Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 1.
Unit Code: IF
Examine the distinguishing features of Islamic finance
Indicative Content: 1.1 Explain the meaning of Shariah and its role in Islamic finance; analyse the sources of Shariah; describe the major prohibitions in Shariahcompliant commercial transactions; What is Shariah? The sources from which the Shariah tenets are derived Role of the Shariah in Islamic finance Shariah compliance a precondition Major prohibitions to be observed in Islamic finance 1.2 Describe and explain the prohibition of Riba and Gharar; Meaning of Riba consensus connotation of Riba Types of Riba Riba Al Nasiah and Riba Al Fadl Rationale for prohibition of Riba Implications of Riba prohibition in Islamic finance What is Gharar as a term in Islamic economics and finance? Rationale for prohibition of Gharar in Islamic finance 1.3 Describe and evaluate the implications of prohibition of Riba and Gharar on individuals, financial institutions and societies; Deposits mobilisation on any basis other than interest Risk-based financing by IFIs IFIs not allowed to launch lotteries and other games of chance Transactions involving hazard (in which rights and liabilities of the parties are not clear and sufficiently known) are prohibited Socio-economic justice 1.4 Evaluate the role of risk-based and equity finance. What is meant by the terms risk-based and risk-free Impact of risk-free capital on economies Risk-based finance encourages real sector development Examiners Tips: Keep in view the comprehensive definition of Riba which includes any increase over and above the principal amount payable in a contract obligation, and/or in exchange transactions not covered by a corresponding increase in labour, commodity, risk or expertise. Make sure that you understand that the paying and receiving of interest in the conventional sense is included in the term Riba.
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As a group or individually make sure that you can explain what you understand by Gharar and Mayser and how they impact on individuals, financial institutions and society. And provide necessary explanations with examples. Candidates should have plenty of time to examine the difference between risk-free / debt-based and risk- / equity-based finance and their respective implications.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 2.
Unit Code: IF
(Part 1) Develop a sound understanding of Islamic economics
Indicative Content: 2.1 Explain the concept of time value of money and the impact of inflation on financial liabilities in Islamic economics; The concept of time value of money or opportunity cost in conventional finance Scope of acceptance of time value of money in Islamic finance Impact of inflation on financial liabilities in terms of mainstream Islamic economics and finance Non-suitability of indexation as an alternative to interest in conducting business by banks and financial institutions 2.2 Explain wealth as a means to the good life rather than an end in itself growth and development free of exploitation of one another; Wealth as a means to the good life rather than an end in itself Not to be spent lavishly Should be used as a source of charity welfare of the needy and deprived Its ethics dominate economics Growth and development free of exploitation of one another Examiners Tips: Make sure that you understand that the concept of time value of money is accepted in Islamic finance to the extent of pricing of goods and usufruct of assets; not in the shape of the conventional concept of opportunity cost. Make sure that you can explain how the Islamic economic concept of welfare differs from conventional notions and its ethics dominate the pursuit of self-interest; the Islamic economic concept of welfare means Falah (success) in this world and reward in the Hereafter; so self-interest and the quest for profit have been limited by the normative values.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 2.
Unit Code: IF
(Part 2) Develop a sound understanding of Islamic economics
Indicative Content: 2.3 Explain the objectives of Islamic economics which include the fulfilment of basic human needs with dignity, provision of basic food, education and health necessities with equal opportunities to all for work and employment; Describe the functioning of market forces and the role of the State for optimum growth with social justice just distribution of produce among the factors of production and necessary transfer payments by the State and among individuals. Facilitating the forces of demand and supply to function in an Islamic framework without distortions Balancing free market economy with socio-economic justice and societys common needs
2.4
Examiners Tips: Make sure you understand that balancing free market economy by the State is needed to achieve social equality, need fulfilment of all, gainful employment for all who are able to work, equitable distribution of income and wealth, and economic stability. Make sure that you can explain the higher objectives of Shariah that are related to human welfare in a broader perspective and include not only economic well-being, but also human brotherhood and socio-economic justice, tranquillity, happiness and social harmony.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome:
Unit Code: IF
3. Describe and explain the business ethics cherished in Shariah-based economics Indicative Content: 3.1 Identify the business ethics and moral values in the creation and distribution of wealth; Emphasis on honesty, gentleness, safeguarding others from harm and straightforwardness in business deals; Emphasis on transparency and disclosure and avoiding misleading marketing and false bidding; Emphasis on fulfilling the covenants and responsibilities of all parties to contracts; Shariah guidelines for debtors and creditors regarding loans and debts. 3.2 Analyse the motivation for following the Shariah in business dealings. Emphasis on normative values and social justice Increasing emphasis on corporate social responsibility Examiners Tips: Make sure that you understand that, besides major prohibitions, Shariahbased economics has prescribed a number of norms and boundaries in order to avoid inequitable gains by any of the parties to contracts. These norms are related to the accountability of human beings before God and, therefore, have different implications from the norms of mainstream / conventional business ethics. As a group or individually make sure that you can explain how Shariahbased economics guides all parties to contracts to fulfil the covenants and pay liabilities, and encourages employers and employees to be fair and just to each other.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 4.
