Module 1: Introduction to the Course

• Course Overview:
o Covers fundamental principles, theory, and practice of Islamic banking and
finance.
o Focuses on Islamic banking practices in Pakistan.
o Highlights differences between Islamic and conventional financial products.
• Learning Objectives:
o Introduce students to Islamic banking and finance comprehensively.
o Emphasize differences between Islamic and conventional finance.
o Prepare students for entry-level roles or advanced studies in Islamic finance.
• Learning Outcomes:
o Achieve basic competency in Islamic banking and finance.
o Understand and appreciate differences between Islamic and conventional
banking.
o Be ready for entry-level positions or pursue higher qualifications.
• Recommended Textbooks:
o Islamic Law of Contract and Business Transactions by Dr. Tahir Mansoori.
o Islamic Finance by Dr. Muhammad Imran Ashraf Usmani (Meezan Bank’s Guide,
revised).
o Understanding Islamic Finance by Muhammad Ayub.

Key Takeaway: This course provides a foundation in Islamic finance, equipping students with
practical and theoretical knowledge for career readiness.

Module 2: Some Fundamental General Concepts

• Deen:
o Recognition of the universal system and living in harmony with it.
o Broad, generic concept encompassing life’s principles.
• Shari’ah:
o Framework prescribed by Islam for believers to live in submission to Allah.
o Specific guidance for leading a religious life.
• Fiqh:
o Understanding Shari’ah requirements to derive specific rules and regulations.
o Acts as a rulebook drawn from Shari’ah.
• Differences:
o Deen: Very generic, universal.
o Shari’ah: Specific Islamic framework.
o Fiqh: Detailed rules derived from Shari’ah for practical application.

Key Takeaway: Deen, Shari’ah, and Fiqh form a hierarchy of Islamic principles, with Fiqh
providing actionable rules for compliance in finance and daily life.
Module 3: Sources of Shari’ah

• Four Fundamental Sources:

1. Quran:
▪ Revealed book, preserved in original form.
▪ Offers general guidance, not a detailed rulebook.
2. Sunnah:
▪ Recorded sayings and actions of Prophet Muhammad (PBUH).
▪ Provides detailed guidance on permissible and prohibited actions.
3. Ijma’:
▪ Consensus among scholars on matters lacking clear Quran/Sunnah
guidance.
▪ Contemporary example: Rulings by OIC’s Fiqh Academy.
4. Qiyas:
▪ Analogical reasoning to judge new phenomena based on similarities to
existing rulings.
▪ Used when Quran, Sunnah, and Ijma’ are silent.
• Ijtihad:
o Process of deriving new rulings for unprecedented issues.
o Performed by qualified experts (Mujtahids) when all Shari’ah sources are silent.

Key Takeaway: Shari’ah sources (Quran, Sunnah, Ijma’, Qiyas) provide a structured approach to
Islamic law, with Ijtihad enabling adaptation to new contexts like finance.

Module 4: Schools of Islamic Legal Thought

• Major Schools:
1. Hanafi:
▪ Largest school, prevalent in Indian subcontinent, Turkey, Central Asia.
2. Shafa’ii:
▪ Second largest, dominant in Egypt, Malaysia.
3. Hanbali:
▪ Prevalent in Saudi Arabia.
4. Maliki:
▪ Common in Sudan, North Africa.
5. Ja’afari/Zaidi:
▪ Associated with Shia Islam.
6. Others:
▪ Smaller or less widespread schools.
• Significance:
o Different schools interpret Shari’ah, influencing Islamic finance practices
globally.

Key Takeaway: Understanding regional school dominance (e.g., Hanafi in Pakistan) is key for
applying Islamic finance principles locally.
Module 5: Islamic Finance in a Global Context

• Historical Development:
o Emerged in countries like Philippines, Egypt, Pakistan, UAE, Saudi Arabia.
• Geographic Spread:
o Strong in GCC countries, Muslim world, and growing in the West.
• Segments:
o Islamic banking, capital markets, Takaful (Islamic insurance), microfinance.
• Current State:
o Global Islamic finance market: $2.941 trillion (2021, Global Islamic Finance
Report).

Key Takeaway: Islamic finance is a growing global industry with diverse segments, offering
opportunities for businesses like Reborn Business Solutions in markets like Saudi Arabia.

Module 6: Islamic Banking and Finance in Pakistan

• History:
o 1960s: Failed Islamic cooperative bank in Karachi (lasted 6 months).
o 1980s: Military government attempted full banking system Islamization.
o 1990s: Struggle for Islamization; Modaraba Companies Ordinance (1980).
o 2000s Onward:
▪ First full-fledged Islamic bank in 2002.
▪ Now: 5 Islamic banks, 17 conventional banks with Islamic windows.
▪ Active Islamic fund management, Sukuk issuance, Takaful, microfinance.
• Intellectual Thoughts:
o Contributions from Ulama and first-generation Islamic economists.
• Demand:
o Political and constitutional push for an Islamic economic system.

