Shariah Such rules & regulations as have their origin in the holy Quran

and Sunnah to govern all aspects of human life.

Every Islamic financial institution shall have a Shariah Supervisory

Board.
Objectives of Shariah The very objective of the Shariah is to promote the welfare of the
people which lies in safeguarding
(i) their faith
(ii) their life
(iii) their intellect
(iv) their prosperity and
(v) their wealth
Whatever ensures the safeguarding of these five serves public
interest and also desirable.
Compensation Such financial penalty as is imposed by an Islamic Banking
Company over and above the amount of installment when a client
fails to repay Bank’s investment on due dates as per the
agreement executed by him.
Islamic Economy: Objectives 1. Promotion of brotherhood & unity
2. Establishment of social justice
3. Achievement of moral & material development
4. Circulation of wealth
5. Elimination of exploitation
6. Provision of basic human needs
7. Achievement of Falah*
8. Fair & equitable distribution

* The Islamic concept of Falah is very comprehensive. It refers to

spiritual, moral and socio-economic well-being in this world and
success in the hereafter.
Principles of Islamic Economy 1. Allah determines right & wrong.
2. Principle of Justice
3. Principle of Use
4. Principle of Moderation
5. Economic freedom
Problems of Islamic Banks (a) Problem with legal reserve requirement.
(b) Apprehension of liquidity crisis & possibility of liquidity surplus.
(c) Problem in capital market investment.
(d) Absence of inter-bank money market.
(e) Predominance of Murabaha financing.
(f) Absence of legal framework.
(g) Depression of profit.
(i) Absence of sufficient numbers of Islamic Insurance Company.
Investment (j) Lack of opportunities for profitable use of surplus funds.
In Islamic Banking, investment means utilization of fund or
deployment of fund for a special legal purpose on profit/loss
sharing basis for a certain period. Islami Bank, as per Shariah,
deals with goods & services, not money. Shariah law prohibits
speculative trading that involves risk and uncertainty. Shariah also
has forbidden investing in haram businesses such as gambling,
alcohol, etc.
Impact of Riba Social Impact
(a) Riba makes a man selfish and miser.
(b) Riba creates hostile relation between the rich & the poor.
(c) Moral decay spreads out in the society.

Economic impact
(a) Riba increases the price level.
(b) Riba decreases the demand for goods.
(c) Riba creates deficit of capital.
(d) Riba is against the efficient distribution of capital.
(e) Riba diverts investment into speculative sector.
(f) Riba creates idleness among the savers.
(g) Riba creates monopolistic opportunity for the capitalist.
(h) Riba concentrates wealth in the few hands through public finance.
(i) Riba encourages artificial crisis in financial sector.
(j) Riba increases unemployment & exploitation of labor.
Bai-Murabaha Bai-Murabaha comes from a combination of two Arabic words: Bai
& Ribhum. Bai means purchase & sale, while Ribhum means
agreed upon profit. So, Bai-Murabaha means sale on agreed upon
profit. It is a mode of investment based on Islamic Shariah
principle under which Bank purchases goods as per terms of
contract with the client from the market (not from the client or his
sister/allied concern), takes the possession of the goods as pledge
in the godown of the Bank or godown of the client under Bank’s
control duly insured and sale these to the client partly or wholly in
cash after fixing price with profit & other expenditures.
Investment Assessment  KYC
 Amount & types of loans proposed
(KAM-BIPASHA-LSN)
 Mitigating factors
 Borrower analysis
 Industry analysis
 Projected financial performance
 Account conduct
 Supplier/buyer analysis
 Historical financial analysis
 Adherence to lending guidelines
 Loan structure
 Security arrangement
  Name lending
Istisna Istisna (Manufacturing Finance) is a process where payments are
made in stages to facilitate step-wise progress in the
manufacturing//processing/construction works.

Istisna enables any construction company to get finance to

construct slabs/sections of a building by availing finance in
installments for each slab.

Istisna also helps manufacturers to avail finance for

manufacturing/processing cost for any large order for goods
supposed to supply in stages.

