Islamic Finance and Banking

Prepared By:
Dr. H. M. Mosarof Hossain
Professor
Department of Finance
University of Dhaka
mosarof@du.ac.bd

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Role of islamic bank as an efficient financial intermediary

i. Channelling of funds between surplus-fund units and

deficit-fund units directly through financial markets and
indirectly through financial intermediaries.
ii. Offering competent and solid money and capital
market.
iii. Helping in the reduction of information and provisional
costs.
iv. Providing an established and secure payment system.
v. Having a well-developed market for risk trading to
protect economic agents from both event risks and
financial risks.

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 Balance Sheet of an Islamic Bank

Islamic banks have at their disposal a number of financial

contracts like wadiah yad dhamanah, murabahah, ijarah and
istisna etc that create a unique relationship between
depositors and islamic banks on one side and islamic banks
and financing customers, on the other. Common format of
islamic banks balance sheet is as follows:

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Assets:Cash (including deposit with Central Bank) -Cash and short term funds
Murabaha Receivables -Deposits & placement with banks and other financial
institutions
Mudaraba Investments -Securities held-for-trading
Musharaka Investment -Securities available-for-sale
Investments -Securities held-to-maturity
Investment in associates -Financing, advances and others
Investment in Ijarah assets -Other assets
Ijarah Muntahia Bittamleek -Statutory deposits with the Central Bank
Investment in properties -Current tax asset
Ijarah rental receivables- Deferred tax asset
Other assets -Investment in subsidiary, Property & equipment, Prepaid lease
payments
Liabilities:
Customers Current Account- Deposits from Customers
Other Liabilities -Deposits and placements of banks
Unrestricted Investment -Accounts Bills and acceptance payable
Financial Institutional Investment -Accounts Other liabilities
Customers Investment Accounts Zakat Subordinated financing
 Sources of funds
i. Current deposit- qard, wadiah yad dhamanah, mudarabah
ii. Savings deposit- qard, wadiah yad dhamanah, mudarabah
iii. Term deposit mudarabah, wakalah unrestricted
investment and mudarabah general investment
iv. Investment deposit PLS

underlying contracts for savings and current deposit:

a. Qard-based deposit- this is the transfer of ownership in
fungible wealth to a person upon whom it is binding to return
wealth similar to it. The essence of qard is to provide on loan
the wealth or property to one who will gain from this act. By
giving, the receiving party will employ and consume it in
pursuit of his aims and then return its equivalent value.

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Salient features of a qard-based deposit:
i. Deposited money is treated as a form of benevolent
loan to the bank.
ii. The bank is entitled to use these deposits at its own risk
without any authorization from the depositor.
iii. The bank is only owes the principal amount borrowed from
the depositor.
iv. The principal amount is guaranteed by the bank to the
depositor even if there is negligence or loss of wealth from the
side of the bank.
v. No dividends are due in these deposits.

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Salient Shariah issues:
i. Excess for the lender (depositor) ATM services and
free cheque book.
ii. Hibah The banks discretion to reward the depositors
through gift.
b. Wadiah yad dhamanah deposit: The element of
guarantee is deemed necessary since the bank is allowed to
utilise the funds at its own risk where depositors can withdraw
their upon demand.
Salient Shariah issues:
i. No excess for the lender
ii. Hibah The banks discretion to reward the depositors
through gift.
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c. Mudarabah deposit: The distribution of profit between
the depositor and the bank is in accordance to a mutually
pre-agreed PLS. The capital of the depositor can not be
guaranteed since any loss shall be borne entirely by the
depositor as the capital provider.
d. Term deposit:
i. Commodity mudarabah term deposit
ii. Wakalah unrestricted investment deposit
iii. Mudarabah general investment account

e. Investment deposit:
i. Wakalah restricted investment deposit
ii. Mudarabah special investment account
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Uses of Funds:
A: Islamic retail financing:
a. Home financing-
i. Bay bithaman ajil home financing
ii. Musharakah mutanaqisah home financing
iii. Parallel istisna home financing
iv. Tawarruq home financing

b. Automobile financing- Al-ijarah thumma al-bay financing

c. Personal financing-
i. Inah personal financing
ii. Tawarruq personal financing
iii. Rahn personal financing

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d. Islamic credit cards-
i. Islamic credit card based on inah
ii. Islamic credit card based on ujrah
iii. Islamic credit card based on tawarruq
B: Corporate financing:
a. Sale-based
b. Lease-based
C: Working capital financing
D: Islamic trade financing instruments and practices:
a. Islamic letter of credit
b. Islamic trust receipt
c. Islamic accepted bills
d. Islamic bank guarantee
e. Islamic shipping guarantee 10