Introduction to Islamic Banking

1. Unit 25 Introduction to Islamic Banking Facilitator Support Materials for Introduction to Islamic Banking

2. Unit Aim The aim of this unit is to introduce the learner to the necessity, principles and conventions of Islamic Banking. This unit is 20 Guided Learning Hours

3. Unit Description This unit provides the learner with an introduction to Islamic Banking, its necessity from a religious perspective, its historical roots, the key Islamic principles involved and the Islamic bank’s mode of operations relative to conventional banks. In particular, the unit will cover the following areas: The sources of Islamic law and how Islam affects economic and financial transactions Principles of Islamic commercial law of transactions

4. Unit Description Continued • Islamic Contract Law • Nominate Contracts in Islamic Jurisprudence: Modes of Islamic financing and investment • Comparison between Islamic banks and conventional banks • At the end of the unit the learner will be able to understand the principles and rationale behind the establishment of Islamic banks and how they function from a broader perspective, allowing the learner to appreciate the operating principles of Islamic banks.

5. Learning Outcome 1: Understand how Islamic principles impact on banking transactions Amplification of the Learning Outcome: Key features and sources of law: Faith and Belief; practices and transactions; morality and ethics; Qur’an; traditions of the Prophet; analogy; pre-modern scholarly consensus; independent scholarly research and reasoning

6. Amplification of the Learning Outcome Continued • Islamic principles: unity of the Creator; vicegerency; universal brotherhood; striving and implementing all forms of justice including social and economic justice by Islamic methods of wealth redistribution • Influence of Islam on economics:regulation of unbridled capitalism and individual freedom; unencumbered ownership of resources and property rights subject only to limits based on productive utilisation; factors of production from an Islamic perspective; unencumbered transfer of ownership; re-distribution of wealth among people

7. Amplification of the Learning Outcome Continued • Influence of Islam on financial transactions: intrinsic value of money; transactions must conform to the ethical and moral framework of Islam; transactions are asset backed and participatory financing preference as opposed to debt financing

8. Assessment Criteria for Learning Outcome 1 Assessment Criteria: 1.1 Explain the key features of the Islamic system and the sources of Islamic law Open discussion with Learners 1.2 Explain the connection between Islamic principles and economic transactions Open discussion with Learners 1.3 Describe the salient features of Islamic principles that affect financial transactions Open discussion with Learners

9. Learning Outcome 2: Know how Islamic principles impact contract law Amplification of the Learning Outcome: Islamic contract: unilateral undertaking; bilateral undertaking; contract Nominate contracts and processes: offer and acceptance; consent; subject matter; price; contracting parties; riba; gharar; maysir; haram

10. Assessment Criteria for Learning Outcome 2 Assessment Criteria: 2.1 Describe the principal requirements of an Islamic contract Open discussion with Learners 2.2 Describe the primary restrictions on Islamic financial transactions Open discussion with Learners

11. Learning Outcome 3: Know the processes involved in each Islamic nominate contract Amplification of the Learning Outcome: Categories and undertakings: unilateral; bilateral; sale; lease; security; partnership; agency; custody Processes: Murabaha (mark-up full disclosure sale); Mudaraba (investment agency); Musharaka (investment partnership); Wakala (agency); Wadiah (custody); Ijarah (lease); Istisna’a (sale upon construction); Salam (deferred delivery sale); Sarf (currency exchange)

12. Assessment Criteria for Learning Outcome 3 Assessment Criteria: 3.1 Describe the categories of contracts and undertakings and their key features Open discussion with Learners 3.2 Outline each of the nominate contracts and the processes involved Open discussion with Learners

13. Learning Outcome 4: Know the activities of a conventional bank compared with those of an Islamic bank Amplification of the Learning Outcome: • Conventional bank activities: principally functions as a financial intermediary earning a margin for extending credit long term and borrowing short term; financing is loan with interest; different types of interest imposed including simple and compound; deposits can be interest bearing savings accounts (short-term), fixed-term or current accounts with no interest; financial reporting for conventional banks; gross income earned is through difference between interest revenue and expense and banking services; balance sheet has one major asset (loans outstanding) and one major liability (deposits)

14. Amplification of the Learning Outcome Continued: • Islamic bank activities: structure of mobilising and investing capital in Islamic banks; profit sharing institution that invests investment account holders money in Shari’a compliant financing activities; investment account holders and their unique position in Islamic financial institutions; principles and practical operations of current accounts and savings accounts (mudaraba, wakala and wadiah); financing through leasing (ijarah), sale based contracts (murabaha, istisna’a, salam) or profit sharing modes (musharaka/mudaraba); mechanism of profit and loss sharing with investment account holders

15. Assessment Criteria for Learning Outcome 4 Assessment Criteria: • 4.1 Describe the practical modes of financing and investment in Islamic banks • Open discussion with Learners • 4.2 Compare the activities of a conventional bank with an Islamic bank • Open discussion with Learners

16. Appropriate Books Ayub, M. (2008) Understanding Islamic Finance, chapters; 2,3,5-6,8-13 In-depth resource for the full unit. Kabir, M.H. and M.K. Lewis (2007) Handbook of Islamic Banking, chapter; 1, pages 1-21 Good for introduction to conceptual background (not mandatory) Usmani, T. (1999) An Introduction to Islamic Finance, chapter 1-5; pages, 15-198 Relevant for introduction and provides step by step analysis of Islamic nominate contracts.

17. Appropriate Books Continued • Thomas, A., S. Cox and B.Kraty (2005) Structuring Islamic Finance Transactions • Good resource for real life application/case studies of Islamic Finance. • Islamic Law and Finance: Religion, Risk and Return, chapters; 1-7 Advanced study of unit topics (not mandatory).

18. Appropriate websites www.financeinislam.com/ www.ifsb.org www.iiibf.org/journal.html www.irtipms.org/PubAllE.asp www.islamicfinance.de/

19. Journals • Review of Islamic Economics • International Journal of Islamic and Middle Eastern Finance and Management • Journal of Islamic Economics Banking and Finance