How Islamic Finance works?

Almir Colan | @almircolan | almir@auscif.com | www.AusCIF.com
AusCIF aims to:
»Raise the awareness of Islamic Finance by developing
comprehensive and unique educational programs and re...
What	
  does	
  religion	
  have	
  to	
  
do	
  with	
  wealth	
  and	
  
economic	
  life?	
  

Set	
  of	
  rules	
  =	...
Money &
wealth?	

Story of Yusuf a.s.; Shu’ayb a.s. (Madyan)	

1 (out of 5) of the Maqasid (aims) of sharia is
preservatio...
“A	
  #me	
  will	
  come	
  when	
  one	
  will	
  not	
  
care	
  how	
  they	
  gain	
  their	
  money,	
  
whether	
  ...
Is	
  Islamic	
  Finance	
  knowledge	
  fardh	
  ‘ein?
• Our	
  daily	
  financial	
  transac=ons,	
  halaal	
  or	
  
not...
Why Islamic Finance?
Universal demand for a
fair and just system that
is socially responsible
and sustainable. 	

Change t...
• The	
  Prophet	
  said,	
  “Two	
  hungry	
  wolves	
  let	
  loose	
  
among	
  sheep	
  are	
  no	
  more	
  harmful	
...
"The best of people are those who are the
most beneficial to the (other)
people" (Daraqutni, Hasan)
What	
  is	
  Islamic	
  finance?
• Islamic	
  finance	
  represents	
  financial	
  ac=vity	
  that	
  is	
  
consistent	
  ...
Growth and potential
• 1963 Egypt (town of Mit Ghamr) first savings bank based on profitsharing 	

commercial Islamic
• 1975...
Growth and potential
• Fastest growing segments of the finance service industry.	

• Growing at over 10% - 15% per annum	

...
ConvenConal	
  Banks	
  -­‐	
  Money	
  is	
  considered	
  a	
  
commodity
Surplus	
  	
  	
  	
  	
  	
  

Money

Exchan...
Islamic	
  banks	
  -­‐	
  Money	
  used	
  as	
  a	
  medium	
  of	
  
exchange	
  
Profit

Money

Asset

In	
  Islamic	
 ...
Islamic	
  	
  

ConvenConal	
  	
  

Bank

Bank

• Deal	
  in	
  goods	
  and	
  documents	
  
and	
  not	
  in	
  money....
Basic modes of Islamic Financing
– Musharaka (Equity partnership, Joint
Venture)	

• Eg: purchasing property or assets suc...
Other	
  complex	
  instruments:	
  eg.	
  Sukuk
3c	
  Periodic	
  
payments

Investor

1a	
  Sukuk
1b	
  Cash

SPV	
  

2...
AusCIF’s Islamic Finance
Quiz: Results & Answers
• Average Score 63%
Q.1
• True of False: One of the core aims or

objectives (maqasid) of the Shariah is the
preservation of Wealth (Maal).	

...
Q.2
• True or False: Subject matter in a contract

can not be anything that is not tangible. (Eg:
usufruct (benefit from so...
Q. 3
• True or False: It is permissible to sell a

commodity before it comes under our
control or we take (actual or const...
Q. 4
• True or False: Offer and acceptance are

non-essential attributes of the contract and
if they are missing then the ...
Q. 5
• True or False: It is permissible to have

contract that combines contracts of sale
and lease if they refer to the s...
Q. 6
• True or False: According to shari'ah,
anything that has economic value is
considered wealth.	


• False	

• 39% Cor...
Q. 7
• True or False: Riba al-Fadl refers to a delay
in the settlement of one or both countervalues.	


• False
“Gold	
  with	
  gold,	
  silver	
  with	
  silver,	
  wheat	
  with	
  wheat,	
  barley	
  
with	
  barley,	
  dates	
  w...
Q. 8
• True or False: Exchanging US$105 with
AUD$100 on the spot (hand to hand,
without delay) is permissible.	


• True
Q. 9
• True or False: Buying a house for eg.

$450,000 (to be paid in instalments over 5
years) is a permissible arrangeme...
Q. 10
• True or False: Late fees are permissible as
long as they are mutually agreed to at the
start of a contract.	


