Islamic Financial Contract

Islamic Financial Contract
Training of Islamic Finance Level Basic
Trainer: Dr Hurriyah El Islamy

July 2021
Credentials
• Board of Trustee, Responsible Finance & Investment (RFI) Foundation;

• International Monetary Fund (IMF) Expert in Islamic Finance and Capital Markets;
• Islamic Finance News (IFN) Advisory Board Member;
• Finance Accreditation Agency (FAA) Accreditation Panel Member (Assessor);
• Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
Master Trainer, Islamic Crowdfunding Standard Working Group, Centralised Shariah
Board Working Group;
• Shariah Board and Strategic Adviser, Islamic Fintech Alliance
• Astana International Financial Centre (AIFC) Advisory Council on Islamic Finance;
• Director, Group Head Shariah and Governance, Group Head Islamic Legal and
Capital Markets, CIMB Group
• Director, Head of Legal and DMLRO, Capinnova Investment Bank Bahrain;
• Head of AML & Compliance and Legal Counsel, Kuwait Finance House Bahrain;
• Chairperson, Audit and Legal, Bahrain Association of Bankers,
• Author of Articles, Book Chapters and Books on Islamic Finance, Islamic Banking and
Capital Markets, Islamic Fintech, Cryptocurrencies, Privacy and Data Confidentiality.
(c) Dr Hurriyah El Islamy, July 2021 – Page 2

Islamic Finance – What is
01
What is Islamic
History of Islamic Finance
02 05 Banking?
Why Islamic TABLE OF Islamic Financial

Finance? 03 CONTENTS
06 Contract
•Personal Financing
•Credit Card
•Home FInancing
The Current State of Opportunities and

Islamic Finance 04 07 Challenge
08 Key Takeaway

01
Islamic Finance – What is

Islamic Finance – What Is
A comprehensive financial
system that adheres to Islamic
principles

02
History of Islamic Finance

Islamic Finance is not new: some simple facts
• Many financial structures eg. Mudharabah/Musharakah pre-existed Islam during
the Mesopotamian era in the Babylonian/Akkadian/Assyrian empires (circa 2900
BC)
• Formally established during the Umayyad (661-750AD) and Abbasid empires (750-
1258 AD). Continued to be a vibrant and significant financial system by Islamic
empires in Andalusia (1031), Granada (1492), Sultanate of Malacca (1511) and the
Ottoman Empire (1918)
• Its modern operation was re-introduced and re-developed in 1960s
• It is not really 55 years old but has been around for more than 1,400 years
• It provides for the intermediation between the have and have not's and all type of
financial activities to be done in a Shariah-compliant manner that meets all
stakeholders’ expectations and the “Maqasid al Shariah” of each activity

History
Partnerships and Islamic The Experiments (50s

Agents Economics and 60s)
• The Prophet (SWT) and • Pragmatism of Umar • 1956: Tabung Haji
Khadija (RA) – Mudharaba (RA) (Malaysia)
• The Arabs trade journeys - • Abu Yusuf – Tax • 1963 – 1967: Mit Ghamr
Musharaka systems (Egypt)
• The importance of
reputation
• The establishment of
designated market places
• Guilds
The Revolution for the Changes in Global The Growth (90s –

Ummah (70s) Finance (80s) Present Day)
• 1970: Organisation of Islamic Countries (OIC) • The deregulation of the • Fall of communism and greater
• 1973: Oil shocks and the increased price of oil markets. Western influence in the Middle
• 1974: Islamic Development Bank (IsDB) and • Significant changes in East
the Fiqh Academy the financial markets • Recognition of Islamic finance by
• 1975: Dubai Islamic Bank • Islamic banks and the West
• 1976: First International Conference on Islamic products enter • The success of Malaysia
Economics international markets • The economic growth of the
• 1979: Pakistan ‘islamicises’ economy; Iranian Middle East
Revolution • The problem of “terrorism”
Islamic Banking and Finance - Now
• Global Islamic banking assets with commercial banks: Asset with Growth – $1.54t
in 2012, 1.7t in 2013, on course to exceed $3.4t by 2018 and predicted to be circa
USD8.6 trillion in 2023.
• Asset growth globally: Islamic banking asset 50% faster than the growth rate of the
overall banking sector. In GCC, Islamic banking assets grew by 14% in 2012,
conventional banking assets grew by only 8.1%
• Compound Annual Growth Rate (2009-13) circa 17% vs conventional average at

15%
• Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Turkey banking assets growing
c.18%.
• Average ROE of 11.9% for top 20 Islamic banks compared to conventional average
of 14.5%
• Estimated 38 million customers who bank with Islamic retail banks globally.

