IFB Fundemental + Finacing - (Final)

Abay
Abay Bank
Bank S.C
S.C
Fundamental
Fundamental of
of IFB
IFB
Presenter
Abubeker Nezir
Interest Free Banking Division Fundamental
1
of IFB
Content
o Introduction
o Concept of IFB
o Origin & Development
o Regulatory bodies/Standards
o IFB Principle
o Conventional VS IFB
o IFB Service Delivery Model
o IFB products
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of IFB
What is Interest Free Banking ?

3
of IFB
Introduction ...
o IFB usually referred as ISLAMIC BANKING

o It is ‘a banking business in which mobilizing or advancing of
funds taken in a manner consistent with Islamic Finance
Principles and mode of operation that avoids receiving or
paying interests’, (NBE’s Directive No.SBB 51/2011);
o A banking system operate according to Islamic law i.e.
Shari’ah
o Alternative service for both Muslim and non Muslim

4
of IFB
Concept of IFB
ISLAM
• Aqidah
ah (Faith and Belief) Shari’ah (Practices and Activities) Akhlaq (Morality and Ethics)
Shari’ah
Muamalat Ammah (Man-to-Man – to- Nature
Ibadat (Man-to-God Worship)
Activities)
Muamalat Ammah
Munakahat (Family Law) Muamalat Jinayat (Criminal Law)
Muamalat
5
Political of IFB
Economic Social
Source of Islamic Principles or Law
Sources of Shari’ah Law
Primary sources
oAl-Qur’an :- direct revelation from Allah (SW) to the prophet Mohammed
(PBUH)
oSunnah (Method/Tradition):- the saying and deeds of the prophet
Mohammed (PBUH)
Secondary sources
oIjma (consensus) :- general agreement among Islamic scholars about
religious matter
oQiyas (analogy/comparsion) :- Analogy qualified shari’ah scholars
consider rulings of previous cases & apply them to new cases of similar sort
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of IFB
Regulatory Bodies/International Standards
o Conventional Banking
 International Financial Reporting Standards (IFRS)
 Generally accepted accounting principles (GAAP)
o IFB
 Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI)-was established in 1991 at Bahrain.
 Issues Standards on Shariah, Accounting, Auditing,
 Islamic Financial Services Board (IFSB)- was established in 2002 at Kuala Lumpur,
Malaysia
 AAOIFI more accepted than IFSB

Interest so Abay
Free Banking Bank
Division also use AAOIFI standards
Fundamental
7
of IFB
Origin & Development of IFB
o Associated with the coming of Prophet Mohamed (over 1400

year)
o First Islamic bank is established in Egyptian town of Mit
Ghamr in 1963.
o 1973 ( Philippines) Philippines Amanah Bank was established.
Designed to serve the special banking needs of the Muslim
community.
o On 1975, the Islamic Development Bank (IDB) was setup

8
of IFB
Cont’d …
o 1978 (Luxembourg) Islamic Finance House was established.

o On 1979 (Bahrain) Bahrain Islamic Bank was established.
o The first Islamic bank in Malaysia was established in 1983.
o On 1993, commercial & merchant banks were allowed to offer

Islamic banking products and services under the Islamic Banking
Scheme (IBS).

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of IFB
Cont’d …
o These institutions however, are required to separate the funds

and activities of Islamic banking transactions from that of the
conventional banking business.
o 1984 (Sudan) launches Islamic Banking
o Today (Western banks) Citibank, Merill Lynch, HSBC, UBS,

Standard Chartered Bank, the Royal Bank of Scotland, JPMorgan
Chase, Barkley’s offering Islamic Financial services. IB Britain,
Lariba (America) were established

10
of IFB
Cont’d …
o Subsequently, ethical Banks and financial institutions, based on

Islamic principles, spread in countries where Muslims are
minorities, such as UK, Luxemburg, Denmark, Australia, India
and the United States.
o On the year 1991 (Bahrain) Recognizing the need for standards.