Istisna helps use of limited funds to develop higher value

goods/assets in different stages/contracts.
Common Charge Documents  Letter of Arrangement
(L-D-B-P)  Letter of Disbursement
 Letter of Continuity
 DP Note
 DP Note Delivery Letter
 DP Note Revival Letter
 Balance Confirmation
 Purchase Schedule
Bai-Muajjal  Bai Muajjal Agreement
 Letter of Hypothecation
Bai Murabaha  Murabaha Agreement
 Agreement for pledge of goods
 Letter of Disclaimer (in case goods are kept in hired
godown of the party)
 Blank D.O.
Izara  Izara Bil Baia Agreement
 Letter of Installment
 Deed of mortgage of machinery & equipment
 Supplementary IBB Agreement (as & when required)
 Cash memo in the name of Bank
Izara Bil Baia It is a mode of investment based on Islamic Shariah principle
under which the Bank, as per contract, shall invest for purchasing
durable assets like machinery, equipment, transport, land, building
etc. along with the client with the stipulation that the client shall
pay off the rent/profit at the agreed rate on the outstanding
equities of the bank together with the installment of principal
amount of equity of the Bank for the purpose of eventual
ownership of the concerned assets.
Profit The excess amount between purchase and sale with a risk of loss. Here
 there must be a business of commodity or sale-purchase agreement.
Mudaraba A mode of partnership financing based on Islamic Shariah
principle under which entire capital is provided by the Bank
against a firm contract to the client on the stipulation that the
client will manage the business with due diligence properly and
effectively. Profit shall be shared as per agreed ratio and loss (if
any) shall be borne by the Bank i.e., supplier of capital. Supplier of
capital is known as Shaheb-Al-Maal and the user of the capital is
called as Mudarib.
Musharaka It is a contract of partnership between two or more parties in
which all the partners contribute capital, participate in the
management, share the profit in proportion to their capital or as
per pre-agreed ratio and bear the loss, if any, in proportion to
their capital/equity ratio.
Bai-Muajjal It is a contract between the Bank and the client under which the
Bank sells to the client certain specified goods (permissible under
Islamic Shariah and law of the country), purchased as per order
and specification of the client at an agreed price payable within a
fixed future date in lump sum or by fixed installments.
Bai Salam It is a contract between a buyer and a seller under which the seller
sells in advance certain commodity permissible under Islamic
Shariah and the law of the land to the buyer at an agreed price
payable on execution of the said contract and the commodity to
be handed over to the buyer at a future time in exchange of an
advanced payment fully paid on the spot.
Features of Islamic Banking Risk Sharing: No predetermined rate of return. Sharing the end
result of the business. Loss arising out of Mudaraba business is
entirely borne by Shahib-Al Maal.

Emphasis on Productivity: Dominant consideration not on

collateral. Emphasis on soundness of the project.

Stability of Banking System: Mudaraba & Musharaka ensures

stability.

Moral Dimension: Islamic value oriented system. Full compliance

of Shariah. No finance for wine/tobacco/casino/pork production
or trading.

Equality: Justice to all parties. Riba is unjust.

Allocative Efficiency: Productivity of the project. Finance goes to

high productive project even if credit worthiness is lower.
Objectives of Islamic Banking The fundamental objective of Islamic banking is to bring
about departure from the conventional system moving
from a debt-based relationship to an equity-based and
stake-taking economy.

Providing banking services of the highest standards

according to Islamic Shariah without dealing in Riba and
by using the state-of-the-art technology in computer,
telecommunication and information system.

Investing funds prudently to achieve optimum profits for

the mutual benefit of customers and the bank.

Coordination, cooperation and integration with other

financial bodies that apply Islamic Shariah in their dealings,
in order to support creating a base and regulations for an
Islamic Financial System.

Promotion of social benevolence through its Islamic

methods, particularly through Zaakat.
Interest The amount which is predetermined upon principal amount for a
certain period with certain rate. Here time, amount & rate are
fixed.
Riba In Shariah, riba technically refers to the premium that must be
paid by the borrower to the lender along with the principal
amount as a condition for the loan.

All transactions based on riba are strictly prohibited in the Holy

Quran.
7(seven) Core Risks  Investment Risk
 Asset & Liability/Balance Sheet Risk
 Foreign Exchange Risk
 Information & Communications Technology Risk
 Money Laundering Risk
 Environment & Climate Change Risk
 Internal Control & Compliance Risk
Constraints faced by Islamic Problem with legal reserve requirement
Banks Apprehension of liquidity crisis and possibility of liquidity surplus
Problem in capital market investment
Absence of inter-bank money market
Predominance of Murabaha Financing
Absence of legal framework
Depression of profit
Absence of sufficient numbers of Islamic Insurance Company
Lack of opportunities for profitable use of surplus funds