islamic-banking-concept-practices-challenges

Islamic Banking: Concept, Practices &
Challenges
Presented by
Md. Fariduddin Ahmed
Former Managing Director & CEO
Islami Bank Bangladesh Limited
Export Import Bank of Bangladesh Ltd.
Sponsor CEO Jaiz Bank Ltd, Nigeria
Former Advisor
Export Import Bank of Bangladesh Ltd.
Former Head of Islamic Banking
AB Bank Limited
Secretary General
Bangladesh Islamic Banker’s Association
Member: Shariah Supervisory Committee
of several Islamic Banks

The Objectives of Islamic economy are as under:
1.01 To establish Adl (justice), to attain Hasanah (good) and
Falah(welfare) in this life and the life hereafter.
1.02 To establish Ihsan (gracious conduct or kindness) in economic
affairs.
1.03 To establish Maroof (proper or good acts, institutions) in
economic life.
1.04 To eliminate Munker (evil, wrong or injurious practice from
economic life)
1.05 To free the humanity from un-wanted burdens and hackles and
to make life easier for them.
1.00 The Objectives of Islamic Economy:
Prepared by Forkan Uddin
Mahmood 2

1.06 To achieve maximum economic growth.
1.07 To maximize employment to ensure proper distribution of
wealth in the society.
1.08 To achieve universal education.
1.09 To encourage cooperation in the society.
1.10 To favoring the weaker sections of the society to establish
them in life.
The Objectives of Islamic Economy (Contd…)
Mahmood 3

2.01 Sura Al-Baqarah: Ayat 201
And of them there are some who say: “Our Lord! Give us in
this world that which is good and in the Hereafter that which
is good, and save us from the torment of the Fire!”.
2.02 Sura Al-Maidah: Ayat 2
Co-operate in the acts of piety and virtue and do not co-
operate in the acts of sin and transgression (of laws of Allah).
2.00 Al-Quran on the objectives of Islamic Economy:
Mahmood 4

2.03 Sura Al-A’raf: Ayat 157
He (Prophet Muhammad, puh) commands them for Al-Ma’ruf
and forbids them from Al-Munkar, he allows them as lawful At-
Tayyibat and prohibits them as unlawful Al-Khaba’ith, He
releases them from their heavy burdens and from the
fetters that were upon them.
2.04 Sura An-Nahl: Ayat 90
Verily, Allah enjoins Al-Adl and Al-Ihsan and giving help to kith
and kin and forbids Al-Fahsha (evil deeds) and Al-Munkar
(prohibited things) and Al-Baghy (oppression).
Al-Quran on the objectives of Islamic Economy (Contd…)
Mahmood 5

2.05 Sura Al-Hajj: Ayat 41
Those who, if we give them power in the land, enjoin Iqamat-as-
Salat, to pay the Zakat and they enjoin Al-Ma’ruf and forbid Al-
Munkar.
2.06 Sura Al-Qasas: Ayat 5-6
And we wished to do a favour to those who were weak in the
land, and to make them rulers and to make them the inheritors.
And to establish them in the land and we let Fir’aun and Haman
and their hosts receive from them that which they feared.
2.07 Sura Al-Hashr: Ayat 7
What Allah gave as booty to His Messenger (puh) from the
people of the townships – it is for Allah, His messenger the
kindred, the orphans, Al-Masakin, and the wayfarer, in order that
it may not become a fortune used by the rich among you.
Al-Quran on the objectives of Islamic Economy (Contd…)
Mahmood 6

The objectives of Islamic Banks are to promote, foster and
develop the application of Islamic principles in the financial
sector in such a manner that it help achievement of the above
objectives of the Islamic Economy
3.00 The Objectives of Islamic Banks:
4.00 The Concept of Islamic Banking:
General Secretariat of the OIC defined Islamic Banking as “An
Islamic Bank is a financial Institution whose statutes, rules and
procedures expressly states its commitment to the principles
of Islamic Shariah and to the banning of the receipt & payment
of interest on any of its operations.”
Mahmood 7