Accounting and Auditing organization for IFI ((AAOIFI
(pronounced “a-yo-fee”)) was established
o On the year 2002 (IFSB) was established. Sets and disseminates

the prudential and supervisory standards and core principles that
are in compliance of Shar’iah.
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of IFB
Cont’d …
1990s 2000s
• Most conventional
Regulatory
bodies formed : players enter the
1980s space
First formal Islamic • Accounting &
-Sudan • Industry growing
bank -Mit Ghamr ; -Iran
Auditing
Egypt(1963) 1970s organization for >15% per annum
-Malaysia become Islamic financial
full Islamic Bank Institution
• Islamic Development AAOIF(1991)
1960s Bank(1973)
-Coming of Takaful
• Islamic Financial
• Dubai Islamic Bank service Board
(1975) IFSB(2002)

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of IFB
Fundamental Principle of IFB

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of IFB
Islamic Finance Principles…
Promoting Justice
Concept of Money
 Unlike conventional system money is not considered as a
commodity by itself.
 It cannot be bought & sold in the market,
 Money in shari’ah only considered as a measure of value or
a medium of exchange as opposed to being store of value.
Money has no intrinsic value
 It cannot be utilized to directly fulfill human needs
 Can only be used to acquire some goods or services
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of IFB
 Making money from money is not Islamically acceptable
– Money is treated as “Potential Capital” that is becomes actual

capital only when it is combined with other resources to
undertake a productive activity.
– Shari’ah recognizes the time value of money, but only when it
acts as capital, not when it is “potential” capital.
– The human effort, initiative, and risk involved in a productive
venture are more important than the money used to finance it.

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of IFB
The prohibition of Riba (interest) in financial
transactions,
 Money can be bring economic gain only when some
effort is exerted,
 Money cannot simply create money over a period of time
 Money cannot be traded as commodity it only serves as
medium of exchange

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of IFB
The exclusion of Gharar – contractual

uncertainty
 Contracting parties should make an informed decision,
 Gharar occurs when one or both parties lack some basic
information when entering into contract,
 Contracts have to be unconditional,
 Speculation transactions are not allowed

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of IFB
o Gharar (Uncertainty, Speculation, Ignorance, Deception) is
also prohibited
– The prohibition of a Gharar transaction is due to deception.
– This can arise either through ignorance of the goods, the price,
or through an inaccurate description of the goods
There are several types of gharar, all of which are haram. The
following are some examples:
– Selling goods that the seller is unable to deliver
– Selling goods without proper description
– Selling goods without specifying the price, such as selling at
the 'going price'

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of IFB
Making a contract conditional on an unknown event, wherein the time
is not specified
- Selling goods on the basis of false description
- Selling goods without allowing the buyer the properly examine the
goods
o Gharar is present in contracts where the object of the sale is not in

the possession of the seller or does not exist at the time the parties
enter into the contract but such contracts are permissible.

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of IFB
The avoidance of Maysir or Qimar – Gambling

 The acquisition of wealth by chance (not by effort),
 In modern gambling any game of chance
 Maysir or Qimar prohibited because both parties are
unaware of the outcome of their contract

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of IFB
• Maysir/Qimar: (Gambling)
– Gambling is a form of Gharar because the gambler is ignorant of
the result of his gamble.
– It can also be regarded as a transaction in which there is a
possibility that one party can suffer a total loss.
– It must be noted that while gambling has an element of
uncertainty, not every type of uncertainty is gambling.
– It should be noted that maysir is one of the key elements in the
prohibition of conventional insurance.

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of IFB
Promoting justice
Avoiding investment in prohibition industries like
Alcohol, Pork, Tobacco, illegal drugs and the likes
 Not supporting industries considered as harmful to society
 Still the core element is promoting social justice

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of IFB
o Products & Services invested in, must be permissible

– Trading in Pork, dead animals, alcohol, pornography, brothels
for example would not be financed by an IFB;
– property financing could not be made for the construction of a
casino; and an IFB could not lend money to other banks at
interest.
– Profit in a business venture is determined ex post—that is,
depending on the outcome of the venture but based on the
predetermined profit/loss ratios. (for partnership contracts)

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of IFB
o Profit and loss principle is proportional to the risk
• Islam encourages to invest their money and to become

partners in order to share profits and risks in the business
instead of becoming creditors.
• Islamic finance is based on the belief that the provider of
capital and the user of capital should equally share the risk of
business ventures.