Key Takeaway: Pakistan’s Islamic finance sector has evolved significantly since 2002, offering
a robust ecosystem for career opportunities and business ventures.

Module 7: Islamic Banking and Finance in an Islamic Economic Context

• Islamic Economy:
o Operates on Islamic principles governing economic activities.
o Islamic Economics: Studies behavior of economic actors in this system.
• Islamic Economic Institutions:
o State, social sector, private sector, international institutions.
• Role of Islamic Banking:
o Mobilizes savings and finances economic activities.
 o Not responsible for social goals (e.g., poverty eradication).
o Social goals handled by Awqaf (endowments) and specialized development
finance institutions.

Key Takeaway: Islamic banking supports economic activities within an Islamic economy,
distinct from social welfare roles handled by other institutions.

Module 8: Islamic and Conventional Banking

• What is a Bank?:
o Financial intermediary that collects deposits and offers credit.
• Islamic Bank:
o Acts as a financial intermediary but offers financing (not credit) based on
Shari’ah-compliant contracts (e.g., Murabaha, Ijara).
o Can collect deposits and provide financing, but avoids interest (Riba).
• Differences:
o Islamic banks follow Shari’ah principles, avoiding Riba, Gharar, and unethical
investments.
o Despite differences, Islamic banks resemble conventional banks in structure and
value proposition (financial intermediation).
o Behavior differs (e.g., profit-sharing vs. interest), but both serve similar economic
roles.

Key Takeaway: Islamic banks align with Shari’ah, offering financing instead of interest-based
credit, but maintain a bank-like structure.

Module 9: Three Fundamental Concepts in Shari’ah: Riba

• Riba (Interest):
o Defined as the difference in quantities in an unequal exchange of anything (not
just money).
o Applies to all items, e.g., exchanging 1 kg of dates for 2 kg of dates.
• What is Prohibited?:
o Compulsion in unequal exchanges (e.g., forcing someone to pay extra).
o Unilateral, voluntary extra payment (without prior agreement) is not Riba;
considered a gift.
• Significance:
o Prohibition ensures fairness and prevents exploitation in transactions.

Key Takeaway: Riba is prohibited when it involves compelled unequal exchanges, a core
principle for Islamic finance contracts.
Module 10: Three Fundamental Concepts in Shari’ah: Gharar

• Gharar (Uncertainty):
o Definition: Lack of knowledge or explicit agreement on contract terms and
conditions.
o Involves ambiguity that may lead to disputes or disagreement.
• What is Prohibited?:
o Contractual uncertainty (not general uncertainty).
o Any ambiguity in contracts that could cause disputes is forbidden.
o Example: Selling an item without specifying price, quantity, or delivery terms.
• Scope:
o Some argue Gharar covers general uncertainty and speculation, but the
prohibition focuses on contract-specific issues.

Key Takeaway: Gharar is prohibited in contracts to ensure clarity and fairness, critical for
Shari’ah-compliant financial agreements.

Module 11: Three Fundamental Concepts in Shari’ah: Maysir

• Maysir (Gambling):
o Defined as gambling, where two or more people pool money to reward one or all
disproportionately to their contributions, based on a game, random process, or
event.
• What is Prohibited?:
o Rewarding disproportionately to contributions based on random events.
o Characterized as a zero-sum game, where one person’s loss is another’s gain.
o Question raised: Are Prize Bonds prohibited in Islam?