• F...
Q. 11
• True or False: Gharar refers to uncertainty
and deception (amongst other things).	


• True	

• 85% Correct answer...
Q. 12
• True or False: In Musharaka (joint venture),
the profit ratio is fixed according to capital
contribution, while loss...
Q. 13
• True or False: In musharaka, partner who

invest eg. $50,000 (or 10% of total
investment capital) has right to spe...
Q. 14
• True or False: The result of a sale

transaction is instant and results in an
absolute transfer of the (asset) own...
Q. 15
• True or False: Buying shares (stock) on a

short term price fluctuations is considered
speculation (rather than inv...
Why	
  learn	
  about	
  Islamic	
  finance?
• Umar,	
  the	
  second	
  Caliph	
  and	
  successor	
  to	
  
the	
  Prophe...
Almir Colan	


@almircolan	

www.almircolan.com	

almir@auscif.com	

www.AusCIF.com
How islamic finance works webinar by aus cif com
How islamic finance works webinar by aus cif com
How islamic finance works webinar by aus cif com
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How islamic finance works webinar by aus cif com

  1. 1. How Islamic Finance works? Almir Colan | @almircolan | almir@auscif.com | www.AusCIF.com
  2. 2. AusCIF aims to: »Raise the awareness of Islamic Finance by developing comprehensive and unique educational programs and research capabilities; »Encourage and improve links between academics, practitioners, government and community; »Attract leading international Islamic finance scholars and researchers in order to build lasting high-level international linkages, global partnerships and contribute to the developments of the Islamic banking and finance industry; »Enhance Islamic finance research, practices and public awareness via Islamic finance events and conferences; and »Facilitate the development of local research programs in new and emerging fields of Islamic banking and finance.
  3. 3. What  does  religion  have  to   do  with  wealth  and   economic  life?   Set  of  rules  =  Shari’ah     (Prohibi=ons,  obliga=ons,   clarifica=ons  and  so  on)     ! Islam  =
 “way  of  life”  (Qur’an  5:3)   Objec=ves  of  Shariah   Preserving:     1. 2. 3. 4. 5. Ibadaat   (Acts  of  Worship) Religion   Life   Family  Progeny   Wealth   Intellect  and  honor Muamalaat     (Interac=ons  with  People) v Islamic  finance,  economy…                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  4. 4. Money & wealth? Story of Yusuf a.s.; Shu’ayb a.s. (Madyan) 1 (out of 5) of the Maqasid (aims) of sharia is preservation of wealth. (other: Religion, Life, Family Progeny and Intellect/honor) 1 (out 4) questions on Day of Judgment is about wealth: “where he earned it and how he spent it.” (other: life, knowledge, body) (Tirmidhi) Riba: “a war [against you] from Allah and His Messenger.” (Qur’an, 2:279) Zekat and Hajj (2/5 pillars of Islam) directly linked with your financial ability.                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  5. 5. “A  #me  will  come  when  one  will  not   care  how  they  gain  their  money,   whether  legally  or  illegally”  [Bukhari] Do  we  fall  under  this  descrip=on?    Do  we  follow   what  is  halaal  (permissible)  to  the  best  of  our   ability?                  ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  6. 6. Is  Islamic  Finance  knowledge  fardh  ‘ein? • Our  daily  financial  transac=ons,  halaal  or   not?  Do  we  know?  Who  to  ask?   • What  about  more  complex  transac=ons? A  muslim  is  expected  to  support  himself.    Muhammad  al-­‐Shaybani  said  that   according  to  the  majority  of  the  fuqaha   from  the  Ahl  sunnah  wal  Jamaa’a  is  that   supporCng  one’s  self  to  the  level  of  need   is  fardh. :: www.auscif.com :: facebook.com/Islamic.Finance.Au ::
  7. 7. Why Islamic Finance? Universal demand for a fair and just system that is socially responsible and sustainable. Change the greedy and inhumane system we have created. To provide a stable and secure ethical alternative, especially in these uncertain times.
  8. 8. • The  Prophet  said,  “Two  hungry  wolves  let  loose   among  sheep  are  no  more  harmful  to  them   than  a  man’s  craving  a=er  wealth  and  status  is   to  his  religion.”  (Tirmizi) Such  individuals  may  be  willing  to  compromise  themselves,   exploit  others,  their  religion  and  so  on.  Their  craving  drives  them   to  make  money  anyway  and  anyhow.                    ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  9. 9. "The best of people are those who are the most beneficial to the (other) people" (Daraqutni, Hasan)