Unit Code: IF
(Part 1) Understand and explain the concepts and operations of Islamic banking
Indicative Content: 4.1 Explain the concept of intermediation between the resource surplus and the recourse deficit units and its basis in the conventional and Islamic framework; Islamic banking is also intermediation between savers and fund users Different bases in conventional and Islamic finance Rules of loans and debts and the potential of Qard al Hasan in Islamic finance Risk and return in Islamic finance 4.2 Explain the main elements of the contracts and features of Islamic commercial law relating to banking; Various categories of contracts with respect to legality Elements of contracts Valid, void and voidable contracts Compensation in the contracts (commutative vis--vis noncommutative) 4.3 Describe the key operations of Islamic banking: deposit mobilisation and use of funds for financing and investment; Basis of deposit mobilisation in conventional and Islamic finance Basis of current account / non-remunerative deposits Basis and procedure for saving / term / investment deposits Fund management on an agency basis Various categories of Islamic contracts for financing Examiners Tips: Banking is intermediation between the savers / depositors and the fund users through financial institutions and by means of markets and the financial instruments both in the conventional and Islamic frameworks. Make sure that you can explain that IFIs could operate as indirect and direct intermediaries despite involvement in real economic sector businesses and activities. In Islamic finance the instrument of interest will be replaced by a set of instruments comprising risk-based profit / loss sharing ratios and profit margins in trading and leasing activities. Provide any necessary explanations with examples.
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Make sure that you understand the various categories of contracts used by IFIs like sale, leasing, partnership, agency, assignment of debt, mortgages, etc; and the factors that render such contracts void. Make sure that you understand the basis and procedure of deposits management by IFIs and the possible methods for their financing activities.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 4.
Unit Code: IF
(Part 2) Understand and explain the concepts and operations of Islamic banking
Indicative Content: 4.4 Describe the essentials of partnership-based modes Musharakah, Mudarabah; Types of Shirkah (partnership) Rules regarding partnership capital, profits and losses Principles and procedure of Musharakah Principles and procedure of Mudarabah Procedure in Musharakah financing by Islamic banks
4.5 Explain the features of trade-based modes credit sales like Murabaha and Musawamah, and forward sales including Salam and Istisnaa; Essentials of trade-based modes Procedure and potential of Murabaha as a financing mode Difference between Murabaha and Musawamah and their scope Essentials of forward sales Procedure and potential of Salam as a financing mode Procedure and potential of Istisnaa as a financing mode Differentiating Salam from Istisnaa Risks and risk management in trade-related modes Examiners Tips: Make sure you understand the basis of the partnership modes used by banks in the Islamic economic framework Make sure that you understand the importance of achieving Shariah compliance in trade-based modes and why in the case of non-Shariah compliance the IFIs income from related transactions goes to a charity account.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome:
Unit Code: IF
4. (Part 3) Understand and explain the concepts and operations of Islamic banking Indicative Content: 4.6 Describe and explain the lease (Ijarah) based modes and the hybrid of partnership and lease (diminishing Musharakah: DM); Essentials of leasing assets subject to valid leases and rules for rentals Responsibilities of the lessor and the lessee Methods of transfer of ownership of the asset to the lessee Ijarah and conventional leasing Securitisation through Ijarah issuance of Ijarah Sukuk DM through partnership by ownership (Shirkatulmilk) DM through commercial partnership (Shirkatulaqd) DM for purchases of houses / apartments Components of the mortgage arrangement (Partnership, lease and sale) Procedure DM for construction of houses DM for balance transfer facility Examiners Tips: Make sure that you understand clearly the operations of the different lease (Ijarah) based modes and illustrate with examples. Make sure that candidates have plenty of time to consider the procedure for all types of mortgage financing under diminishing Musharakah; and can calculate the rentals and apply the whole procedure of financing for the purchase, construction and renovation of properties.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome:
Unit Code: IF
4. (Part 4) Understand and explain the concepts and operations of Islamic banking Indicative Content: 4.7 Explain the main features of Islamic instruments of investment. Financial markets: money & capital markets; primary & secondary markets Features of Islamic financial instruments Variable-return securities Quasi-fixed-return securities Fixed-return securities and their scope Islamic money market Islamic capital markets Stocks Sukuk Unit Trusts and Islamic Funds Trading of various investment instruments in Islamic financial markets Trading rules of various categories of instruments Screening Criteria Purification Criteria Managing financial investments
Examiners Tips: Stocks, Sukuk and Unit Trusts / Funds are the main components of Islamic financial markets. Explain to the candidates how the functioning of these markets is different from the conventional markets. Emphasise that Shariah-compliant instruments can be developed on the basis of PLS and the debt-creating modes that could generate variable, quasi-fixed and fixed return on investments. Explain with exercises and case studies. Make sure that candidates understand the investment management process under the framework of Islamic finance.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome:
Unit Code: IF
5. (Part 1) Explain the key differences between conventional banking and Islamic banking Indicative Content: 5.1 Explain that complying with the Shariah is the basic requirement of Islamic banking; Explain the difference in the subject matter of conventional and Islamic banking and the nature and level of risk taken in the two systems; Difference in the nature of intermediation Different subject matters in the two systems Nature of business in the two systems Nature of risks in the two systems Explain the difference in the procedure and processes of the two kinds of banking in calculating return despite the fact that normally the same benchmark is used by conventional and Islamic banks; Difference in the application of the concept of time value of money in the two systems Use of benchmarks in the two systems; rationale for the permission to use the same benchmark Procedure and processes of the two kinds of banking despite the use of the same benchmark in the two systems.