5.01 Riba (Interest) Nasia and Riba Fadl are prohibited.
Riba Nasia means interest on Loan and
Riba Fadl is the exchange of the homogenous commodity but
of unequal quality and quantity.
5.02 Gharar (uncertainty/ambiguity) prohibited.
5.03 Maiser (Gambling) prohibited.
5.04 Conducting Shariah permissible businesses and services only.
5.00 Philosophy of Islamic Banking:
Mahmood 8

6.01 Risk Sharing :
No predetermined rate of return. Sharing the end result of
the business. Loss arising out of Mudaraba business is entirely
borne by the Shahib-Al-Maal.
6.02 Emphasis on Productivity, not on Credit Worthiness:
 Dominant consideration not on collateral.
 Emphasis on soundness of the project.
6.03 Moral Dimension
Islamic value oriented system. Full compliance of Shariah. No
finance for wine/ tobacco/ casino/ pork production or trading.
6.00 Special Characteristics/ distinguishing
features/superiority of Islamic Banking:
Mahmood 9

6.04 Equity :
Justice to all parties.
Riba is unjust.
6.05 Allocative Efficiency:
Productivity of the project.
Finance goes to high productive project even if credit
worthiness is lower.
6.06 Stability of the Banking system:
Mudaraba & Musharaka ensures stability.
6.07 Growth:
Promotion & innovation Entrepreneurship development.
Special Characteristics/ distinguishing (Contd…)
Mahmood 10

7.00 Principles of Mobilization Resources:
7.01 Al-Wadeah:
Fund which is deposited with Banks by the depositors with
clear permission to utilize/invest the same is called Al-
Wadeeah. Islamic banks receive deposits in Current Accounts
on the basis of this Al-Wadeeah Principle. Islamic banks obtain
permission from the Al-Wadeeah depositors to utilize the
Funds at its own responsibility and the depositors would not
share any profit or loss earned/incurred out of using of this
funds by the bank. The banks have to pay back the deposits
received on the principle of Al-Wadeeah on demand of the
holders. The depositors have to pay govt. taxes and other
charges, if any.
 Mechanics of Islamic Banking:
Mahmood 11

7.02 Al-Mudaraba:
Mudaraba is a partnership of labor and capital, where one
partner provides full capital and the other one manages the
business. The capital provider is called Sahib-Al-Maal and the
user of the capital is called Mudarib. As per Shariah principles,
the Mudarib will conduct the business independently following
Shariah principles. The Sahib-Al-Maal may provide advices, if
he deems fit but he cannot impose any decision over the
Mudarib. Profit, if any, is divisible between the Sahib-Al-Maal
and the Mudarib at a predetermined ratio, while loss, if any, is
borne by the Sahib-Al-Maal. Mudarib can not avail of any
salary or remuneration against his labor as a manager or
conductor of the enterprise/business. The deposits, received
by Islamic banks under this principle are called Mudaraba
Deposits.
Mechanics of Islamic Banking (Contd…)
Mahmood 12

Al-Mudaraba (Contd…)
Here, the depositors are called Sahib-Al-Maal and the bank is
called Mudarib. The Mudaraba deposits Include:
i) Mudaraba Savings Deposits (MSD)
ii) Mudaraba Short Notice Deposits (MSND)
iii) Mudaraba Term Deposits (MTD).
iv) Mudaraba Deposit under various Scheme.
Different Islamic banks have developed various deposit
schemes on the basis of this Mudaraba principle such as
monthly deposit- based Hajj Scheme, Monthly/One time
deposit-based Term Deposit Scheme, Monthly Mudaraba
Profit Deposit Scheme, Monthly Mudaraba Marriage Savings
Scheme, Mudaraba Savings Bond etc.
Mahmood 13

 Principles of utilization of resources:
8.00 Bai-Mechanism:
8.01 Bai-Murabaha:
Contractual buying and selling at a mark-up profit is called
Murabaha. In this case, the client requests the Bank to
purchase certain goods for him. The Bank purchases the
goods as per specification and requirement of the client. The
client receives the goods on payment of the price which
includes mark-up profit as per contract. Under this mode of
investment the purchase/ cost price and profit are to be
disclosed separately.
Mahmood 14

