This document discusses Islamic financial instruments. It begins by outlining the principles of Islamic banks, including prohibitions on interest and investing in ethical businesses. It then describes the objectives of Islamic banks as promoting financial transactions and investments according to Islamic principles. The document goes on to summarize various types of Islamic financial instruments for mobilizing funds, such as savings accounts, investment accounts, and sukuk bonds. It also describes instruments for utilizing funds, including mudaraba (partnership), musharaka (equity participation), murabaha (cost-plus financing), and ijara (leasing).

1. Islamic Financial Instruments Dr. Mohamed Jamaldeen For more presentation in Islamic Finance visit http://ifinanceexpert.wordpress.com/ Islamic Finance Expert Blog

2. Objectives + New Financial Principals of Islamic Instruments by Banks Islamic According to Shar’ia Development of Islamic Financial Instruments

3. Principals of Islamic Banks Prohibition of Interest Business activities based on fair & halal profits Giving Zakat (The poor due) Prohibition of monopoly Co-operation in the development by ethical investing

4. The objectives of Islamic Banks To promote and development of financial and banking transaction according to Islamic prinicipal To promote investment and enterprises that are engaged in ethical economic activities Returns for the investment based on Profit-Loss-Sharing

5. Types of instruments Instruments for mobilising fund Same as conventional dealings but different in principal - No interest & No predetermined return of savings ( E.g.. Savings and Current Account) Instruments for utilizing fund New concepts similar to entrepreneurship in Banking (E.g.. Musharaka, Mudaraba, Ijaara etc.)

6. Instruments for Mobilising Funds Current Accounts Savings Accounts Investment Accounts Sukuk (Islamic Bonds)

7. Current accounts Islamic Banks Conventional Banks In terms of withdrawing and depositing the funds Islamic Banks Conventional Banks In terms paying interest to the currents accounts

8. Savings account Islamic Banks Conventional Banks Deposits are repayable on demand Islamic Banks Conventional Banks Return Profit/Loss Return - Interest

9. Investment account Alternative to the Fixed Account of conventional Banks Return – Depends upon the dealing of business project of the banks Types of Investment Account - With Authorization – The depositor authorises the bank to invest in any project return as profit or loss - Without Authorization - The depositor select the project and invest the money in specified project return as profit or loss

10. Sukuk (Islamic bond) 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. 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). Sukuk structures are listed in the stock exchange or in secondary market Some scholar does not agree with the concept of Sukuk as they effectively requires time value for money

11. Instruments for Utilising Fund Mudaraba (Partnership) Musharaka (Equity Participation) Murabaha ( Mark-up on sales) Ijara ( Leasing)

12. Mudaraba ( Partnership) Bank - Capital Entrepreneur – Knowledge and Experience Profit / Loss Profit Entrepreneurship Return – Profits or Loss Arrangement can be made for the money to be gradually paid back to the bank with the bank taking decreasing share of profits

13. Musharaka (joint venture) Bank Working capital, Assets, Technical and Managerial experiences Client Working capital, Assets, Technical and Managerial experiences Joint Venture Return Profit / Loss (shared according to the agreement) Arrangement can be by bank to gradually receives its part of capital back in agreed instalment together with the profits ex. Letter of credit

14. Murabaha (Mark-up on sales) Bank – buy the good requested by the client Ex. Machinery, Raw Materials Cost + Mark up (Agreed by higher price) Client With the option to purchase the good Buy Sale Mark-up the bank – There is a risk element when the client not to fulfilling the promise Client payment – May pay on delivery or instalement agreed

15. Ijaara (Leasing) Purchase order and Asset price SUPPLIER LEASSOR Asset Title Lease Payment Asset Specification & Negotiation. Asset Client ( Lessee ) 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

16. Various other financial instruments Short term transaction between Islamic Banks Lines for financing working capital Redeemable participation

17. The End