This document provides an overview of Islamic finance, including its key concepts, models, and growth opportunities. It discusses how Islamic finance works using models like murabaha and ijara that avoid interest, the principles of prohibiting riba (interest), gharar (uncertainty), and investing in certain sectors. It outlines major Islamic finance contracts and products like mudaraba, sukuk, and takaful. It also explains the roles of mudaraba, sukuk, and Sharia boards in ensuring compliance with Islamic principles.

1. Islamic Finance
Its Concepts, Models, Growth & Opportunities
IndoAsia Partners
Investment Banking: Finance & Regulatory
India & Indonesia
Representatives in UAE, Europe & Singapore
Sanjay H. Indulkar +91 9867161367
Amir Ahmed : Indonesia +6281382101577
indoasiapartner@asia.com
www.linkedin.com/in/sanjay-harishchandra-indulkar
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2. Contents
1.The Islamic Finance Markets –Highlights
2.How it works
3.Principles behind Islamic Finance
4.Iillustration
5Majors Contracts/Products used in Islamic Banking
6.Mudaraba
7.Sukuk
8. Sharia Board
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3. The Islamic Finance Markets - Highlights
.
• The new Islamic Financial Services Industry Stability Report 2018 released by
the Islamic Financial Services Board (IFSB) on June 8 2018 confirms earlier
forecasts that the global Islamic finance industry now has surpassed the $2tn-
mark in assets across its three main sectors: Banking, capital markets and
takaful.
• Total assets were valued at $2.05tn as of the end of 2017, marking 8.3%
growth in US dollar terms year-on-year and reversing the preceding two years
of near stagnation of asset value of $1.89tn in 2016 and $1.88tn in 2015
• Asia had the most improved market share, increasing to 24.4% from 22.5%,
with expansions in key markets such as Malaysia, Indonesia, Pakistan and
Bangladesh. Islamic finance penetration in other regions, including Africa (ex-
North Africa), the Americas, Australia and Europe, while slowly picking up,
remained nascent.
• The world’s biggest Muslim country Indonesia wants to boost sharia finance
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4. How it works?
It is suggested a two-tier mudarabah model as the basis of a riba-free banking. The
bank would act as the capital partner in mudarabah accounts with the depositor on
one side and the entrepreneur on the other side.[51] This model would be
supplemented by a number of fixed-return models—mark-up (murabaha), leasing
(ijara), cash advances for the purchase of agricultural produce (salam) and cash
advances for the manufacture of assets (istisna'), etc. In practice, the fixed-return
models, in particular murabaha model, were the bank's favourites, as they bear
results most similar to the interest-based finance models. Assets managed under
these products far exceed those in "profit-loss-sharing modes" such
as mudarabah and musharakah.
Murabahah may be called an Islamic mortgage transaction, instead of lending the
buyer money to purchase the item, a bank might buy the item itself from the seller,
and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in
installments. However, the bank's profit cannot be made explicit and therefore there
are no additional penalties for late payment. In order to protect itself against default,
the bank asks for strict collateral. The goods or land is registered to the name of the
buyer from the start of the transaction. Another approach is EIjara wa EIqtina, which
is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar
way (selling the vehicle at a higher-than-market price to the debtor and then
retaining ownership of the vehicle until the loan is paid).
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5. Principles of Islamic Finance
Main principles of Islamic finance:
1Prohibition of RIBA (interest): No receipt of interest
2Prohibition of activities with elements of GHARAR (uncertainty): excessive
speculation is prohibited. Gambling, derivatives
3Prohibition to invest in certain sectors- “haram” items:
- Alcohol/drugs
- Weapons/defense
- Adult entertainment
- Pig related industry
- Conventional financial services (banks, insurance)
4Transactions should be backed by a tangible asset
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6. Illustration
Ijara Transaction It is a lease of an object or services involving the transfer of the usufruct
or manfa’a for a rent consideration. The nature of the manfa’a must be precisely defined;
the rent must be a fixed value, whether payable in a lump sum or in installments; and the
term must be precisely determined. The most‐frequently encountered ijara transaction is a
“bifurcated transaction
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7. Major Contracts/Products used in Islamic Banking
Murabaha: Buying & Selling
Mudaraba: Investment management
Musharaka: Partnership
Ijarah: Leasing
Sukuk: Islamic bonds
Takaful: Islamic insurance
Wakalah: Agency
Istisna’: Contract of works
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8. Mudaraba
Investors provide the financial
institutions with capital to fund a
specified enterprise
The financial institution does not
contribute capital but investment
management capabilities only
Similar to discretionary asset
management
Investment/
trading activity
Financial
Institution
(mudarib)
Investor (rab
al-mal)
Mudarabahcapital
Periodic profits and
return of capital
Payment of
mudarabah capital
Return of capital
and periodic profits
less mudarib’s
management fee
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9. Sukuk
Sukuk essentially amounts to
commercial paper that provides the
subscriber with ownership or part
ownership in the underlying asset:
Asset backed note Securitization
Assets
Lease
Rental
payment
under
lease
Purchase
price of
assets
Financial
Institution/
Borrower
Special
Purpose
Vehicle
Investors
(financial
institution)
Sukuk
Certificates
Periodic and
amortising
payments
Sukuk
Certificate
proceeds
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10. Sharia Board
One distinct feature of the modern Islamic banking is the role of the Sharia
boards
=> boards made up of Islamic scholars available to an Islamic financial
institution for guidance and supervision in the development of Sharia compliant
products, which have to approve all transactions:
•Sharia board ensures that investments structures are in line with Sharia
•Sharia board has the responsibility of laying down the underpinning Sharia
principles and rules that the institution should adhere to
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