8.02 Bai-Muajjal:
"Bai-Muajjal" means sale for which payment is made at a future
fixed date or within a fixed period. In short, it is a sale on Credit.
It is a contract between a buyer and a seller under which the
seller sells certain specific goods (permissible under Shariah and
Law of the Country), to the buyer at an agreed fixed price
payable at a certain fixed future date in lump sum or within a
fixed period by fixed installments. The seller may also sell the
goods purchased by him as per order and specification of the
buyer.
In Bank's perspective, Bai-Muajjal is treated as a contract
between the Bank and the Client under which the bank sells to
the Client certain specified goods, purchased as per order and
specification of the Client at an agreed price payable within a
fixed future date in lump sum or by fixed installments
Mahmood 15

8.03 Bai-Salam:
Bai-Salam means advance purchase. It is a mode of business
under which the buyer pays the price of the goods in advance
on the condition that the goods would be supplied/ delivered
at a particular future time. The seller supplies the goods
within the fixed time.
Parallel Bai-Salam is a Salam contract whereby the seller
depends, for executing his obligation, on receiving what is due
to him - in his capacity as purchaser from a sale in a previous
Salam contract, without making the execution of the second
Salam contract dependent on the execution of the first one.
Mahmood 16

Bai-Salam (Contd…)
The following conditions are essential in the contracts of
Murabaha, Bai-Muajjal and Salam. The respective contracts
must include the following aspects regarding the Goods:
 Number/Quantity
 Quality
 Sample
 Price and amount of profit
 Date of supply/time limit
 Place of supply
 Who will bear the cost of supply?
 Timeframe for payment in case of Bai-Murabaha and Bai-
Muajjal.
Mahmood 17

8.04 Bai-Istisna:
A contract executed between a buyer and a seller under
which the seller pledges to manufacture and supply certain
goods according to specification of the buyer is called Istisna.
An Istisna agreement is executed when a manufacturer or a
factory owner accepts a proposal placed to him by a person
or an Institution to produce/manufacture certain goods for
the latter at a certain negotiated price.
Here, the person giving the order is called Mustasni, the
receiver of the order is called Sani and the goods
manufactured as per order is called Masnu .
An order placed for manufacturing or producing those goods
which under prevailing customs and practice are produced or
manufactured will be treated as Istisna contract.
Mahmood 18

Bai-Istisna (Contd…)
Conditions & characteristics of Istisna are
enumerated below:
a) The concerned Agreement must contain the details, such as,
the type, class, quantity and features of the goods to be
produced, so that no misunderstanding is created later on.
b) The price has to be settled; payment time/schedule and
modes thereof is to be predetermined.
c) When, where and on whose cost the goods to be supplied
has to be clearly mentioned.
d) If agreed by both parties, payment may be made in advance to
the seller in part or in full or may be deferred to be paid in
due course/ agreed time.
Mahmood 19

Conditions & characteristics of Istisna (Contd…)
e) Generally timeframe is not mandatory for supplying the goods
under Istisna agreement. It may be executed without
determining timeframe. But in case of bank, timeframe for
supplying goods must be determined to avoid any dispute in
future.
f) Condition for imposing stipulated compensation/penalty may
be included in the Istisna agreement against the party who
breaches the terms of the agreement causing the other party
to suffer. But no compensation/penalty would be imposed on
any party if it happens for any valid reason or unavoidable
circumstances.
g) As per opinion of the contemporary jurists, the compensation
in case of Istisna may be treated as legal income.
Mahmood 20

Parallel Bai-Istisna:
If it is not stipulated in the contract that the seller himself would
produce/provide the goods or services, then the seller can enter
into another contract with third party for getting the goods or
services produced/provided by the third party. Such a contract is
called Parallel Istisna. This may be treated as a sub-contract. The
main features of this contract are: -
i. The original Istisna contract remains valid even if the Parallel
Istisna contract fails and the seller will be legally liable to
produce/provide the goods or services mentioned in the Istisna
contract.
ii. Istisna and Parallel Istisna contracts are treated as two separate
contracts.
iii. The seller under the Istisna contract will remain liable for failure
of the sub-contract.
Mahmood 21