  10. 10. What  is  Islamic  finance? • Islamic  finance  represents  financial  ac=vity  that  is   consistent  with  the  principles  of  Islamic  law  or  the   Shariah,  which  prohibits  unethical,  immoral,  specula=ve   ac=vi=es  as  well  as  interest,  gambling,  uncertainty  and  so   on.     • Islamic  finance  encourages  entrepreneurship,  mutual   coopera=on,  generosity  and  a  spirit  of  partnership  which   connect  the  capital-­‐owner  with  real  economic  ac=vi=es   that  may  actually  contribute  to  the  welfare  of  society  via   commerce,  manufacturing,  construc=on  and  so  on.                  ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  11. 11. Growth and potential • 1963 Egypt (town of Mit Ghamr) first savings bank based on profitsharing commercial Islamic • 1975 Dubai Islamic Bank (The first modernfunding to projects in bank), Islamic Development Bank (provide the member countries • 1999 The first index launched - The Dow Jones Islamic Market Index (DJIM) • Top 500 Islamic Finance Institutions by The Banker (No #1 Al Rajhi Bank) Islamic banks and • 2011 A consortium of the industry's first financial industry associations launched International Islamic interbank rate (alternative to LIBOR)                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  12. 12. Growth and potential • Fastest growing segments of the finance service industry. • Growing at over 10% - 15% per annum • Estimated to be worth more than AUD$1.4 trillion held by Islamic financial may rise • Assetsthan $5 trillion. (Moody’sinstitutionsService) five-fold to more Investors is expected to 2.2 • The world’s Muslim population world’s totalto increase population. billion by 2030 or 26.4% of the projected (Projections by the Pew Research Center’s Forum on Religion & Public Life) • What will they do in next 5, 10 or 20 years? • IBF in Australia...                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  13. 13. ConvenConal  Banks  -­‐  Money  is  considered  a   commodity Surplus             Money Exchange/sale Money Delay The  sale  of  money  for  money  runs  contrary  to  the  nature   of  money  as  being  a  medium  of  exchange  (judge),  unit  of   account  and  store  of  value.   EG:  bank  loans  and  credit  cards                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  14. 14. Islamic  banks  -­‐  Money  used  as  a  medium  of   exchange   Profit Money Asset In  Islamic  finance  money  must  be  converted  into  something   useful,  which  in  turn  generates  profit  for  the  investors.   Linking  money  to  produc=ve  purposes  brings  into  ac=on  labour   and  other  resources  to  iniCate  a  process  from  which  goods  and   services  are  produced  and  benefits  passed  on  to  society.                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  15. 15. Islamic     ConvenConal     Bank Bank • Deal  in  goods  and  documents   and  not  in  money.   • Money  used  only  as  a  medium   of  exchange  for  purchasing  the   goods  for  the  purpose  of   leasing  or  selling  onward,   thereby  earning  income  or   profit.     • Hence,  profit  comes  with  Risk   and  Responsibility • Deal  with  Money  &   documents  not  in  goods.   • Money  is  considered  a   commodity  that  can  be  sold/ bought  and  rented  against   profit  or  rent  that  one  party   has  to  pay,  irrespec=ve  of  the   use  or  role  of  the  lent  money   in  the  hands  of  the  borrower. Adapted  from  "Understanding  Islamic  Finance"  M.  Ayub,  2007                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  16. 16. Basic modes of Islamic Financing – Musharaka (Equity partnership, Joint Venture) • Eg: purchasing property or assets such as machinery for a factory – Mudaraba (Trustee/Investment Partnership) • Eg: Bank deposit (saving and investment accounts) – Murabaha (Cost Plus Sale) • Eg: short term financing – Ijarah (Leasing) • Eg: equipment financing, – Salam (Deferred Delivery Sale, pre-paid sale) • Eg: agricultural produce – Istisna (Manufacturing Sale) • Eg: construction and Infrastructure projects • In addition to the above business activities, Islamic banks may provide services against service charges or management fees.            ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  17. 17. Other  complex  instruments:  eg.  Sukuk 3c  Periodic   payments Investor 1a  Sukuk 1b  Cash SPV   2a  Sale  of   assets Seller Issuer  /Trustee 2b  Price 3a  Lease  of   3b  Rentals assets 4  Servicing  agreement Lessee                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      :: Servicing   Agent