Aggregate Islamic Banking Average Annual Assets Growth by Country (y-o-y) (2Q18 and 3Q19)
The figures indicated for each country are denominated in the respective local currency
Source: IFSB Stability Report 2020

03
Why Islamic Finance

The $1,597.4billion reasons
300
Indonesia $1,597.4b
250 India, $1,380b
Muslim population in millions
Bangladesh $1,154b
200 Pakistan $1,368b
150
Turkey $591b Iran $367.9b
100 Egypt $524b
Yemen $197b Sudan $204b

50Syria $153b Saudi Arabia $199b
Malaysia $133.4b
Kuwait $79.5b
Jordan $49b
0 Brunei, $3.7b Qatar $52.3b
UAE $94.1b Bahrain $58b
0 10 20 30 40 50 60 70 80
Number of Shariah compliant banks
Financial Times project that 2023 Market Size for Islamic Finance would be circa US$8,602 billion globally

04
The Current State of
Islamic Finance

Downside Risks of the Global Global IFSI Maintains
Economy in 2020: Positive Growth in 2019

SEGMENTAL ANALYSIS

SEGMENTAL ANALYSIS
Source: IFSB Stability Report 2020 (c) Dr Hurriyah El Islamy, July 2021 – Page 16
Segmental Composition of the Global Breakdown of the Global IFSI by Segment and Region
IFSI (2019) (USD billion, 2019*)
Data for ṣukūk outstanding and Islamic funds are for full-year 2019; for Islamic banking, they are as
at 3Q19; and for takāful, they are as at end-2018.
Notes: (a) Data are mostly taken from primary sources (regulatory authorities’ statistical databases, annual reports
and financial stability reports, official press releases and speeches, etc., and the IFSB’s PSIFI database).
(b) Where primary data are unavailable, third-party data providers have been used, including Bloomberg.
The ICM segment of the IFSI now accounts for a 26.5% (c) Takāful contributions are used as a basis to reflect the growth in the takāful segment.
(d) The breakdown of Islamic funds’ assets is by domicile of the funds, while that for ṣukūk outstanding is by
share of global IFSI assets. Over the past three years – from domicile of the obligor.
2016 to 2019 – the sector had recorded an increasing share (e) The regional classification is different from that used in the previous IFSI stability reports. Other than the GCC
of global IFSI assets at the expense of the Islamic banking and South-East Asian region, a new classification – Middle East and South Asia (MESA) – is used to capture other
segment, which also regained momentum in 2019. jurisdictions in Asia. The African region now includes both North Africa and Sub-Saharan Africa. Jurisdictions not
belonging to any of the four regions are classified as ‘Others’, specifically countries located in Europe, North
America, South America, and Central Asia regions.
Islamic Banking Share in Total Banking
Assets by Jurisdiction
Notes:
a) The countries whose coloured bars extend beyond the red
dotted line satisfy the criterion of having a more than 15%
share of Islamic banking assets in their total domestic banking
sector assets and, hence, are categorised as systemically
important.
b) A recognition of systemic importance is considered for a
jurisdiction that is within one percentage point off the 15%
benchmark, provided it has active involvement (is among the
top 10 jurisdictions) in the other two sectors of the IFSI –
Islamic capital markets and takāful, for instance, Bahrain.
c) Yemen, which has previously been classified as having
achieved domestic systemic importance, is not Included in this
IFSI Stability Report 2020, due to a lack of availability of data.
South Africa

Islamic Banking Assets in Jurisdictions* Ṣukūk Outstanding in Jurisdictions* with
with an Islamic Finance Sector of Systemic an Islamic Finance Sector of Systemic Importance
Importance (2019) (2019)
USD 151.9 bln

USD 89.1 bln
8.6%

Breakdown of IFSI by Region (%) (2019) Share of Global Islamic Banking
Assets* (%) (3Q19)
Regionally, the GCC retained its position as the largest domicile for In terms of the top jurisdictions for Islamic banking assets, Iran at
Islamic finance assets. In 2019, the region experienced a modest 28.6% (2Q18:32.1%), Saudi Arabia 24.9% (2Q18: 25.1%), Malaysia
increase in its share in global Islamic banking assets to 45.4%. This is 11.1% (2Q18: 10.8%), UAE 8.7% (2Q18: 9.8%) and Kuwait, which
followed by the share of the MESA region with 25.9% of global IFSI remains at 6.3%, are the top five. The other countries in the top 10
assets. The South-East Asian region ranks next with 23.5%, while Africa
Islamic banking jurisdictions, in order of size, are Qatar, Turkey,
ranks least with a share of 1.6% of global IFSI assets.
Bangladesh, Indonesia and Bahrain

Key Highlights on Global Islamic Banking
* Forecast.
Compound Annual Growth Rate (December 2013 – September 2019). Data used in
calculating CAGR, as well as growth rates for assets, financing and deposits, were
obtained from the Prudential and Structural Islamic Financial Indicators of the IFSB, and
include data from both Islamic banks and windows in Bangladesh, Indonesia, Malaysia,
Oman, Pakistan and Saudi Arabia, and from Islamic banks in Brunei, Iran, Jordan,
Kuwait, Lebanon, Nigeria, Palestine, Qatar, Sudan, Turkey and the UAE. Aggregate
growth rates for deposits, including CAGR, exclude Kuwait and Qatar due to data
limitations. The UK data were not used for growth calculations due to their short time
series, but were used to calculate aggregate asset, financing and deposit values.
Islamic Banking Assets and Market Share (3Q19)
Islamic Banking Assets (2018–2019F) Compound Average Growth of Key Islamic
Banking Statistics (3Q17– 3Q19)