9.00 Share Mechanism:
9.01 Mudaraba:
Mudaraba is a shared venture between labor and capital.
Here Bank provides with entire capital and the investment
client conducts the business. The Bank, provider of capital, is
called Sahib-Al-Maal and the client is called Mudarib. The
profit is to be distributed between the Bank and the
investment client at a predetermined ratio while the bank has
to bear the entire loss, if any.
Mahmood 22

9.02 Musharaka:
Musharaka means partnership business. Every partner has to
provide more or less equity funds in this partnership business.
Both the Bank and the investment client reserve the right to
share in the management of the business. But the Bank may
opt to permit the investment client to operate the whole
business. In practice, the investment client normally conducts
the business. The profit is divided between the bank and the
investment client at a predetermined ratio. Loss, if any, is to
be borne by the bank and the investment client according to
capital ratio.
Mahmood 23

10.00 Leasing Mechanism:
10.01 Ijara:
The mode under which any asset owned by the bank, by
creation, acquirement or building-up is rented out is called
Ijara or leasing. In this mode, the leasee pays the Bank rents at
a determined rate for using the assets/properties and returns
the same to the Bank at the expiry of the agreement. The
Bank retains absolute ownership of the assets/ properties in
such a case. However, at the end of the leased period, the
asset may be sold to the client at an agreed price.
Mahmood 24

10.02 Ijarah Muntahia Bittamleek (Hire-Purchase):
Under this mode, the bank purchases vehicles, machineries
and instruments, building, apartment etc. and allowed clients
to use those on payment of fixed rents in installments with
the ultimate objective to sell the asset to the client at the end
of the rental period. The client acquires the ownership/title of
the assets/ properties subject to full payment/adjustment of all
the installments.
Mahmood 25

10.03 Hire-purchase Musharaka Mutanaqasa (HPMM):
Hire-purchase Musharaka Mutanaqasa means purchasing and
acquiring ownership by one party by sharing in equity and
paying rents for the rest of the equity held by the Bank or
other party. Under this mode, the Bank and the client on
contract basis jointly purchase vehicles, machineries, building,
apartment etc. The client uses the portion of the assets
owned by the bank on rental basis and acquires the
ownership of the same assets by way of paying banks portion
of the equity on the assets in installments together with its
rents as agreed upon,
Mahmood 26

Hire-purchase Musharaka Mutanaqasa (Contd...)
The features of this mode are elaborated below:
a) The client applies to the Bank expressing his/her wishes to
purchase the assets/properties and the bank accords its approval
after proper evaluation/ scrutiny.
b) The client deposits his/her share of equity with the bank after
obtaining approval and the bank pays total price of the
assets/properties together with its equity.
c) Before purchase of the assets/properties an agreement is
executed stipulating the actual prices, monthly rents, price of the
bank's portion of the assets/properties, payment schedule and
installment amount and the nature of the security etc.
d) The bank shall rent out its own portion of the assets/properties
to the client as per terms & conditions of the agreement.
Mahmood 27

e) The client (Hirer) pays off in installments bank's portion of
equity on the assets together with its fixed rent as per the terms
and conditions of the agreement.
f) With the payment of installments by the client, the ownership of
the bank in the assets/properties gradually diminishes, while that
of the client increases.
g) The amount of the rent receivable by the bank, reduces
gradually proportionate to the increase in the ownership of the
client on the assets/properties.
h) The client acquires full ownership of the goods/assets after
payment of the entire dues of the bank.
i) The client may acquire the full ownership of the assets/
properties before expiry of the deal by paying off the entire dues
to the bank.
Mahmood 28

j) The rent remains payable in proportion to Bank's ownership,
if the client fails to pay the due installment(s).
k) The bank can take of the assets/properties under its control,
if the client fails to pay the installment(s) as per the terms and
conditions of the agreement.
l) The ownership of the assets/properties remains with the bank
until the entire equity provided by the bank together with the
fixed rent is fully paid off. On full payment/ adjustment of
Bank's dues, it transfers the ownership to the client.
m) The amount which the bank receives as rent is its income.
The rent should not treat as a part of the equity in any way.
Mahmood 29

