst thing in the world, I will say it is
compound interest.“
President of Nigeria, G8 summit, Okinawa, 2000
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11. Gharar
● Lexical Meaning:
Lexically it means delusion, risk or uncertainty. Ambiguous situation
which has chance of non agreement or dispute upon disclosure of details.
Examples of Gharrar transaction:
Sale of Fish which is still in the Sea, Sale of Unborn Animals or Sale of
Birds in the Air.
● Maisir / Qimar (Gambling):
Gambling has been strictly prohibited due to the inherent element of
uncertainty and chance.
Prize bonds and lotteries are modern day examples that fall under the category
of Qimar.
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12. Prohibited Sales
 Incompetency of the parties involved
 Incorrect form
 Sale of something non-existing or weak existence
 Sale of something which is not deliverable easily
 Sale of debt to someone other than the debtor
 Sale with Jahalah (subject matter or price or time is unknown)
 Sale with two different prices
 Contingent & future sale
 Sale before taking possession
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13. Prohibited Sales
 Sale with Haram money or consideration
 Hording (sale containing harm to the society)
 Sale of Haram or Najis subject matter
 Sale of grabs to the producer of wine
 Sale with wrong condition
 Combining sale with loan
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14. What distinguishes Islamic Banking from
Conventional Banking
• Transactions are mostly asset-based (Shariah Compliant).
• It is socially-responsible banking because it operates under Shariah
restrictions.
• Does not permit financing of prohibited goods / Industries.
• It starves evil out of the society.
• Ethics and moral values play a major role in investment decisions. Not a
choice but a must.
• Unlike the principles of conventional banking and finance that look only at a
transaction from its economic and financial perspective, the tenets of Islamic
banking and finance require further inquiry to ensure each transaction passes
the litmus test of morality, social well-being, and religious adherence or
compliance.
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15. What distinguishes Islamic Banking from
Conventional Banking
Conventional Banking
Conventional banking prices
money.
Is based on fixed return on both
Sides of the balance sheet.
Islamic Banking
Islamic banking prices goods and
services which creates real wealth
in the society leading to
economic well-being.
Is based on profit & loss sharing
on deposits side, and on profit &
loss sharing or profit on assets
side.
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16. What distinguishes Islamic Banking from
Conventional Banking
Conventional Banking
Does not involve itself in trade and
business.
Depositors get a fixed rate
regardless of the bank’s
profitability, thus insulating them
from the bank’s true performance.
Islamic Banking
Actively participates in trade and
production.
Profit is shared with the
depositors, higher the bank’s
profit, higher the depositors
income.
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17. What are the main types of Islamic finance instruments/vehicles
(i.e., Murabaha, Sukuk, etc.)?
The following are some of the common and major types of Islamic
banking products offered to various customers.
• Mudaraba (direct equity participation)
• Musharaka (partnerships/joint ventures)
• Murabaha (cost plus profit mark-up)
• Ijarah (leasing)
• Sukuk (islamic bonds)
• Istisna& Salam (long & short term project financing)
• Wakala
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18. Mudaraba Contract ‫بة‬‫ر‬‫مضا‬- :
• It is an investment contract in which one party (Rab ul-Mal ‫رب‬‫المال‬- )
contributes capital while the other party (Mudarib ‫مضارب‬- ) makes
efforts for generation of profit.
• It is a contract in which the capital is provided by the depositor/fund
provider and the bank acts as Mudarib.
• The profit is shared in pre-agreed ratio and loss (if any) unless caused
by negligence or violation of terms of the contract by the Mudarib, is
borne by the depositor.
• Islamic banks use Mudaraba as the vehicle of offering savings
accounts to its customers.
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19. Madarabah in Practice
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20. Musharaka ‫كة‬‫مشار‬-:
• Musharaka means commingling by two or more persons either their
money or work to earn a profit or appreciation in value and to share the
profit and loss.
• In case of a loss it shall only be shared according to the partners
proportionate share in the Musharaka.
• The profit can be shared in any ratio if the partners are active/working
partners.
• However, a sleeping partner cannot have a profit sharing ratio higher
than his proportionate share of investment.
• The most common form of Musharaka being used by the financial
institutions is Diminishing Musharaka: it is a form of partnership in
which one of the partners promises to buy the equity share of the other
partner in a Musharaka Asset, gradually until the title to the Musharaka
Asset is completely transferred to the other Partner and untill such time
the Partner using the asset pays the rent on financial institutions share in
the Musharaka Asset.
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21. Musharaka in Practice
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22. Murabaha ‫ابحة‬‫ر‬‫م‬-:
• It is a sale contract in which a seller sells his goods/asset at cost plus
an agreed profit.
• The sale price could be paid on spot or deferred to be paid in lump
sum or in installments.
• In Islamic banking, normally the goods/asset is purchased after a
customer requests the bank to purchase the goods/asset in order to
sell the same to the customer on Murabaha (cost plus profit) basis on
deferred payment.
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23. Murabaha is Practice
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24. Ijara ‫اجارة‬-
• Ijara is leasing of a property under which a specified permissible benefit, in
the form of a usufruct, is obtained for a specified period in return for a rental
payment.
• Ijara Muntahiya Bit Tamleek ‫اجارة‬‫منتهية‬‫بالتمليك‬–
• Islamic banks more commonly use Ijara MBT, Ijara MBT is a lease that
includes a promise from the lessor to transfer the asset to the lessee.
• The asset be transafered at the end of the lease term or by stages during the
term of the contract.
• The asset can be transferred by way of gift or sale for an agreed price.
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25. Ijara in Practice
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26. SUKUK: ‫صكو‬
• An Islamic investment instrument that is asset-backed, structured in
accordance with Shariah, and registered in the name of the holders
(Sukuk holders).
• A Sukuk certificate is proof of partial ownership or beneficial interest
in an asset or enterprise. (It is always linked with an underlying asset
(tangible or intangible).
• Sukuk can be either bought from the issuer (primary market) or from
its holders (secondary market), either directly or via intermediaries
(brokers).
• Sukuk funds are raised based on the value of the underlying asset.
• Any increase /decrease in the value of the underlying asset would be
reflected in the value of the Sukuk.
• The RETURN on Sukuk is directly proportionate to the performance
of the underlying asset/project.
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27. Sukuk in Practice
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28. Istisna’ ‫استصناع‬- : and Salam : ‫سالم‬
• ISTISNA
Istisna is an advance sale of a specific commodity not yet manufactured
constructed/processed. Although the buyer may make progress payments,
no advance payment is required. An Istisna is only valid if 1) the price is fixed
with the consent of both parties, and 2) the to-be-manufactured
commodity’s specifications are fully agreed upon by both buyer and
seller/manufacturer.
• SALAM
Salam is an advance sale of specific goods which are to be supplied at a later
date and for which advanced payment is required. In contrast to a Murabaha
sale where goods are delivered and payment is deferred at a price higher than
the spot price, in a Salam transaction, the agreed-upon price is paid in full in
advance, and the delivery of the goods is deferred.
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29. Istisna and Salam in Practice
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30. Wakala: ‫كالة‬‫الو‬
Wakalah is a contract whereby the principal, appoints the agent, to substitute him
or perform on behalf of the principal. The principal is called “Aseel/Muwakkil”
and the agent is called “Wakeel”.
● The profit/loss earned/sustained is solely of the principal and the agent may
take a fixed remuneration against its services.
● Wakala is commonly used by the Islamic bank for inter bank lending
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31. Wakala in Practice
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32. Thank you
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