Aggregate Islamic Banking Average Annual Financing Growth by Aggregate Islamic Banking Average Annual Deposit Growth by
Country (y-o-y) (2Q18 and 3Q19) Country (y-o-y) (2Q18 and 3Q19)

Global Ṣukūk Issuances and Ṣukūk
Outstanding Trends (2004–19)
The ṣukūk market experienced double-digit growth in 2019. Total ṣukūk issuances expanded by more than 24% under attractive
global financing conditions for issuers .The strong growth in the ṣukūk market was supported primarily by increases in issuance
from Malaysia, Saudi Arabia, Qatar and Turkey. The robust issuance in 2019 marks the fourth consecutive year of expansion of
the ṣukūk market. It also represents an overall growth in ṣukūk outstanding in the last 15 years (from 2004 to 2019) by a CAGR
of 26%, making it the fastest-growing segment in the IFSI.

Sovereign Sukuk Issuance by Jurisdiction (2019)
Corporate ṣukūk issuances have demonstrated an upward growth trajectory in recent years, a reversal from the generally lower issuance rates
observed historically. The turnaround of the downward trend observed for corporate ṣukūk issuances from 2012 to 2015, and the steady growth
of the market since 2016, has been supported by structural reforms across regulatory and legal frameworks in many countries.

Total Ṣukūk Issuances by Domicile (2019) Global Ṣukūk Issuances by Sector (2019)
Excludes issuances by multilateral organisations and

development banks.
Green Ṣukūk Issuances
Green Ṣukūk Issuances (2017–19)

Timeline of Developments, Initiatives
and Green Ṣukūk Issuance

Islamic Funds
Growth in Assets under Management and Islamic Fund Assets by Domicile (2019)
Number of Islamic Funds (2008–19)
Source: Bloomberg, Thomson Reuters, EIKON and data received directly from regulators

Islamic Funds
Ten-Year Historical Performance (2009–19)

05
What is Islamic
Banking?

What is Islamic Banking?
A banking system or banking activity consistent with Islamic law (Shariah) principles:
• prohibits usury—collection and payment of interest (“Riba”)
• prohibits investing in businesses considered (i) of no value or (ii) unlawful (“Haraam”). For example
the selling of alcohol, pork, weapons, tobacco, entertainment or pornography.
• prohibits uncertainty in contracts ("Maysir“) and speculative transactions ("Gharar“)
Everything else is PERMITTED
Does this mean you cannot incur debt since charging interest is not permitted?
Answer: IT DEPENDS.
Prohibited  Indebtedness arising from borrowing monies
(e.g. conventional loans)
Permitted  Indebtedness arising from a trade contract
(e.g. sale transaction, sale & leaseback, sale & buyback, partnership)

Islamic Finance within the Shariah Universe

Islamic Finance Industry Components
Islamic Finance
Banking Capital Markets Non-Banking
Asset Custodial
Equity Debt Manage- Takaful Manage-
ment ment

Islamic Banking Industry Stakeholder Expectations
Stakeholders’ Expectations
Customers Shareholders Governments/Regulators Employees
Real
Good, Shariah Protect Protect
Maximize Good
competitive compliance Public Interest, systemic employment
profitability
products of their integrity opportunity
choice Nation-building
No fraud Serious and

Social Maximize Proper committed
and Wealth
respon- financial wealth employer in
misrepresen Creation doing the
sibilities inclusion distribution
-tations business
Shariah Facilitates Innovative Products & Services for ALL
Muslims: Non-Muslims:
Want products and

Islamic financial market:
• Banking
Want products and
services that provide services that provide
• Money Market
them value and meet • Debt Capital Market them value.
their personal and • Equity Capital Market
preferred Shariah • Derivatives Do not care about
application as found • Private Equity Shariah compliance but
under the different school • Takaful
care about ethical
of laws – • REITS
• Asset Management business and social
 Hanbali responsibilities, which
• Wealth Management
 Maliki • Non FI services are embedded under
 Shafei • Other financial products and Shariah principles.
 Hanafi activities
 …and many more
Success is contingent on offering the right solutions to the appropriate customer segments.
Selection of Wholesale Banking Offerings
 Sukuk  Islamic Treasury
 Islamic IPO
 Islamic Interbank
 Islamic Warrants
 Corporate Financing-i  Islamic Private Equity
 Islamic Trade Finance

 Islamic Infrastructure Fund
 Islamic Cash Management

 Islamic Property Fund
 Islamic Derivatives
 Islamic PRS
 Islamic Structured Products

 Islamic Mutual Funds

Selection of Commercial Banking Offerings
Islamic term deposits Islamic Structured Products
Islamic CASA
Islamic Pawnbroking or AlRahnu
Islamic Property Financing
Bancatakaful
Islamic Vehicle Financing
Remittance
Bureau De Change
Islamic Personal Financing
Islamic Private Banking
Islamic Cash Management