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of IFB
Prohibition
of interest
Permit
Asset trade/
backed
financing Justifiable
profit
Islamic
Finance
Prohibition Principles Transaction
of must be
Uncertainty Ethical
Profit –
Prohibition
loss(risk)
of Gambling
sharing
25
of IFB
..
Basic Differences :
IFB vs Conventional Banking

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of IFB
Let assume , a customer needs to buy a car
through loan so how would it be treated in
Convectional and IFB financing?

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of IFB
Conventional Banking
Money
Money + Money (interest)

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of IFB
Interest Free Banking
Goods & Services
Money + profit

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of IFB
.
IFB Conventional
Profit-based Interest-based
Asset Financing Provide Cash Directly
Trade Participation Not involved in Trade

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of IFB
Variables Conventional IFB
Governing rule Only based on the law of the Based on Shari’a+ law of the
county (NBE Directive) country (NBE directive)
Considering -Consider economic -Consider economic (Profitability),

aspect ( profitability) & legal aspect legal and ethical /MORAL aspect
( Permitted) -Ethics is above all
Objective & its Profit through interest based Profit though trade based ,
Methodology contracts leasing and Partnership contract

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of IFB
Restrictions •Deposit can be sourced from •Deposit can be sourced from any
any lawful business lawful + shari’ah compliant
•The bank Can finance any business
lawful business • the bank Can finance any lawful
+shari’ah compliant business
Form of Interest based deposit Safe custody ,investment

Deposit

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of IFB
.
Form of Loan Interest based loan Equity financing , Trade

financing , Lease financing
Guarantee of Customer are guaranteed for Customers are not guaranteed for
Deposit their deposit ( in case the bank their deposit (for investment
face loss ) deposit kind only )

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of IFB
Risk sharing •The bank fully transfer the risk to Risk sharing among bank and
(Partnership customers - loan customers incase of both deposit
Financing ) • the customers fully transfer the and loan /financing
risk to the bank -deposit
Time value of It work and hence interest is related It doesn't work so interest rate is
money with time not applied
concept
Penalty on additional interest rate (3%) in case No extra interest rate for the bank
default of late payment or default for late payment . But there is late
payment penalty that goes to
charity organization .

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of IFB
o Types of IFB Service Delivery
Models

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of IFB
A. Dedicated Window Model
oProviding IFB service using window of conventional bank
oBut IFB window only work IFB transaction not CNV transaction
oIFB transaction is completely segregate from conventional
oE.g.
 ABSA Islamic Bank south Africa,
 Citibank,
 HSBC,
 Lloyds of London
oNBE’s Directive No.SBB Interest

51/2011 allow
Free Banking this
Division one
Fundamental
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of IFB
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of IFB
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of IFB
B. DEDICATED BRANCH MODEL
o Providing IFB service using the branch of conventional bank
o Dedicated branch are established for the delivery of Shari’ah
compliant products.
o E-g:
 NED Bank (South Africa)-CNV Bank
 NED Bank Middle East Branch- IFB branch

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of IFB
C. SUBSIDIARY MODEL:
o A conventional Bank(parent company) develops a subsidiary
under its entity
o Has its own process , operating structure, policy
o Example
 HSBC (London)-Parent-CNV bank
 HSBC Amana (Malaysia)- Subsidiary -Islamic bank

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of IFB
D. FULLY FLEDGED ISLAMIC BANK MODEL:
o It fully provide Islamic bank service – no conventional service
o E.g
 Albaraka Bank Limited in South Africa,
 Sudanese banks
 Faisal Islamic Banking in Egypt

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of IFB
IFB PRODUCTS

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of IFB
IFB as Financial Intermediaries
Mobilize Offers
Deposits Financing

43
of IFB
DEPOSIT PRODUCTS
o Wadiah based products (safe keeping )

 Wadiah curent account =cheque
 Wadiah saving account =pass book+no interest
o Mudarabah based products (profit loss sharing )

 Mudaraba Fixed account =PLS+No withdrawal
 Mudaraba Saving account=PLS+witdrawl possible
44
of IFB
Financing Products
What is Financing ?