  18. 18. AusCIF’s Islamic Finance Quiz: Results & Answers • Average Score 63%
  19. 19. Q.1 • True of False: One of the core aims or objectives (maqasid) of the Shariah is the preservation of Wealth (Maal). • True
  20. 20. Q.2 • True or False: Subject matter in a contract can not be anything that is not tangible. (Eg: usufruct (benefit from someone else's property) which is commonly found in a lease agreements) • False
  21. 21. Q. 3 • True or False: It is permissible to sell a commodity before it comes under our control or we take (actual or constructive) possession of it. (Excluding Salam and Istisna arrangements) • False
  22. 22. Q. 4 • True or False: Offer and acceptance are non-essential attributes of the contract and if they are missing then the contract can not be described as Void (batil). • False
  23. 23. Q. 5 • True or False: It is permissible to have contract that combines contracts of sale and lease if they refer to the same asset (e.g. Hire Purchase contracts with e.g. a lease for 3 years and sale at 30% at the end of the lease period). • False • 43% Correct answers
  24. 24. Q. 6 • True or False: According to shari'ah, anything that has economic value is considered wealth. • False • 39% Correct answers
  25. 25. Q. 7 • True or False: Riba al-Fadl refers to a delay in the settlement of one or both countervalues. • False
  26. 26. “Gold  with  gold,  silver  with  silver,  wheat  with  wheat,  barley   with  barley,  dates  with  dates,  and  salt  with  salt;  same  quanCty   for  same  quanCty,  equal  for  equal;  transacCon  being  made  hand   to  hand  (i.e.  on  the  spot  payment).”  (Muslim)
  27. 27. Q. 8 • True or False: Exchanging US$105 with AUD$100 on the spot (hand to hand, without delay) is permissible. • True
  28. 28. Q. 9 • True or False: Buying a house for eg. $450,000 (to be paid in instalments over 5 years) is a permissible arrangement. • True • 85% correct answers
  29. 29. Q. 10 • True or False: Late fees are permissible as long as they are mutually agreed to at the start of a contract. • False • 36% correct answers
  30. 30. Q. 11 • True or False: Gharar refers to uncertainty and deception (amongst other things). • True • 85% Correct answers
  31. 31. Q. 12 • True or False: In Musharaka (joint venture), the profit ratio is fixed according to capital contribution, while loss ratio can be negotiated, but, must be fixed at the start. • False
  32. 32. Q. 13 • True or False: In musharaka, partner who invest eg. $50,000 (or 10% of total investment capital) has right to specify from the beginning that his share of profit will be $5,000 per year (which equals to 10% of his initial contribution). • False
  33. 33. Q. 14 • True or False: The result of a sale transaction is instant and results in an absolute transfer of the (asset) ownership. • True
  34. 34. Q. 15 • True or False: Buying shares (stock) on a short term price fluctuations is considered speculation (rather than investment) and thus is a prohibited trading practice. • True
  35. 35. Why  learn  about  Islamic  finance? • Umar,  the  second  Caliph  and  successor  to   the  Prophet  Muhammad,  stated,   “Whoever  does  not  have  an   understanding  of  the  rules  of  Islam   should  not  deal  in  our  market”  (The  Life   of  Umar,  As-­‐Sallabi  2007).     • He  also  warned,  “No  one  should  sell  in   our  marketplace  except  one  who  has   understanding  of  the  rules  of  Islam,   otherwise  he  is  going  to  consume  riba   whether  he  wants  to  or  not”  (ibid).                ::      www.auscif.com      ::      facebook.com/Islamic.Finance.Au      ::
  36. 36. Almir Colan @almircolan www.almircolan.com almir@auscif.com www.AusCIF.com

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