Islamic Preferred Banking
Islamic Trade Finance

Islamic Credit Cards

Shariah Advisory Services Offerings
Service Description
Shariah advisory & Provision of Shariah advisory & consultation on an on-going basis to ensure the
consultation client's business and products are Shariah-compliant.
Development and assistance with the structuring of Shariah-compliant product and
Shariah-compliant
services & issuing edicts in the form of a confirmation and/or a pronouncement
product and services
(Fatwa) in respect to Shariah compliant structures, mechanisms, techniques and
development
products for the purpose of end-to-end solution for product development.
Shariah compliance A service to ensure proper implementation and execution of approved Shariah
and review compliant products and services from time to time.
Review and screening of the investment of the Fund submitted by a company on a

Investment review
periodical (usually quarterly) basis reflecting monthly transactions to ensure
and screening
compliance with the prescribed appilcable investment policies and guidelines.
Undertaking research in the field of Shariah compliant products, mechanisms,

Shariah research
techniques and services in order to provide innovative products and.
Provision of training to personnel of a company on Shariah compliant financing
Training mechanisms, techniques, products, services, transaction and assisting in human
capital development in the areas of Islamic banking and finance.

06
ISLAMIC FINANCIAL
CONTRACT
• Personal Financing
• Credit Card
• Home FInancing

ISLAMIC FINANCIAL CONTRACT
PERSONAL FINANCING CREDIT CARD HOME FINANCING

 Types of Personal Financing  Credit Card / Debit Card /  Completed Properties &
Products Charge Card Properties Under Construction
 Underlying Contracts of Personal  Structures of Credit Card  Conventional v. Islamic
Financing offered by the Banks  Underlying Contracts
 Bay’ Al `Inah  What are the differences  Murabahah
 Bai’ Bithaman Ajil
 Tawarruq / Murabahah between conventional and  Istisna’
 Ijarah:
 Ijarah Islamic products
 Ijarah Mausufah Fi Dhimmah
 Ijarah Muntahia Bitamlik
 Musyarakah Mutanaqisah
Shariah and Legal Issues in
 Some Issues
Personal Financing & Credit Card

PERSONAL FINANCING
Personal Financing – Underlying Contracts
Bay’ Al-Inah Tawarruq / Murabahah Ijarah

PERSONAL FINANCING Bay Al Inah
Common Features:
• Profit rate may be fixed or variable. Variable rate is subject to
• Literally means: sale of a an object a cap at a rate determined by the bank. The capped rate
• Refers to a transaction involving the sale of an asset by a seller to a (commonly called ‘the Ceiling rate’) is used as the contracted
buyer and subsequently the seller purchases the asset back from the rate to derive the deferred sale price. The difference between
buyer. the deferred sale price at the Ceiling profit rate and the actual
variable rate (commonly called ‘the Effective Profit rate’) shall
• Mode of Financing:
be waived by the bank by way of ibra’.
• Bank sells its asset to the customer on deferred payment • Deferred sale price may be unsecured or secured against
terms acceptable collaterals eg. Property, cash, shares etc.
• Immediately after that the bank buys the asset back from the • Ibra’ (rebate) must be given for early settlement of deferred
customer on spot basis at a price lower than when the asset sale price by Customer.
is sold
• Early settlement charges may be charged for early settlement
Or during a specified period (usually called Lock-in Period)
• Partial settlement may be allowed so as to reduce the total
• Customer sells his/her asset to the bank on spot basis
profit payable to the bank
• Immediately after that Customer buys the asset back from • Late payment charges may be charged for any late payment
the bank on deferred payment terms at a higher price than
in instalments . Late payment charges may be charged
when the asset is sold
based on approved rate (if any). Late payment charges
• This concept is also commonly called Bai Bithaman Ajil cannot be compounded