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of IFB
o Broad Definition :Enabling customers (borrowers) to
make their business through providing either
Loan/Debt
Trading on Deferred Base

Partnership/Equity Äúoþ
Leasing
o Narrow Definition: Provide loan to customer

46
of IFB
Type of Financing
Partnership
Äúoþ
Interest based Loan

47
of IFB
So which of them are provided by IFB?

48
of IFB
Other Classification of Financing Products
 PLS based Financing Product

– The bank is partner of the business
– Based on profit – loss sharing (PLS) Principle
– Murabha, Musharaka
 Non PLS/ Deferred Payment base Financing Products
– The bank is not partner of the business
– But the bank not provide cash directly to customers rather it is
asset based financing
– Murabaha, salam, Interest
Istisina , Ijara
Free Banking Division Fundamental
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of IFB
Financing Products Modes

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of IFB
 Asset based financing – most of IFB financing is take place
through providing asset
 75 percent of the financing is in assets based financing
categories

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of IFB
1.Trade Financing (የዱቤ ሽያጭ)

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of IFB
Necessary condition for valid sale contract
 The thing sold (subject matter)

o must be exist,
o must owned by seller ,
o must be known,
o must have value ,
o must be pure substance (halal).
o Its price has to be known
 Most of the condition related Prohibition of Gharar (Uncertainty)

principle of IFB
53
Type of Trade Financing
oMurabha
oSalam
oIstisina

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of IFB
A.Murabaha (cost plus financing)
o Mostly used trade financing product( 66%)

o Up on the request of the customer, the bank purchase the
asset from third party /supplier/ & sell the good to
customer on deferred payment
o The bank first purchases the good from the seller by
itself and acquire the ownership of good
o Cost+ profit financing = trust sale i.e. the cost price
and the profit amount has to be known by the buyer
of IFB
55
56
of IFB
Conditions of Murabaha

57
of IFB
o Subject matter must exist at
the time of contract
o Bank on the first level must have physical or
constructive possession
o It is a FIXED PRICE SALE
o Re-negotiation of price not permitted.

58
of IFB
(Process Flow Murabaha Financing)
59
of IFB
.
1. Client approach the bank for Murabaha facility

( submit Purchase Order/requisition)

60
of IFB
2.If the bank agree, the facility approved and Master
Murabaha Financing Agreement is made ( it can be one
time or revolving )- where the Client agree or promise to
purchase the good from the bank= Hamish Jedya is effected

61
of IFB
.
3.The Bank appoints the Customer as its agent to purchase the required goods on its behalf and Agency agreement is made b/n bank and Client

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of IFB
4. Bank disbursers the purchase price to the supplier/
agent for purchase of goods.

63
of IFB
5. The agent takes possession of goods on the Bank’s behalf.
De
go liver
od
s y of

64
of IFB
6. Client makes an offer to purchase the goods from the Bank
and the bank give acceptance to customer (elements require to
make legally binding contracts)
Offer & Acceptance=

Contract

65
of IFB
7.The Bank sells the goods to Customer at a price
comprising of cost + profit= Murabaha financing
come in to existence
Murabaha Agreement
+
Transfer of Title

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of IFB
Client pays agreed price to the Bank on a deferred
payment basis( installment )

67
of IFB
Summary of Murabah Financing Stage
oPromise to acquiring/purchase stage – Investment Stage

oExecution of Murabaha- Financing Stage
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of IFB
Application of Murabaha
Term Financing
 Import Letter of Credit
 Pre-shipment Export
Working capital in the form of asset (Raw material)
N.B. It cannot be used for working capital purpose in the
form of cash for paying utility bills, wages, overhead
costs etc.

