Islamic banking is a system that allows Muslims to deal with their finances according to their faith. It is based on avoiding interest (riba), which is forbidden. Common Islamic financing modes include mudarabah (profit-sharing), murabaha (cost-plus), ijara (leasing), musharaka (joint venture), takaful (Islamic insurance), and sukuk (Islamic bonds). The main differences between conventional and Islamic banks are that conventional banks lend money and charge interest, while Islamic banks engage in asset-backed trading and business partnerships based on profit/loss sharing.

1. PRESENTATION ON
ISLAMIC BANKING

2. Islamic Banking and Finance
• The Islamic banking and finance is a system designed to allow
Muslims to deal with their financial affairs in accordance with
their faith. Islamic banking today is an industry that is still
evolving.
• Islamic finance, is the absence of interest. Interest, known as
Riba
• It is compulsory for Muslims to completely avoid Riba in their
commercial and non-commercial daily activities. It is even
suggested that a shadow of interest will make a transaction
haram.

3. Beginning in the 1960s, Islamic banking resurfaced in the
modern world, and since 1975, many new interest-free banks
have opened. Though the majority of these institutions were
founded in Muslim countries, Islamic banks also opened in
Western Europe during the early 1980s.

4. MODESOF ISLAMIC FINANCING:
o Mudarabah (profit sharing)
o Murabaha (cost plus finance)
o Ijarah (leasing)
o Musharakah (joint venture)
o Takaful (Islamic insurance)
o Sukuk (Islamic bonds)

5. MUDARABAH (profit sharing)
• "Mudarabah" or Profit-and-loss sharing contract is a kind of partnership
where one partner gives money to another for investing it in a commercial
enterprise. The capital investment should normally come from both
partners. Both should have some skin in the game.
• The Mudarabah (Profit Sharing) is a contract, with one party providing 100
percent of the capital and the other party providing its specialized
knowledge to invest the capital and manage the investment project. Profits
generated are shared between the parties according to a pre-agreed ratio. If
there is a loss, the first partner "rabb-ul-mal" will lose his capital, and the
other party "mudarib" will lose the time and effort invested in the project
the profit is usually shared 50%-50% or 60%-40% for rabb-ul-mal.

6. MURABAHA (cost plus finance)
This concept refers to the sale of goods. such as
i. real estate
ii. Commodities
iii. Vehicle
In which Murabaha the purchase and selling price, other costs, and
the profit margin not interest are clearly stated at the time of the
sale agreement.

7. IJARAH (leasing)
• Ijarah means lease, rent or wage. Generally, the Ijarah concept refers to
selling the benefit of use or service for a fixed price or wage.
• Under this concept, the Bank makes available to the customer the use of
service of assets / equipment such as plant, office automation, motor
vehicle for a fixed period and price.

8. MUSHARAKAH (JOINT VENTURE)
Musharakah is a relationship between two parties or more that contribute
capital to a business and divide the net profit and loss pro rata.
This is often used in
• investment projects,
• letters of credit,
• purchase or real estate or property.
In the case of real estate or property, the bank assess an imputed rent and
will share it as agreed in advance. All providers of capital are entitled to
participate in management, but not necessarily required to do so. The profit
is distributed among the partners in pre-agreed ratios, while the loss is borne
by each partner strictly in proportion to respective capital contributions.

9. TAKAFUL (Islamic insurance)
Takaful is an alternative form of cover that a Muslim can avail himself against
the risk of loss due to misfortunes. Takaful is based on the idea that what is
uncertain with respect to an individual may cease to be uncertain with respect
to a very large number of similar individuals. Insurance by combining the risks
of many people enables each individual to enjoy the advantage provided by
the law of large numbers.

10. SUKUK (islamic bonds)
• Sukuk (Arabic: ‫كوكص‬, plural of ‫كص‬Sakk, "legal instrument, deed, check") is
the Arabic name for financial certificates, but commonly referred to as
"sharia compliant" bonds.
• Sukuk are defined by the AAOIFI (Accounting and Auditing Organization for
Islamic Financial Institutions) as "securities of equal denomination
representing individual ownership interests in a portfolio of eligible existing
or future assets.“
• Sukuk securities are structured to comply by not paying interest. This is
generally done by involving a tangible asset in the investment. For example,
by giving partial ownership of a property built by the investment company
to the bond owner who collect the profit as rent, which is allowed under
Islamic law.Upon expiration of the Sukuk, the rent payments cease.

11. DIFFERENCES BETWEEN CONVENTIONAL &
ISLAMIC BANK
Conventional Islamic Bank
• Conventional Bank treats money as
a commodity and lend it against
interest as its compensation
• Generally Conventional Banks do
not involve themselves in trade and
business as they act only as money
lenders.
• Compensation is always Interest
• Conventional banks are in the
business of lending & borrowing
money based on interest.
• Islamic banking products are usually
asset backed and involves trading of
assets, renting of asset and
participation on profit & loss basis.
• One of the Islamic Bank business
model is based on trade, thus it
needs to actively participate in trade
and production process and
activities.
• Compensation is always Price
(Thaman)
• Islamic Banks are not money lending
institutes but they work as a trading/
investment house.