1. Salient Features

Islamic Banking Theory and Practice Course code MBF 706InstructorDr. Muhammad Azhar Khan1. Characteristics of Islamic Financial SystemAllah is the SustainerGod is Real Owner of Everything and Man is Merely a TrusteeEverything Created for Service and Use of ManConcept of Halal and HaramSystem of Sadaqat and ZakatProhibition of InterestBan on Hoarding of WealthPolicy of ModerationCondemnation of Monasticism and MaterialismEquity and not Equality2. Principles of Islamic Financial SystemBasic idea of Islamic Financial System is prohibition of receipt and payment of interest. Literature based on the divine guidance about Islamic financial system suggest the following principles.1.Money as potential capital2.Prohibition of Interest3.Risk Sharing4.Sanctity of Contracts35.Sharia Approved Activities6.Individual Liberty7.Right to Own Property8.Economic Inequality and Charity9. Social Equality10. Circulation of Wealth2. Principles of Islamic Financial System43. The existing economic systemSome of the known economic systems are;CapitalismSocialismCommunismIslamic economic system

5characteristics of Socialism and communism, such as their definition, ideas, economic system, social structure, freedom of choice, ownership of private property, and means of control etc.A comparison of the major economic systems in the world, i.e. Capitalism, Socialism, Communism, and Islamic economic system.

4. Comparison of the Economic Systems5. Money in Islamic Financial SystemConcept of money, how it evolved from representative money to fiat money.Role of money in the economy and its usage as a tool to create debt.You will also watch an animated documentary explaining the role of money as debt.5. Money in Islamic Financial SystemImplication of Fiat MoneyCredit CreationInflationUnjust wealth appropriationDeposit multiplication6. Factors of Production in Islamic Economic SystemConventional concept of factors of production, i.e. land, labor, capital, and entrepreneur.Concept of factors of production in Islamic economic system.Role of money as of being a factor of production.6. Factors of Production in Islamic FrameworkAll productive inputs are grouped into two categories;Factor inputs: those inputs that dont get consumed in the production process.Consumed inputs: those inputs that are consumed during the production process and lose their original nature and shape, e.g. fuel, raw cotton, plastic, etc.6. Factors of Production in Islamic FrameworkMoney as factor of production:Money is recognized as consumed input and become useful only when converted into consumed input or factor input.

Money itself is not considered a factor of production but it has the potential to become a factor of production.7. Money: An Islamic ViewpointThe Concept and Nature of Money in Conventional system : Money is a commodity and is used to obtain other goods.Widely Marketable as it is highly in demand and valued good. Thus, it is sure that it can be used anytime and anywhere.It can be transport easily. Money is made to make human life easier therefore to make sure that convenience is important.Relatively scarce as it is high in demand and high in value, which means it holds a high value in small quantities

7. Money: An Islamic ViewpointNature of money under Conventional systemMoney is relatively imperishable. It is durable and can be used for future purchases.Easy to store.Easily divisibleMoney lasts forever.All units of money are similar, means that it is easy to distinguish and estimate the value of the money.7. Money: An Islamic ViewpointNature of money under Islamic system Islam treats money as unit of account to determine the relative worth of goods and services.A medium of exchange, and not a store of value. All units of money of the same denomination are 100% equal to each other.It becomes useful only when it is exchanged into a real asset or used to buy services. Money cannot be sold or bought on credit.8. Principles of Islamic BankingGoverning features of Islamic banking systemThe prohibition of interest based transactionsAvoidance of speculations (gharar)Avoidance of oppression (zulm)Introduction of Islamic tax (zakat)Financing of Sharia Approved activitiesComparison of Islamic and conventional banking system.9. Islamic Modes of Financing: MurabahaAfter this lecture you should be able to understandThe concept of MurabahaThe stages involved in Murabaha transactionPractical issues in Murabaha and their resolutionMurabaha documentationUses of Murabaha as Mode of finance (Local as well as import Murabaha)1610. Islamic Modes of Financing: Salam and IstisnaSalam and parallel SalamIstisna and parallel IstisnaAnd the differences between the Salam and Istisna modes of financing11. Islamic Modes of Financing: MusharakahMusharakah is a form of partnership which is based on profit and loss sharing. Types of Shirkah Shirkah al-Aqad (commercial partnership) Shirkah al-Milk (joint-ownership). Shirkat al-Aqad refers to partnership with commercial objective, whereas, Shirkah al-Milk refers to joint-ownership in a particular asset.

12. Islamic Modes of Financing: MudarabahThis is a kind of partnership between the two parties where one partner contributes capital and the other one contributes efforts as manager or entrepreneur. The profit of the venture is share at an agreed ratio while the losses are borne by the capital provider.

The investment comes from Rabb-ul-Maal (Investor) while the management and work is an exclusive responsibility of the working partner, who is called Mudarib. 1913. Islamic Modes of Financing: Diminishing MusharakahThe concept of Diminishing MusharakahFeatures and rules of diminishing Musharakah.Uses of diminishing Musharakah particularly in House Financing for four purposes:Purchase of HouseConstruction of HouseRenovation of HouseBalance Transfer Facility (BTF)

14. Islamic Modes of Financing: IjarahIjarah literally means to rent or lease something. In its technical sense, the term Ijarah has two different connotations as follows:A hire contract to employ the services of a person with wages given to him/her as a consideration for his/her hired services.A lease contract to transfer the usufruct of a particular property to another person in exchange for a rent from the client.15. Applications of Islamic FinancingThe concept of Islamic financing regarding its applications in different areas like. Musharakah, Mudarabah, and Murabaha is applied in;Project financingWorking capital financingImport financing Export financing16. Islamic Investment FundsPrinciples of Islamic investment funds.Modes of investment of funds and their management under Islamic financial system.Equity fundIjarah fundsCommodity fundsMurabaha fundsBai al DainMixed funds

17. SukukSukuk is the Arabic name for a financial certificate. Its an Islamic alternative to the conventional interest bearing bonds.Sukuk is a Trust certificate in which investor returns are derived from legal or beneficial ownership of assets.Comparison of Sukuk and BondControversies/objections in Sukuk

18. Risk Underlying Islamic Financial ModesAfter this lecture you will be able to understandThe basic concept of risk and its classification into different types.Risks faced by the financial institutions.Uniqueness of risk in Islamic banks.Risks in Islamic Financial instruments.How to mitigate in Islamic financial instruments.

19. Takaful (Islamic Insurance)Concept of conventional InsuranceObjections against conventional Insurance systemDifference between Takaful and conventional insuranceDifferent models of Takaful like Wakalah model, Mudarabah model, and the Hybrid model (Wakalah and Mudarabah)

20. Evolution of Islamic Banking in PakistanSocial and political background of PakistanHistory of Islamic banking in PakistanFact and figures regarding Islamic banking in PakistanSummary of the LectureIn this lecture we had an introduction of the course.