69
of IFB
Major Risk and its mitigation factor
• Customer refuse to purchase the good after the promise-
Hamish Jedyaha
• Customer delay on repayment- penalty (Charity)
• Customer totally default- collateral

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of IFB
’
Istisina and salam

71
of IFB
Istisina and Salam
o In Salam and Istisna mode of financing the following basic

conditions for validity of sale is not applied.
 The commodity must exist at the time of sale;

 The seller should have acquired the ownership of the
commodity at the time of contract

72
of IFB
B.Istisina
o It is financing for Work-in-progress i.e. manufactured,
constructed, assembled
o It is order of sale (customer first order it then they buy it
again )
o The bank is seller and the customer is a buyer But the product
is not existed at the time of contract .
o The good must be a thing that needs to constructed ,
manufactured ,assembled
o .
73
of IFB
Step of successful Istisina financing
o A customer request financing from the bank ( order to be manufactured or

constructed )
o Customer Promise to purchase the good from the bank - hamish Jeddya
o A parallel Istisna contract is entered between the bank and the
contractor/manufature
o The bank provide the money to manufacturer( Contractor)
o The bank deliver the good to customer by considering its profit
o The customer repay the loan ( financing )
o N.B- collateral/Guarantee is required from both customer and manufacturer

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of IFB
Sell/Deliver of good (house)
6 Installment
(Cost price+ fixed profit
Customer Order (House)
Payment: full in advance/Phase

Disbursement to contractor
Cost Price
Parallel Istisina
Deliver to the bank

oConstructor
75
of IFB oManufacturer
Application of Istsina
o Used for financing of constructed or manufacturing goods like
House or building construction financing /not for house

or building purchase loan
For buying manufactured or industrial good ( - here the

product are not available in the market like murabaha
rather it will be manufactured

76
of IFB
Major risk and mitigation factor
• The manufacturer shall default in deliver of the good – guarantee,
collateral
• Late delivery of the good – penalty ( reduction the value of the
constructed/manufactured good )-Re-pricing is allowed
• Market( price risk)- contract is binding
• Customer fails to accept the property- Hamish Jedyaha+ the bank
can sell the good
• Customer may not repay as per the schedule- Penalty( charity)
• Customer totally default to repay-

of IFB collateral
77
C.Salam
o The seller supply the goods to the buyer at he future
date(deferred delivery) but the buyer pay the full price at spot
o The bank act as buyer while the customer is seller
o A contract with full advance payment for future delivery of an
item.

78
of IFB
• Example -The bank buy farm outputs which will
be produced in the future against the full spot
payment

79
of IFB
Necessary condition for Salam( feature)
o The product is not existed at time of contract

o The bank pay the price fully at spot
o Exact date and place of delivery specified
o collateral or guarantee is required
o spot price < selling price, hence the bank get profit.

80
of IFB
Application of Salam
o It is provided for producer /manufacturer who face working

capital shortage to produce their product
Mainly used to finance agricultural operation
It also used to finance manufacturing operation (but

the bank has already bought the factory good )

81
of IFB
o Process flow of Salam Financing

82
of IFB
Client
Ap
pli
ca
tio
nt
ot
he
ba
nk
Bank
83
of IFB
Th
Client ad e ba
va nk
nc
Sa e ( pay
sp
bu lam ot the
ye ag ) pri
r a ree ce
De nd m o n
li v cli ent
ery en
of t a –b a
the s s nk
go ell as
od er
in
the
fut
ure
Bank

84
of IFB
De
li ve
r y
of
th
eg
oo
d
Bank
Bank
85
of IFB
dity
o the
m
m re ice
o r
De Co
bef t-P
f - c
live g o
lam rod
u
the
ry lin Sa e p r
of l l f te
com Se a lle t th nt l - A ct-
l u
mo
P ar ge fro se rod it
dit
y o nk up ha e p red
a
b ai d a
ra b t th n c
p u ge e o
M
o nk has
ba urc
P
Bank
86
of IFB
How the bank deliver or dispose the good?
o Option 1: Enter in to Parallel Salam =here the good is

not existed = the bank receive the money immediately
from third party but delivery of the good in the future
o Example: Bank-Wheat producer farmer-Pasta factory
o Option 2 :Murabaha Sell = here the product should

be is existed first = deferred payment
o Option 3: the bank directly sell in the market or use its
own agent ( Worst scenario)
87
of IFB
Major Risks and Mitigation Tools
o Risk of default of the seller(farmer) to deliver the goods-
 collateral or guarantee is existed
 the bank and the customer could change the commodity with mutual consent
 the bank has an option to wait until the time when the commodity becomes
available
o Deliver defective good - collateral or guarantee
o Late delivery –penalty exist (charity)
o The bank may not have buyer of the goods- parallel salam + detail study on the
marketability of the good
o The price may be lower than the expected -parallel salam + detail study on the
marketability of the good
88
of IFB
.
• Equity Financing
(The bank has ownership right & Partner on the business )
 Mudaraba
 Musharaka

