Islamic finance

El Harrar Marwa
Elbenna Karima
Hamdoune Anas
Contents
 Introduction
 Definitions
 Sources of IF
 Islamic Finance Principles – Concept
 Framework of the IF system
 Values of islamic finance
 The Islamic Finance Markets - highlights
 Development of IF
 Chronology of modern Islamic Finance
 Multinational banks position
 conclusion
Introduction

 Islamic financial contracts are designed to facilitate

financing according to Islamic norms. It emerged in
the early 1960s with the objective of developing and
providing alternative financial contracts in conformity
with Sharia principles as necessitated by Islam.

 “O you who believe, Eat not Riba doubled or multiplied,

but fear Allah that you may be successful.”
Definitions:

Islamic banking can be defined as: a form of modern

banking based on Islamic legal concepts using risk-
sharing as its main method excluding financing based
on fixed pre- determined return.
 Takaful: An arrangement between members of
community to jointly guarantee each other.
Sources of IF

 Primary Sources
 The Holy Quran
 Sunnah (the sayings, deeds and endorsements of Prophet
Muhammad PBUH)
 Secondary Sources (mostly by the exercise of Ijtihad
(reasoning by the learned))
Islamic Finance Principles - Concept
No intrinsic value in money :
 Money as a way of exchange and a store of value not subject to trade
Fundamental principle :
 Risk sharing partnership => Profit and Loss Sharing (PLS)
 basically, no pain no gain

 The purpose of the Islamic financial system is, as with

conventional finance, to mobilize global resources to promote
and sustain global and regional development.
 Banking and finance
needs

Shariah sources Fiqh al-Muamalaat contracts

– Musharaka- Partnership
– Quran
– Mudaraba - Partnership
– Sunnah
– Murabaha - Purchase-resale
– Ijma’ (jurist Shariah filter
consensus) – Ijara - Lease

– Qiyas (analogy) – Istisna’ - Manufacturing

contract
– Ijtihad (reasoning)
– Salam - Forward sale

Islamic banking and finance

solutions
• Prohibition on: • Prohibition of certain investments: • Credit and debt
– Interest products are not
− Sectors (e.g.: alcohol, armaments,
financial services, gambling, pork, encouraged
– Speculation pornography, tobacco)
– Gambling − Instruments (e.g. no forward
transactions, limited option use, no
derivatives, short-selling)
Values of islamic finance
– Synthesis of Islamic law and – Widens ownership base
contemporary finance of society
– Community banking: serving – Offers “success with
communities, not markets Client Fulfils authenticity”

affinity aspirati
ons – Builds systematic
checks on
financial
– Ethical providers
investment Parallel Respons
– Restrains
trends ible consumer
finance indebtedness

Inclusiv Alterna
e tive
proposi paradig – Stability from linking
– Open to all-faith clients tion m financial services to the
productive, real economy
– Available to Islamic and – Moral compass for
conventional issuers capitalism

Islamic finance is more than financial contracts

The Islamic Finance Markets - highlights
 56 Islamic countries member of Islamic Development
Bank (IDB)
 Leading Islamic Finance centres : Bahrain, Dubai/UAE,
Kuala Lumpur, Riyadh, Qatar, Singapore, London,
Luxembourg
 More than 500 Islamic financial institutions operate
worldwide in some 75 countries
 Top management of Islamic banks not confined to
Muslims countries but spread over Europe, the United
States, the Far East and the Middle East
 ECONOMIC SOCIAL
IMPERATIVE IMPERATIVE
ZONE OF
SUSTAINABILIT
Y
Islamic
businesses NGOs
not-for-profits

Islamic finance characteristics:

• Market-driven yet values-based
• Gradualist and evolutionary nature
• Symbiotic and synergistic relationship with mainstream finance
Development of IF
 Islamic finance emerged in the early 1960s with the
objective of developing and providing alternative financial
contracts in conformity with Muslims laws.
 Previously, various Islamic modes of financing were used
in different parts of the Muslim world but the
institutionalization of Islamic finance in the form of banks
and financial institutions became possible with the
establishment of the first Islamic social bank, Mit Ghamr
Islamic Bank in Egypt in 1963, and the first Islamic
commercial bank, Dubai Islamic Bank in 1975
Chronology of modern Islamic Finance
Development of industry

− Development of theoretical framework

1950s − Muslim-majority nation independence
− Egypt and Malaysia pioneering institutions
60s − Establishment of OIC (1969)
− Islamic Development Bank (1974)
70s − One country-one bank setup
− Advancement of Islamic products
80s − Full “Islamization” of Pakistan, Sudan and Iran

90s − Entry of global institutions, e.g. HSBC

− Tipping point reached in some markets

00s − Development of industry-building institutions

Industry has developed a comprehensive product offering

over its young history
Islamic finance industry is developing a global reach with
worldwide momentum from retail to regulator involvement
Islamic finance flourishing

Strong growth of
OIC economies

Innovative product
Institutional capital
development
EXPLOSIVE GROWTH
OF ISLAMIC FINANCE
Liberalisation of Resurgence of
capital markets Muslim cultural values

Retail customer
commitment

Industry is driven by fundamental factors

 And still, the industry has not yet reached its potential
 Within 8 to 10 years, as much as half the savings of the world’s
then 1.6 billion Muslims would be in Islamic banks
 The global Islamic insurance (Takaful) market is estimated to reach
USD 14.4 billion by 2010
 Islamic finance has also gained popularity in Non Muslim/Muslim-
minority countries
 Germany issued the first Islamic Eurobond (2004)
 UK’s first standalone Islamic bank (2004)
Multinational banks position

 Multinational banks have gradually increased their

focus on Islamic finance

Defensive strategy Proactive strategy

• Service and retain • •Acquire

Acquirenewnewcustomers,
customers,
existing Muslim clients especially
especiallywealthy
wealthylocals
locals
• Service and retain
• Refine
existingcurrent
Muslim clients • •Build
Buildaasustainable
sustainable
proposition to reflect community
communitybanking
banking
• Refine current
local needs proposition
proposition
proposition to reflect
local
– Particularly
needs • •Benefit
Benefitfrom
fromhigher
higher
important and growth
growthrates
ratesofofemerging
emerging
• Protect and embed the
economic clout of markets
markets
brand
locals increased
–– Crucial
Crucialasasdeveloped
developed
• Protect and embed the market
marketgrowth
growthslows
slows
brand
Conclusion

 The current unprecedented level of interest in Islamic finance

has been generated by a growth in the wealth of a number of
Islamic states, together with a change in the socio political
climate over the last few years.