11.00 Direct Investment:
Under this mode, the bank can under its full proprietorship
conduct business by directly investing in the industries, trading,
transports etc. In these cases, the profit/loss fully goes to the bank.
12.00 Investment Auctioning:
Selling by auction of those assets/goods acquired by the bank
through direct investment is called Investment auctioning.
Generally, the bank establishes industrial units by direct investment,
makes the same operationally profitable and then sells out on
auction. This mode of investment is very helpful for industrialization
of the country.
13.00 Quard:
It is a mode to provide financial assistance/loan with the stipulation
to return the principal amount in the future without any increase
thereon.
Mahmood 30

14.00 Quard Hassan:
This is a benevolent loan that obliges a borrower to repay
the lender the principal amount borrowed on maturity. The
borrower, however, has the discretion to reward the lender
for his loan by paying any amount over and above the amount
of the principal provided there will be no reference (explicit
or implicit) in this regard.
If a bank provides its client any loan, it can receive actual
expenditure relating to the loan as service charge only once.
It cannot charge annually at a percentage rate.
If a loan is provided against the money deposited by a client in
the bank, it has the right not to pay any profit against the
amount of money given as loan. But profit should be paid on
the rest of the amount deposited as per previous agreement.
Mahmood 31

Bai- Mechanism:
1. Bai-Murabaha
2. Bai-Muajjal
3. Bai-Salam & Parallel Bai-Salam
4. Bai-Istisna & Parallel Bai-Istisna
Share Mechanism:
1. Mudaraba
2. Musharaka
Leasing Mechanism:
1. Ijara
2. Ijarah Muntahia Bittamleak (Hire Purchase)
3. Hire-purchase Musharaka Mutanaqasa (HPMM) also known
as Hire Purchase under Shikatul Meelk (HPSM)
Direct Investment
Investment Auctioning
Quard & Quard Hassan
 Summary of Modes of Investment by Group
Mahmood 32

15.00 Foreign Exchange & Foreign Trade under
Islamic Perspective:
Islamic Conventional
Based on sale contract
between the parties
Legal relation is based on
assignment and Mandate
Title in the name of the Bank
Title of goods in the name of
the client
Deals in goods Deals in documents
Accepts Risk Does not take Risk
Subordinate to the Contract
Abstract responsibility in case
of fraud or defective goods
No interest elements Charges interest
Mahmood 33

15.01 Import & Export Services and Financing
Products:
Service
Principles
Scope of Application Basis
Wakalah  Letter of Credit
 Advising Letter of Credit
 Transferring Letter of Credit
 Safe Keeping
 Export Bills Collection
Commissions &
Fee Basis.
Kifalah  Letter of Credit
 Performance
 Bid
 Advance Payment Guarantee
 Adding Confirmation
Commission
Basis
Mahmood 34

Import & Export Services and Financing Products (Contd…)
Financing
Principles
Scope of Application Basis
Bai  Bai-Murabaha (Import)
 Bai-Murabaha (Import Bills)
 Bai-Murabaha (Post Import)
 Bai-Muajjal (Pre Shipment)
 Bai-Salam (Pre Shipment)
 Bai-as-Sarf (Post Shipment)
Mark up Basis
Mark up Basis
Mark up Basis
Mark up Basis
Profit Basis
Profit Basis
Shirkat  Mudaraba (Import)
 Musharaka (Pre Shipment)
 Musharaka Documentary
Bills
Profit Loss sharing Basis
Ijara  Hire Purchase under
Shirkatul Meelk
Rental Basis
Mahmood 35

16.00 Difference between Islamic Banking and
Conventional Banking:
No Conventional Banking Islamic Banking
1 The functions and operating
modes of conventional
banks are based on man-
made principles.
The functions and operating modes of
Islamic banks are based on the
principles of Islamic Shariah.
2 The investor is assured of a
predetermined rate of
interest.
In contrast, it promotes risk sharing
between provider of capital (investor)
and the user of funds (entrepreneur).
3 It aims at maximizing profit
without any restriction.
It also aims at maximizing profit but
subject to Shariah restrictions.
4 It does not deal with zakat
and does not pay any zakat
In the modern Islamic banking system,
it has become one of the service-
oriented functions of the Islamic banks
to collect and distribute zakah. It pays
zakat.
Mahmood 36