PERSONAL FINANCING Tawarruq / Murabahah
• From the Arabic word “Ar Ribh” means profit.
Commonly used for: Mode of financing:
• Murabahah literally means to make profit / sale on
profit • Personal financing • A customer requests to purchase
commodity from a bank on deferred sale
• Murabahah originally refers to a contract of sale in • Home or property financing price
which the seller declares his cost and profit. It’s a (completed or under
kind of amanah sale whereby the disclosure of construction) • The Bank purchases commodity from a
actual cost and profit is a must (otherwise it will be trader on its own account at a price
a musawamah transaction). • Asset backed financing equivalent to the facility amount (Cost)
• BNM definition: Murabahah contract is a type of • Term financing • The Bank sells the commodity to the
“trust” sale contract under Shariah in which the Customer on deferred sale price (Cost +
purchaser relies upon the integrity of the seller to • Cash line facility Profit) payable in installments over an
acquire the desired Shariah compliant asset at a agreed period of time.
reasonable cost. In line with the underpinning • Revolving credit facility
element of trust in Murabahah contract, the seller In Tawarruq (after the process specified above):
is required to disclose the breakdown of the selling
price to the purchaser, which comprises the • The Customer appoints the Bank to sell
acquisition cost and the mark-up or profit margin. the commodity on the Customer’s behalf at
a price equivalent to the facility amount.
• In Islamic finance, Murabahah refers to a
transaction involving a purchase by a customer of • The Bank, acting as the Customer’s agent,
a commodity in the ownership and possession of sells the commodity to trader B and credit
the IFI against a deferred price. In Tawarruq this the sales proceeds (equivalent to the
process is followed by subsequent sale by the facility amount) into the Customer’s
purchaser (the customer) to a party other than the account
seller (originating trader) on cash.
PERSONAL FINANCING Tawarruq / Murabahah
Common Features:
Common Features:
• Profit rate may be fixed or variable. Variable rate is subject to a cap at • Early settlement charges may be charged for early
a rate determined by the bank. The capped rate (commonly called ‘the settlement during a specified period (usually called Lock-in
Ceiling rate’) is used as the contracted rate to derive the deferred sale Period)
price. The difference between the deferred sale price at the Ceiling
profit rate and the actual variable rate (commonly called ‘the Effective • Partial settlement may be allowed so as to reduce the total
Profit rate’) shall be waived by the bank by way of ibra’. profit payable to the bank
• For financing of properties under construction, ‘Grace Period’ may be • Late payment charges may be charged for any late
allowed for payment of profit only during the Grace Period. payment in instalments .
• Deferred sale price may be unsecured or secured against acceptable • Late payment charges may be charged based on approved
collaterals eg. Property, cash, shares etc. rate (if any).
• In Malaysia, Ibra’ (rebate) must be given for early settlement of • Late payment charges cannot be compounded
deferred sale price by Customer.

PERSONAL FINANCING Ijarah
• From the Arabic word ‘Ajr’ which means lease/hire/sale • BNM (Concept Paper): “In the context of Islamic
of usufruct. It also means compensation/fee. financial transaction, the IFI, as the owner of the
asset and the usufruct, leases or transfer the
• Ijarah literally refers to a transaction whereby a person
usufruct of the asset for an agreed rental amount
(owner/lessor) agrees to hire/lease/rent his “asset” or
and at a specified period to the customer who is
provide his service to the other (hirer/lessee) for an
agreed fee. the lessee... Ijarah can also be structured as a
financing tool to allow customers to acquire their
• Ijarah in Islamic finance refers to a transaction whereby a assets through a lease, instead of outright
lessor who owns the leased asset will lease it to the purchase. For this, Ijarah would be structured
lessee in exchange for rental. with supporting arrangements and/or other
contracts to finance a customer who intends to
• BNM (Concept Paper): “Technically, Ijarah is a contract own an asset upon completion of lease period.
of transfer of ownership of usufruct or service in The intention to own asset is usually reflected va
exchange for a specified consideration. The primary a wa’d (promise) arrangement to purchase asset
objective of lease is to facilitate a lessee who does not
by customer upon maturity or early termination of
intend to own certain assets but need to use and benefit
ijarah contract.
from the utilisation of the assets against payment of
certain agreed rental to the lessor” • For financing purposes, the concept of Ijarah is
• The typical arrangement in simple Ijarah is that during usually “coupled” with other principle to allow the
the lease period the lessee will benefit from the leased transfer of ownership in the asset to the
asset subject to the terms and conditions of the lease. At customer upon the expiry of the lease. This could
the expiry of the lease period, the asset shall be returned be done either by way of sale to the customer
to the lessor and the lessee shall cease to benefit from (bai’) or as a gift (hibah)
such asset.

CREDIT CARD / DEBIT CARD / CHARGE CARD
• Credit Card, Debit Card and Charge Card are all form of • Ujrah: Fee – in credit card this refers to the fee the
electronic cards issued by a bank to facilitate or provide Bank is entitled to earn for providing the services and
some facility to its customers. the customers are liable to pay for utilising the
services.
• The difference between the three are:
• Islamic Credit Card may be based on several
• Credit Card: usually allows the customer to use structures, among others:
such card to make purchases or pay for services
• Murabahah or tawarruq.
on credit that could be payable over some
allowable period of time, usually with interest. • Al Hiwalah (for purchases) + Qard Hassan (for
cash withdrawal) + Ujrah
• Debit Card: is the electronic card that provides the
customers access to their banking account. It • Arrahnu (customer pledging the asset) + Ijarah
works similar to cash except that the customers will (Bank leases back) + Hiwalah (trader’s claim on
instead use the card to pay for the goods or debt) = this is akin to “debit card”
services by affecting direct deduction from the cash
available in their banking account. • Bay Al Inah + wadiah (bank sells and buys back its
asset to create “available credit limit” kept with the
• Charge Card: works in similar manner as the Credit Bank on Wadiah basis)
Card except that it originally required full payment
upon issuance of the statement. Thus, unlike credit • Kafalah (bil-ujrah) + Qard
cards, it does not usually have a pre-set limit.
• Qard al Hassan + Ujrah