89
of IFB
A.Mudaraba
o It is a partnership b/n the bank and entrepreneur( skilful people)
but financially weak

o Bank provide capital ( Rabul Maal)
o Entrepreneur contribute skill and manage the business

(Mudarib)
o Profit is shared according to agreement while loss is born by the
bank only
o Incase, for negligence action + early termination of the contract -
collateral may required . Free Banking Division Fundamental

Interest
90
of IFB
100% capital
contribute

91
of IFB
Application
o For single transaction
 To fulfill day-to-day financial needs of traders

 Export financing – when the bank cover all the cost
associated with export
 Import financing -When LC opened without margin
o Long term investment-Project finance
o But any hallal (Shari’ah compliant) business allowed
92
of IFB
o Entrepreneur understate profit
o The bank bear all financial loss
o It is difficult the bank to monitor as the number of
Mudaraba business grow
o It need regular monitoring to mitigate risks
o Negligence + early termination -collateral

93
of IFB
B.Musharaka/“Shirka” /
oIt is partnership b/n the bank and entrepreneur /customer
oBoth the Bank and entrepreneur contribute capital and

expertise or mange the business together
oProfit –loss sharing agreement
oShare profit Based on to pre agreed ratio
oShare loss based on the ratio of invested capital
oThe asset is jointly owned-All partners share in the ownership
of the assets pro-rate to their capital contribution

94
of IFB
95
of IFB
Type: Permanent vs Diminishing Musharaka
A. Permanent (Continuing) Musharakah

o The period of termination of the contract is not
specified.
o Until the end of the project life, both the bank and
customer has ownership right

96
of IFB
B. Diminishing Musharaka
o The ownership of the project gradually transferred to the

customer

97
of IFB
Application
oFor single transaction
 To fulfill day-to-day financial needs of traders
 Import financing -When LC opened with certain margin
 Export financing – when the bank and exporter share the cost of
export
oProject finance( partial contribution)
oAny halal business

98
of IFB
o Relative to mudarab, it has medium risk

o still Entrepreneur understate profit
o It is difficult the bank to monitor as the number of
Musharaka business grow

o It need regular monitoring to mitigate risks
o Negligence + early termination -collateral

99
of IFB
.
oLease Financing

100
of IFB
Ijarah ( Leasing)
o Definition “transferring of usufruct (legal rights to use property) to
another person
o Bank is lessor and customer is lesee
o In the period of lease, the asset remains in the ownership of the bank
but the right of use is transferred to the lessee
o The rental amount can be fixed or differentiated in the whole period
of lease
o Type of lease: Operational vs Financial (Capital)

101
of IFB
Operational Ijarah
o Simple leasing with an option that the lessee / customer

will not purchase the property (not transfer of
ownership) at the end of the leasing period

102
of IFB
. 5. End of lease period , the customer
return the good to the bank

103
of IFB
Financial Ijarah
o Ownership right is finally transferred to

customers

104
of IFB
105
of IFB
Application
o Only for Durable goods like
Vehicles
 Equipment
Machinery
Other suitable and acceptable assets

106
of IFB
Major risks and mitigation factor?
o The customer do not rent the good after the promise-
Hamish Jediah
o Delay in rent payment- penalty( charity)
o Totally default + damage due to negligence –Collateral +
Insurance
o Early termination- collateral + advance rental payment
o To minimize risks-enable the customer to have equity in the
lease good Interest Free Banking Division Fundamental

107
of IFB
Collateral /securities (‗uqud tauthiqat)
o Collateral can be in the form of:
Mortgage /pledge- Rahn
Guarantee - kafalah
The sold commodity itself

 interest bearing securities( take the Principle Only ) e-g-
Abay Bond at its face value
o In all type of financing product COLLATERAL IS

REQUIRED
108
of IFB
Other IFB Products
o Qard Loan
 It is a loan without interest (Benevolent Loan)
 Applicable for social welfare sector(Poors)
o Hawalah-Money Transfer Services

o Local Money Transfer Services
o International Money Transfer Services
o Sarf-FOREX Services
o Kafalah -Guarantee Services

109
of IFB
110
of IFB
Address
o [email protected]
o +251 911 169270

111
of IFB
• Example – How Nigerians can be
finacened 5 billion in IFB?