5.2
5.3
Examiners Tips: Make sure that you can explain why Shariah-compliance is the basic requirement of Islamic banking and the differences to conventional banking. Illustrate with examples of the nature and level of risks taken in the two systems. The main categories of Islamic modes of business and financing include profit- / loss- / sharing-based and debt-creating (trading- and lease-based) modes. Make sure that you understand both and illustrate with examples.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 5.
Unit Code: IF
(Part 2) Explain the key differences between conventional banking and Islamic banking
Indicative Content: 5.4 Explain the additional risks faced by Islamic banks, such as noncompliance with Shariah rules, assets risks, loss of cost of funds in default cases, enforceability of debt; Describe the difference in regulatory and supervisory requirements of the two systems; Risk management and internal controls Cash and liquidity management and the relationship with regulators / central banks Shariah Board and Shariah-related audit / inspection Explain the difference between the two systems in terms of the impact of excessive use of credit on the economy and society. Creation of money Inflation Distortions in real economic activity Defaults and non-performing loans and debts Economic instability and ecological destruction and bank failures Socio-economic justice
5.5
5.6
Examiners Tips: While Islamic banks face almost all the risks faced by conventional banks make sure that you understand the additional risks that they face. You should be able to provide explanations and examples of risk mitigation. Make sure that you understand the different impacts that Islamic banking principles may have on financial institutions, investors and fund users.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 6.
Unit Code: IF
(Part 1) Understand and explain Takaful as an alternative to insurance
Indicative Content: 6.1 Explain the meaning of Takaful; describe and explain the need for taking insurance cover and why its Shariah alternative is required; Nature of and need for Insurance What is Takaful? Non-conformity of conventional insurance to Shariah principles Involvement of Riba, Gharar and Mayser Transfer versus sharing of risks 6.2 Explain the basic concepts and principles of Takaful; the basis of co-operation among policy holders (participants); Principles of Mutuality and Co-operation Principles of Tabarru (Donation) Principles of Al-Wakala (Agency) Principles of Dhaman (Guarantee) Principles of Mudarabah Principles of Rights and Obligations Shared Responsibility, Common Benefit and Mutual Solidarity Examiners Tips: Muslim societies in general have avoided conventional insurance due to the involvement of interest, gambling and excessive uncertainty (Riba, Qimar and Gharar respectively). Make sure that you can explain the implications of the various aspects. Make sure that candidates have plenty of time to consider the principles of Takaful: mutual risk sharing and co-operation among participants / policy holders and non-transference of risks from one party to the other.
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Unit Title: Islamic Finance Level: Advanced Diploma Learning Outcome: 6.
Unit Code: IF
(Part 2) Understand and explain Takaful as an alternative to insurance
Indicative Content: 6.3 Explain various models of Takaful and how they fit in the theory and principles of Islamic finance; Wakalah model Mudarabah model Waqf model Combined models 6.4 Describe and explain how the Takaful system works an overview of operational procedures; General Takaful (alternative of general insurance), and Family Takaful (alternative of Life insurance) Nature of Participants Account and Takaful Account (Fund) 6.5 Explain the main differences between Takaful and conventional insurance in terms of rights and responsibilities of the parties involved and the modes of business; Mutual help and risk sharing Underwriting Surplus / Underwriting Loss Rights of participants and Takaful operators Life policies / Family Takaful Non-Life (general insurance) business / General Takaful Investment of Takaful Funds 6.6 Explain ReTakaful for underwriting the risks of Takaful business; What is ReTakaful? Insuring the risk of Takaful Operators without the involvement of Riba 6.7 Explain the potential of Takaful as an alternative to conventional insurance. Mobilisation of the so-far untapped market Ethical and socially responsible investment of funds based on Shariah principles Increasing Takaful requirements of the IFIs Examiners Tips: Make sure that candidates are given plenty of time to consider the features of the different Takaful models.
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Make sure that you can explain how the Takaful system works, looking at the different types of business models. The differences between the Takaful system and the conventional system are important. Make sure that you can explain the benefits of the Takaful system in terms of rights and responsibilities of the parties and modes of business.
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