Lecture 2
INT R O. TO ISLA MIC B A NK ING & F INA NCE
Components of Islamic Banking and
Finance Industry
Islamic Banking
The Islamic banking component:
• Deposit-taking and finance of institutions to meet needs of Muslim customers and
investors
• May be:
- Fully fledged Islamic banks
- Islamic subsidiaries or
- ‘Windows’ of conventional banks
Components of Islamic Banking and
Finance Industry
Takaful (Islamic Insurance)
• Takaful based on mutual cooperation, common welfare and general good of
society
• Development of modern takaful began with debates about legality of
conventional insurance schemes
• Controversy resolved by the Islamic Fiqh Academy in Resolution No. 9 of
1985
• Takaful and retakaful significant in managing and mitigating risks in Islamic
banking and finance
Components of Islamic Banking and
Finance Industry
The Islamic Capital Markets (ICM)
• ICM is a special market where investment activities do not
contradict the principles of the Sharī‘ah
• The Islamic Capital Market is free riba, gharar and maysir
• The market players include:
- Brokerage houses
- Investment banks
- Fund management institutions
- Islamic asset management institutions
The Islamic Capital Markets (ICM)
• Various international bodies established to study, promote,
develop and set standards for Islamic finance products
include:
- International Islamic Financial Market (IIFM)
- Islamic Financial Services Board (IFSB)
- Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI).
Components of Islamic Banking and
Finance Industry
Islamic non-bank financial institutions
• Islamic non-bank financial institutions that play a facilitative role in Islamic
society ensuring economic development through non-bank financing
• They support liquidity needs of major agents in the economy
• They include: finance companies, Islamic housing cooperatives, Islamic
microfinance institutions, waqf management institutions, private equity
/venture capital firms, hajj and zakat management bodies
Operating Structures of Islamic
Banking and Finance Industry
Key operating mechanisms of Islamic banking and finance
industry include:
• Fund mobilization
• Fund utilization
- Sharing modes
- Sale modes
- Leasing modes
Key Operating Mechanisms of
Islamic Banking and Finance
Figure 1.4: Key Operating Mechanisms of Islamic Banking
and Finance
Key Operating Mechanisms of
Islamic Banking and Finance
Fund mobilization
The process of raising funds to establish a viable financial
institution through the sale of shares to investors and
receiving funds from depositors. Features include:
• An ethical manner
• Net equities owned by shareholders
• Investment deposits
• Demand deposits
Key Operating Mechanisms of
Islamic Banking and Finance
Fund utilization
The process of using the funds realized in Sharī'ah-compliant
business:
Sharing modes - Partnership where funds initially mobilized are
invested in Sharī'ah-compliant business; parties share profits or
loss
Sale modes – The bank purchases an item on behalf the client and
resells it to them on a deferred basis or immediately
Leasing modes - The rent of an asset or hire purchase where a rental
fee is paid for a stipulated period of time mutually agreed by the
parties
The Development of Islamic Banking
Products
• Islamic banking products - financial tools through which the financial
institutions carry out business
• Designed to suit conventional market needs while retaining the true nature
of Islamic financial transactions
• Involve profitable and non-profitable dealings such as:
- zakat (alms)
-waqf (charitable endowment)
- tabaru‘at (gratuitous contracts)
The Development of Islamic
Banking Products
• Islamic banking products initially based on ideas of equity
partnership or partnership modalities
• Early jurists employed ijtihad in developing Sharī‘ah-
compliant products
• Emphasis should be on developing Sharī‘ah-based
rather than Sharī‘ah-compliant financial products
The Growth of Islamic Banking
and Finance
• Islamic banking and finance being integrated into the global
economy
• The practice of Islamic banking and finance has now been accepted
as an alternative to conventional financial systems
• Acceptance attracts new non-Muslim experts, professionals and
financial institutions
Islamic Banking Today: The Size of
the Industry
• The industry has more than doubled in size since 2006
• Sharī‘ah-compliant assets rose by 8.85% from US$ 822 billion in
2009 to US$ 895 billion in 2010
• By end of 2011, total estimate of Sharī'ah-compliant assets was US
$1.3 trillion
• Rapid growth experienced in the Gulf Cooperation Council (GCC)
countries over the last decade
• Growth and expansion of Islamic finance industry continued at the
time of global financial crisis
Total Assets of Islamic Banks
in the GCC Region
Figure 1.5: Total Assets of Islamic Banks in the GCC Region
The World-wide Spread of Islamic
Banking
• Islamic commercial banking experiencing a huge expansion in
products and areas of influence across the world.
• 2010 estimates show Islamic banks and financial institutions
number 430 across over 75 countries.
• Islamic banking spans the Middle East, North Africa, South-
East and central Asia, sub-Saharan Africa, and western
Europe.
• More than 191 leading conventional banks in Europe and
America have opened Islamic banking windows or subsidiaries
such as Standard Chartered Bank, Citibank, HSBC, ABN
AMRO, and UBS.
Global Coverage of Islamic Finance
Figure 1.6: Global Coverage of Islamic Finance
Multinational Islamic Banks
The main multinational Islamic banks are:
• Jordan Islamic Bank – 1978/1979
• Faisal Islamic Banks in Egypt and in Sudan – 1977/1978
• Kuwait Finance House - 1977
• Al Rajhi Bank - 1987
• Islamic Development Bank (IDB) - 1975
Future of Islamic Finance Industry
• Islamic finance set to continue significant growth path
• Legal and regulatory challenges still face the emerging Islamic
financial industry
• Islamic finance has the potential of being an alternative mode of
finance
• Islamic finance assets expected to grow consistently at 15% per
annum and exceed USD 1 trillion by 2016
• Global spread of Islamic finance products likely to soon engulf Latin
America and elsewhere