Difference between Islamic Banking and Conventional Banking
(Contd…)
5 Lending money and getting it
back with interest is the
fundamental function of the
conventional banks.
Participation in partnership business
is the fundamental function of the
Islamic banks
6 Its scope of activities is
narrower when compared
with an Islamic bank
Its scope of activities is wider when
compared with a conventional bank.
It is, in effect, a multipurpose
institution.
7 It can charge additional money
(compound rate of interest) in
case of defaulters..
The Islamic banks have no provision
to charge any extra money from the
defaulters.
8 In it very often, bank’s own
interest becomes prominent.
It makes no effort to ensure
growth with equity.
It gives due importance to the public
interest. Its ultimate aim is to ensure
growth with equity.
Mahmood 37

Difference between Islamic Banking and Conventional Banking
(Contd…)
9 For interest - based commercial
banks, borrowing from the
money market is relatively
easier.
For Islamic banks, it is comparatively
difficult to borrow money from the
money market.
10 Since income from the advances
is fixed, it gives little importance
to developing expertise in
project appraisal and evaluations.
Since it shares profit and loss, Islamic
banks pay greater attention to
developing project appraisal project
appraisal and evaluations.
11 Conventional banks give greater
emphasis on credit-worthiness of
the clients.
Islamic banks, on the other hand, give
greater emphasis on the viability of
the projects.
12 The status of a conventional
bank, in relation to its clients, is
that of creditor and debtors.
The status of Islamic bank in relation
to its clients is that of partners,
investors and trader
13 A conventional bank has to
guarantee al its deposits.
Strictly speaking, an Islamic bank
cannot guarantee all its deposits.Prepared by Forkan Uddin
Mahmood 38

17.01 Commitment.
17.02 Shortage of skilled manpower and inadequate supportive and
linked institutions.
17.03 Inadequate Capital & Money Market Instruments.
17.04 Lack of unified Shariah Rulings.
17.05 Controlling and Supervision by the Central Bank.
17.00 Problems and Challenges of Islamic
Banking:
Mahmood 39

17.06 Separate Law for Islamic Banking.
17.07 Inadequate Branding and Marketing.
17.08 Non-introduction of Mudaraba & Musharaka (Profit & Loss
Sharing) Modes.
17.09 Lack of co-operation among Islamic Banks and Financial
Institution.
17.10 Little effort for orientation and training of the customers and
other stakeholders.
Problems and Challenges of Islamic Banking (Contd…)
Mahmood 40

18.00 The following Standards have been issued by the Accounting
and Auditing Organization for Islamic Financial Institutions
(AAOIFI) as such:
Standards issued by AAOIFI
Mahmood 41
1. Financial Accounting Standards … 25
2. Auditing Standards … 5
3. Governance Standards … 7
4. Ethical Standards … 2
5. Shariah Standards … 41
Total: 80

Mahmood 42
18.01 Financial Accounting Standards (1-8)
1. General Presentation and Disclosure in the Financial
Statements of Islamic Banks & Financial Institutions
2. Murabaha and Murabaha to the Purchase Orderer
3. Mudaraba Financing
4. Musharaka Financing
5. Disclosure of Bases for Profit Allocation Between Owners’
Equity and Investment Account Holders
6. Equity and Investment Account Holders and their Equivalent
7. Salam and Parallel Salam
8. Ijarah and Ijarah Muntahia Bittamleek

Mahmood 43
Financial Accounting Standards (9-16)
9. Zakah
10. Istisna’a and Parallel Istisna’a
11. Provisions and Reserves
12. General Presentation and Disclosure in the Financial
Statements of Islamic Insurance Companies
13. Disclosure of Bases for Determining and Allocating Surplus
or Deficit in Islamic Insurance Companies
14. Investment Funds
15. Provisions and Reserves in Islamic Insurance Companies
16. Foreign Currency Transactions and Foreign Operations

Mahmood 44
Financial Accounting Standards (17-25)
17. Investments
18. Islamic Financial Services offered by Conventional Financial
Institutions
19. Contributions in Islamic Insurance Companies
20. Deferred Payment Sale
21. Disclosure on Transfer of Assets
22. Segment Reporting
23. Consolidation
24. Investments in Associates
25. Investment in Sukuk, shares and similar instruments.