CREDIT CARD / DEBIT CARD / CHARGE CARD Structures of Credit Card
• Ujrah = financial payment for the utilisation of services or • Common Features:

manfaat.
• Service fee is fixed
• Mode of Financing:
• Loan and service fee may be unsecured or
• Bank grants a credit line in the form of Qardh secured against acceptable collaterals.
(interest free loan)
• Credit cards may only be used to pay for goods
• Bank issues a credit card which must be used in and/or services that are not against Shariah
order to utilize the credit line
• Customer has the right to early settle the loan and
• When customer uses the credit card to purchase service fee at any time
goods or services, bank will pay the seller/service
provider using the available credit line. This is part • Late payment charges may be charged for any late
of the service to be rendered by the bank payment. Late payment charges may be charged
based on approved rate (if any).
• Customer must repay the bank the loan in full and
the service fee • Late payment charges cannot be compounded.

CREDIT CARD / DEBIT CARD / CHARGE CARD
Conventional vs Islamic Credit Card Shariah and Legal Issues in Credit Card
Conventional Islamic • Concerns on the validity / whether or not the deployment of the
principles in the transactions is Shariah compliant.
Underlying loan Shariah compliant
principle principles • On expiry of the credit card and where bank decides not to renew
such as Hawalah, the card and the loan is still outstanding, bank cannot continue to
Kafalah, charge service fee as there will not be any service rendered by the
bank.
Arrahnu, Qard, Ujrah
Commercial Interest Profit I Fee • Some scholars perceive that credit card should be avoided – so as
gain not to encourage people to incur debt and/or to spend beyond their
ability to pay.
Late payment Interest Ta'widh
Compounding Non-compounding • Enforcement issue: Al Baqarah 208 “and if someone is in hardship,
then [let there be] postponements until [a time of] ease]. But if you
"Separate" Not required May be required give [from your right at] charity, then it is better for you, if you only
Credit depending knew.”
Facility / on the structure(s)
Collateral
Restriction Usually there Not allowed for
is no purchase or
restriction activities not
sanctioned by
Shariah
HOME FINANCING Completed Properties &
Properties Under Construction
• Conventional vs Islamic Home Financing

• Islamic financing is not lending. The ‘profit’ cannot be
secured from lending activities.
• Underlying contracts for home financing
• Murabahah
• In sale transactions, the asset must exist at the time of
• Bay Bithaman Ajil
sale (one cannot sell something he does not own / one
• Istisna’
cannot sell anything that does not exist).
• Ijarah
• Musharakah Mutanaqisah
• In Ijarah transaction, the rental payment is linked with
the provision of usufruct.
• Some issues:
• Title to the property
• For properties under construction: Ijarah Mawsufa Fi
• Maintenance and insurance
Dhimmah, Istisna or Commodity Murabaha
• Floating Rate Financing
• Mortgage
• Default / Late Payment /Restructuring
• Construction Risk
• Payment During Construction
• Refund Risk

HOME FINANCING
Conventional v. Islamic Underlying Contracts
Conventional Islamic
Underlying loan Shariah compliant principles • Murabahah
principle
• Bai’ Bithaman Ajil
Commercial gain Interest Profit / Rent
• Istisna’
Late payment Interest Ta'widh
Compounding Non-compounding • Ijarah:
Link to asset More security 1. subject of transaction; and/or • Ijarah Mausufah Fi Dhimmah
2. security
• Ijarah Muntahia Bitamlik
Restriction Usually there In Ijarah or any sale transaction
no restriction where the asset is the subject • Musyarakah Mutanaqisah
matter
— the asset must exist.
Not allowed for purchase or is
activities
not sanctioned by Shariah
Risk in relation to Not on the In some principles, this could be
the asset includng bank on
the duty to the bank
maintain
HOME FINANCING
Murabahah Bai’ Bithaman Ajil

• See the slides in Murabahah for personal financing. See slides on Bai Al Inah
• Murabahah is only applicable for completed property. BBA literally means sale of goods with deferred payment.
• For non completed property, murabahah could be deployed Issues:

with Istisna • Many scholars question its validity
• To simplify the process, many IFIs prefer to deploy • In the country where it’s permitted, operationally the
Tawarruq instead. concept may be difficult to practice. Eg, in Malaysia, the
BNM’s resolution on Bai Al Inah prohibits the sale and
• The issues with Tawarruq: buy back agreement to be conditional i.e the two
• There’s cost involved (brokerage fee) payable to trader agreements must be separate and independent of one
A and trader B. Such cost is not applicable for other another. For the purposes of financing facility, the inter-
concepts eg Bai Bithaman Ajil, Ijarah etc conditionality is important otherwise the financing facility
cannot proceed.
• As there are 3 separate sale and purchase • Uncertainty/ambiguity (gharar) in the administration
transactions (Bank buys from trader A, Bank sells to
treatment. Eg. If there’s a lump sum payment (settlement
customer and Bank sells to trader B as agent of
or otherwise) – whether such payment should be affected
Customer), there’s a higher operational risk as
compared to other shariah concepts. It’s imperative for towards capital investment or merely reflecting advance
the 3 sale and purchase transactions to be done in the payment of instalments
correct sequence and documented otherwise the whole • Actual v. beneficial ownership (spot sale?)
structure can be deemed as non-Shariah compliant. (c) Dr Hurriyah El Islamy, July 2021 – Page 53
HOME FINANCING
Istisna’ Ijarah Mawsufa Fi Dhimmah
• Literally means asking someone to make/manufacture • A type of Ijarah involving the contract to sell usufruct in a
something. clearly specified underlying asset, which is currently being
produced or under construction for a future delivery.
• It refers to a contract between the buyer and the seller for the
sale of an asset described in the sale contract and transacted • Also known as Forward Ijarah
before the asset comes into existence.
• Financier takes the risk during construction and must serve all
• The price must be fixed but need not be paid in full on the day of
payments. Rental can only commence after delivery of the
the contract. asset.
• The specifications of the asset must be agreed. If the asset
• The rental must be known at the time of Aqd.
delivered is not as per the agreed specification, the buyer may
cancel the contract. • The rental must be preset for the whole tenure of contract.
• Mode of financing: the IFI will deal with the developer who is to
• To address that: renewable contract or floating rate.
deliver the completed property to the IFI before the IFI will sell or
rent it to the customer who applies for financing. • Issues:
• Main issue: the completion/manufacturing risk and all risks
• Rent collection prior to the delivery of the asset
related to the asset delivery, in a straight forward istisa, as and
between IFI and the customer, lies with the IFI • Legal ownership, security and enforceabilit

HOME FINANCING Ijarah Muntahia Bitamlik
Mode of Financing
Common Features:
• The bank purchases the asset from a third party or the customer
• Rental rate may be fixed or variable. Variable rate may be
• The bank leases the asset to the customer capped at a rate determined by the bank
• The customer gives a wa’ad (undertaking) to the bank that customer • Lease rentals may be unsecured or secured against
will purchase the asset from the bank upon the bank calling on the acceptable collaterals eg. Property, cash, shares etc.
undertaking upon event of default, early settlement or end of tenor.
• Customer has the right to early settle by purchasing the
• At the end of tenor, subject to full payment of lease rentals, the bank asset from the bank at any time during the tenor
will call on the undertaking given by customer to purchase the asset
• Early settlement charges may be charged for early
from the bank at a nominal value. Upon full payment, ownership of
settlement during a specified period (usually called Lock-in
the asset will be transferred to the customer. (this could also be
Period)
done by way of hibah)
• Bank as beneficial owner of the asset must bear the maintenance
rental payable to the bank
cost of the asset throughout the lease tenor. However, the customer
will be appointed as bank’s agent to maintain the asset on bank’s • Late payment charges may be charged for any late payment
behalf and the cost of the maintenance may be offset against higher in installments . Late payment charges may be charged
rentals or against part of the sale and purchase price of the asset based on approved rate (if any).
upon the activation of the purchase undertaking.
• Late payment charges cannot be compounded

HOME FINANCING
Ijarah Muntahia Bitamlik Musyarakah Mutanaqisah
Issues:
• In a common scenario where the bank requires the leased asset • Literally means diminishing partnership.
to be charged to the bank, there’s a question of whether the
bank, as beneficial owner of the asset, can take a charge over • It refers to joint ownership between the parties whereby
the asset it already owns albeit beneficially. Legal opinions seem
the shares or ownership of one of the party will diminish
to lean to the affirmative but the issue hasn’t been tested in the
over time.
court of law.
• In Islamic finance, this concept is commonly deployed in
• As beneficial owner of the asset, the bank will bear the ownership joint ownership of an asset/venture by more than one
risk throughout the lease tenor. This might attract a risk profile party and where the share or ownership of one of the
which is not evident in sale based Shariah concepts like Bai partners will diminish over time resulting in the transfer of
Bithaman Ajil and Commodity Murabahah. all shares or ownership in the other party
• Commonly used for home/property Financing (completed
or under construction properties)

HOME FINANCING Musyarakah Mutanaqisah
Mode of Financing:- Common Features

• Profit rate may be fixed or variable. Variable rate may be
• Customer and bank jointly acquire property at a pre-
capped at a rate determined by the bank
agreed capital contribution ratio.
• For financing of properties under construction, ‘Grace Period’
may be allowed for payment of ‘advance rental’ during the
• Customer issues a purchase undertaking to acquire the
bank’s share in the property on a gradual basis. Grace Period.
• Rental and sale price for the bank’s shares in the property
• Bank leases its share in the property to customer and may be unsecured or secured against acceptable collaterals
gradually sells its share in the property to customer. • Early settlement charges may be charged for early settlement
during a specified period (usually called Lock-in Period)
profit payable to the bank
• Late payment charges may be charged for any late payment
in instalments . Late payment charges may be charged based
on approved rate.
• Late payment charges cannot be compounded

HOME FINANCING
Musyarakah Mutanaqisah Some Issues
Issues: • Title of the Property
• In a common scenario where the bank requires the • Maintenance and Insurance
property to be charged to the bank, there’s a question of • Floating Rate Financing
whether the bank, as joint owner of the property, can • Mortgage
take a charge over the property it already owns albeit
• Default / Late Payment / Restructuring
beneficially and jointly. Legal opinions seem to lean to
the affirmative but the issue hasn’t been tested in the • Construction Risk
court of law. • Payment During Construction
• Refund Risk
• As beneficial joint owner of the asset, the bank will bear
the ownership risk throughout the lease tenor. This might
attract a risk profile which is not evident in sale based
Shariah concepts like Bai Bithaman Ajil and Commodity
Murabaha.