112
of IFB
o Construction of natural gas pipeline
– Equity financing – the bank finance 4 billion for Nigerians where the bank has some
ownership on the project and both share the profit and loss sharing Musharaka,
Mudaraba
– Sale financing –the bank itself construct the pipeline with 4 billion and sell it it 4.8
billion to Nigeria -Istisina
o Purchasing of some vehicles and other
– Sale financing -The bank purchase the cars in 1 billion and sell it to 1.3 billion- Murabaha
– Lease financing -The bank purchase the cars in 1 billion and rent to Nigeria and total rent
value is 1.3 billion- ijara
o Total debt of Nigerians will be 4.8+1.3=6.2 billion and it is fixed VISAVISE Conventional
44 Billion -There may be some penalty butofitIFBis not used by the bank 113
114
of IFB
Risks in IFB
o In addition to the common conventional risk, the
following risks are a peculiar to IFB’s.
Displaced commercial Risk- withdrawal risk

Sheri’a -non -compliance risk

115
of IFB
THE END
THANK
of IFB
116

IFB Fundemental + Finacing - (Final)

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IFB Fundemental + Finacing - (Final)

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Abay

Interest Free Banking Division Fundamental

o IFB usually referred as ISLAMIC BANKING

o Alternative service for both Muslim and non Muslim

 International Financial Reporting Standards (IFRS)

 Generally accepted accounting principles (GAAP)

 Accounting and Auditing Organization for Islamic Financial Institutions

(AAOIFI)-was established in 1991 at Bahrain.

 Issues Standards on Shariah, Accounting, Auditing,

 AAOIFI more accepted than IFSB

o Associated with the coming of Prophet Mohamed (over 1400

o On 1975, the Islamic Development Bank (IDB) was setup

o 1978 (Luxembourg) Islamic Finance House was established.

o On 1993, commercial & merchant banks were allowed to offer

Interest Free Banking Division Fundamental

o These institutions however, are required to separate the funds

o Today (Western banks) Citibank, Merill Lynch, HSBC, UBS,

Interest Free Banking Division Fundamental

o Subsequently, ethical Banks and financial institutions, based on

o On the year 1991 (Bahrain) Recognizing the need for standards.

o On the year 2002 (IFSB) was established. Sets and disseminates

Interest Free Banking Division Fundamental

Interest Free Banking Division Fundamental

– Money is treated as “Potential Capital” that is becomes actual

Interest Free Banking Division Fundamental

Interest Free Banking Division Fundamental

The exclusion of Gharar – contractual

Interest Free Banking Division Fundamental

Interest Free Banking Division Fundamental

o Gharar is present in contracts where the object of the sale is not in

Interest Free Banking Division Fundamental

The avoidance of Maysir or Qimar – Gambling

Interest Free Banking Division Fundamental

Interest Free Banking Division Fundamental

 Still the core element is promoting social justice

Interest Free Banking Division Fundamental

o Products & Services invested in, must be permissible

Interest Free Banking Division Fundamental

o Profit and loss principle is proportional to the risk

• Islam encourages to invest their money and to become

Interest Free Banking Division Fundamental

IFB vs Conventional Banking

Interest Free Banking Division Fundamental

Interest Free Banking Division Fundamental

Money + Money (interest)

Interest Free Banking Division Fundamental

Goods & Services

Interest Free Banking Division Fundamental

Asset Financing Provide Cash Directly

Trade Participation Not involved in Trade

Interest Free Banking Division Fundamental

Considering -Consider economic -Consider economic (Profitability),

Interest Free Banking Division Fundamental

Form of Interest based deposit Safe custody ,investment

Interest Free Banking Division Fundamental

Variables Conventional IFB

Form of Loan Interest based loan Equity financing , Trade

Interest Free Banking Division Fundamental

Interest Free Banking Division Fundamental