Mahmood 45
18.02 Auditing Standards
1. Objective and Principles of Auditing
2. The Auditor’s Report
3. Terms of Audit Engagement
4. Testing for Compliance with Shari’a Rules and Principles by an
External Auditor
5. The Auditor’s responsibility to Consider Fraud and Error in
an Audit of Financial Statements

Mahmood 46
18.03 Governance Standards
1. Shari’a Supervisory Board: Appointment, Composition and
Report
2. Shari’a Review
3. Internal Shari’a Review
4. Audit & Governance Committee for Islamic Financial
Institutions
5. Independence of Shari’a Supervisory Board
6. Statement on Governance Principles for Islamic Financial
Institutions
7. Corporate Social Responsibility Conduct and Disclosure for
Islamic Financial Institutions

Mahmood 47
18.04 Ethical Standards
1. Code of Ethics for Accountants and Auditors of Islamic
Financial Institutions
2. Code of Ethics for the Employees of Islamic Financial
Institutions

Mahmood 48
18.05 Shariah Standards (1-10)
1. Trading in Currencies
2. Debit Card, Charge Card and Credit Card
3. Default in Payment by a Debtor
4. Settlement of Debt by Set-off
5. Guarantees
6. Conversion of a Conventional Bank to an Islamic Bank
7. Hawala
8. Murabaha to the Purchase Orderer
9. Ijarah and Ijarah Muntahia Bittamleek
10. Salam and Parallel Salam

Mahmood 49
Shariah Standards (11-20)
11. Istisna’a and Parallel Istisna’a
12. Sharika (Musharaka) and Modern Corporations
13. Mudaraba
14. Documentary Credit
15. Jua’la
16. Commercial Papers
17. Investment Sukuk
18. Possession (Qabd)
19. Qard (Loan)
20. Commodities in Organized Markets

Mahmood 50
21. Financial Papers (Shares and Bonds)
22. Concession Contracts
23. Agency
24. Syndicated Financing
25. Combination of Contracts
26. Islamic Insurance
27. Indices
28. Banking Services
29. Stipulations and Ethics of Fatwa in the Institutional Framework
30. Monetization (Tawarruq)
31. Controls on Gharar in Financial Transactions

Mahmood 51
32. Arbitration
33. Waqf
34. Hiring of Persons
35. Zakah
36. Impact of Contingent Incidents on Commitments
37. Credit Agreement
38. Online Financial Dealings
39. Mortagage and its Contemporary Applications
40. Distribution of Profit in Mudarabah-based Investments
Accounts
41. Islamic Reinsurance.

19.00 The following Standards have been set by the Islamic Financial
Services Board (IFSB), Kualalampur, Malaysia
Mahmood 52
Standards issued by IFSB
i. Risk Management Standard,
ii. Capital Adequacy Standard,
iii. Corporate Governance Standard,
iv. Transparency and Market Discipline Standard,
v. Supervision Review Process Standard,
vi. Recognition of Ratings on Shariah Compliant Financial Instruments
Standard,
vii. Development of Islamic Money Market Standard,
viii. Governance for Collective Investment Scheme Standard,
ix. Special Issues in Capital Adequacy Standard,
x. Guiding Principles on Governance of Islamic Insurance (Takaful),
xi. Conduct of Business for Institutions offering Islamic Financial Services
Standard,
xii. Guiding Principles on Shariah governance System.

20.00 Contents of the “Guidelines for Islamic Banking”
issued by the Bangladesh Bank in November, 2009
Mahmood
Sections Table of Contents
I Introduction and Definition of term used in Islamic Banking
II License
A. Criteria for Setting up full-fledged Islamic Banks
B. Terms and Conditions for Opening Islamic Banking Branches by conventional
commercial banks
C. Conversion of Conventional commercial banks into Islamic Banks.
III Responsibility for Shariah Compliance
IV Principles of Deposit
V Investment Principles and Investment products.
VI Maintenance of CRR/SLR, Liquidity management
VII Preparation of Financial Statements
VIII Framework of Rate of Return
Appendix-I Fit and proper criteria for selection of members of Shariah Supervisory
Committee
Appendix-II Guidelines for preparation of financial statements
Appendix-III Framework of rate of return
53

Thanks for your
Co-operaTion
Allah Hafez

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