07
OPPORTUNITIES AND
CHALLENGES

OPPORTUNITIES CHALLENGES
• Lack of the market depth and liquidation

• A well developed tradable market can serve the ability.
economic growth.
• The concentration of the investor and issuer
• Boost investment level. base.
• Enhancing the stability and integration of the • Need for developing the legal environment:
financial system. debt offering framework, Securitization,
• Helps banks to diversify their liquidity instrument insolvency and bankruptcy laws, and
effectively. Shariah governance structure.
• Monetary control tool. • Pandemic Covid 19
• Promote national saving scheme.
Source: 13th IFSB-INCEIF Executive Programme

Effective Utilisation of Islamic Capital Market (ICM) Instruments for Sustainable and Responsible Growth (c) Dr Hurriyah El Islamy, July 2021 – Page 60
Fintech, Blockchain and other AIs
● Syariah Treatment
● Regulatory Approach
● Readiness of Infrastructure supports
● Inclusion issues
● Threats and other challenges

08
Key Takeaway

Key Takeway
• Islamic Finance is not new. Ups and downs of Islamic Finance is part of its journey to
growth.
• Challenges include those relate to Syariah treatment, regulatory approach, readiness

of infrastructure and supports as well as public awareness and inclusion.
• Despite challenges, the industry is growing. Opportunities are growing too but to
increase the market share we need creativity and full support of all stakeholders.

THANK YOU

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Training of Islamic Finance Level Basic

Trainer: Dr Hurriyah El Islamy

• Board of Trustee, Responsible Finance & Investment (RFI) Foundation;

(c) Dr Hurriyah El Islamy, July 2021 – Page 2

Why Islamic TABLE OF Islamic Financial

The Current State of Opportunities and

(c) Dr Hurriyah El Islamy, July 2021 – Page 3

(c) Dr Hurriyah El Islamy, July 2021 – Page 4

(c) Dr Hurriyah El Islamy, July 2021 – Page 5

(c) Dr Hurriyah El Islamy, July 2021 – Page 6

• Its modern operation was re-introduced and re-developed in 1960s

(c) Dr Hurriyah El Islamy, July 2021 – Page 7

Partnerships and Islamic The Experiments (50s

The Revolution for the Changes in Global The Growth (90s –

• Compound Annual Growth Rate (2009-13) circa 17% vs conventional average at

(c) Dr Hurriyah El Islamy, July 2021 – Page 9

Source: IFSB Stability Report 2020

(c) Dr Hurriyah El Islamy, July 2021 – Page 11

Yemen $197b Sudan $204b

(c) Dr Hurriyah El Islamy, July 2021 – Page 12

(c) Dr Hurriyah El Islamy, July 2021 – Page 13

Source: IFSB Stability Report 2020

Source: IFSB Stability Report 2020

(c) Dr Hurriyah El Islamy, July 2021 – Page 14

Source: IFSB Stability Report 2020

(c) Dr Hurriyah El Islamy, July 2021 – Page 18

USD 151.9 bln

Source: IFSB Stability Report 2020

Source: IFSB Stability Report 2020

Source: IFSB Stability Report 2020

Source: IFSB Stability Report 2020

(c) Dr Hurriyah El Islamy, July 2021 – Page 25

(c) Dr Hurriyah El Islamy, July 2021 – Page 26

Excludes issuances by multilateral organisations and

Green Ṣukūk Issuances (2017–19)

Source: IFSB Stability Report 2020

Source: IFSB Stability Report 2020

Source: IFSB Stability Report 2020

Ten-Year Historical Performance (2009–19)

Source: IFSB Stability Report 2020

(c) Dr Hurriyah El Islamy, July 2021 – Page 32

Everything else is PERMITTED

(c) Dr Hurriyah El Islamy, July 2021 – Page 33

(c) Dr Hurriyah El Islamy, July 2021 – Page 34

Banking Capital Markets Non-Banking

(c) Dr Hurriyah El Islamy, July 2021 – Page 35

Customers Shareholders Governments/Regulators Employees

No fraud Serious and

Want products and

 Corporate Financing-i  Islamic Private Equity

 Islamic Trade Finance

 Islamic Cash Management

 Islamic Structured Products

(c) Dr Hurriyah El Islamy, July 2021 – Page 38

Islamic Cash Management

Islamic Trade Finance

(c) Dr Hurriyah El Islamy, July 2021 – Page 39

Review and screening of the investment of the Fund submitted by a company on a

Undertaking research in the field of Shariah compliant products, mechanisms,