Module 12: Economic Explication of Riba

• Nature of Riba:
o Involves inequality in exchanging commodities, money, or anything of value,
where one party gives more than the other.
o In interest-based money exchange, the additional amount causes money to lose
value.
• End Result:
o Charging interest creates a debt bubble, diluting everyone’s ownership of money.
o Inflation results from interest-based lending.
o Value-reducing systems are not welfare-enhancing.
 o Riba is prohibited as it unjustly expropriates others’ wealth.
Module 13: Controversies over Riba
• Misconception 1:
o Interest can be charged to cover inflation losses.
o Wrong: Inflation is a macro phenomenon; borrowers should not be penalized.
• Misconception 2:
o Riba only covers usury, not interest, or only compound interest is prohibited.
o Wrong: Past English translations incorrectly limited Riba to usury.
• Controversy 1: Bank Interest is Not Prohibited:
o Claim: Only interest on consumption loans is prohibited.
o Wrong: Bank interest includes default penalties, making it Riba.
• Controversy 2: Riba is Misunderstood:
o Claim: Riba is complex and unclear.
o Wrong: Riba’s meaning and scope are well-understood.
Module 14: Islamic Dealings (Mu’amalaat)
• Contract:
o Basis of all Islamic dealings; governs buying, selling, renting, or giving for free.
o Muslims are bound by implicit or explicit contracts.
• What is a Contract?:
o Mutual agreement between parties for Shari’ah-compliant actions under agreed
terms.
• A Valid Contract:
o Between sane, adult, free individuals agreeing on price, payment, and delivery of
a halal object.
o Ambiguity in transactors, price, or object may invalidate it due to Gharar.
• Base Level Contract:
o Spot contract: Immediate payment and delivery, Gharar-free (known transactors,
price, object).
• Other Variants of a Contract:
o Only one countervalue (price or delivery) can be delayed, not both.
o Delayed price or item must be known (attributes, quantity).
• Rules About Sale and Purchase of Money:
 o Currencies can be bought/sold only on spot.
Module 15: Types of Islamic Contracts
• Five Categories and Other Arrangements:
o Sale contracts, lease contracts, investment contracts, supporting contracts,
gratuitous contracts.
o Other arrangements: Wa’ad, Tawarruq, Takaful, Sukuk, Tahawwut.
• Sale Contracts:
o Spot sale, deferred payment (Bai’ Mu’ajjal), deferred delivery (Bai’ Salam),
commissioned sale (Bai’ Istisna’), cost-plus (Murabaha).
• Lease Contracts:
o Simple lease (Ijara), hire purchase (Ijara Muntahiya Bittamlik), forward lease
(Ijara Mausufa Fidzimma), lease with gift (Ijara wa Iqtina’).
• Investment Contracts:
o Musharaka, Mudaraba.
• Supporting Contracts:
o Agency (Wakala), Juala (service agency), guarantee (Kafala), pledge (Rehn),
remittance (Hawala).
Module 17: Sale Contracts
• Trade as the Engine of Growth:
o Trade is the basis of business in Islam.
o Islamic banking and finance relies on trading or financing trade.
• Trading and Profit:
o No upper limit on profit, provided no monopoly or market manipulation.
• Anything and Everything Can be Bought and Sold:
o Except haram goods/services, non-existent goods/services, or goods not owned
by the seller.
• Public Goods Cannot Be Bought and Sold:
o Air, water, right of passage.
Module 18: Spot Sale
• Base Level Contract:
o Immediate price payment and delivery.
o Safest, least risky, paradoxically most profitable, and seemingly most prevalent.
 • Trading and Profit:
o No upper limit on profit, provided no monopoly or market manipulation.
Module 19: Deferred Payment Sale
• Bai’ Mu’ajjal:
o Immediate delivery, price deferred to a future date.
o Price payable in installments.
o Deferred price can be higher than spot price.
• Time Value of Money:
o Not recognized in Islam, but time is valued.
o Deferment of price can be priced.
o Pricing deferment of debt is strictly prohibited.
Module 20: Salam Sale
• Salam Sale:
o Historically for agricultural produce.
o Seller generates upfront liquidity; buyer ensures future supply.
o Salam price typically lower than market price.
o Applies to generic items, not specific items.
• Is Salam a Forward Sale Contract?:
o Yes, in a limited sense.
o Used by Islamic banks globally, e.g., Sudan for farming finance.
• Important:
o Salam price cannot be changed once agreed, even if delivery is late.
Module 21: Istisna’ Sale
• Istisna’ Sale:
o Commissioned manufacturing, e.g., construction, shipbuilding, furniture on order.
o Price paid in installments; object delivered when ready.
• Example:
o Construction company sells planned houses.
o Buyers pay advance and quarterly installments based on progress.
o After 9 months, house is delivered, and full price paid.
 • Istisna’ in Islamic Finance:
o Used in Sukuk, project finance, infrastructure projects.
Module 22: Bai’ ‘Ina
• Bai’ ‘Ina (Buy-back Sale):
o Not accepted by most Islamic law schools, except a minority Shafa’ii view in
Malaysia.
o Heavily used in Malaysia but being phased out.
• Structure:
o Two sales: Seller 1 sells to Buyer 1 on deferred payment (price P1); Buyer 1 (now
Seller 2) sells back to Seller 1 for cash (price P2, P2 < P1).
o Result: Financing facility where Seller 1 gets P2 with financing cost (P1 - P2).
• Validity:
o Valid if implemented properly but remains controversial.
Module 23: Tawarruq
• Tawarruq:
o Most rampant contract in Islamic banking and finance.
o Used in Islamic retail banking, Sukuk, and liquidity management solutions.
o Tri-partite arrangement (requires diagram for understanding).
• Validity:
o Valid contract if implemented properly.
o Remains controversial.
Module 24: Lease Contracts
• Lease Contracts:
o Extension of sale contract; object of sale is usufruct of the asset, not the asset
itself.
o Rent can be paid upfront, in installments, or at the end.
o Leased asset must remain intact and be returned at the end of the lease period.
• Assets to be Leased:
o Money cannot be leased if rent is in money.
o Leasing money for non-money rent (e.g., wheat) is not acceptable; Salam sale
contract applies instead.
Module 25: Simple Lease
• Ijara:
o Lessor leases an asset to lessee for an agreed period and rent.
o Leased asset must be available for lessee’s use.
o Lessee pays rent per agreed terms.
• Important Considerations:
o Lessee not responsible for asset loss unless negligent.
o Maintenance is lessor’s responsibility.
o Lessee may buy Islamic insurance on lessor’s behalf.
• Operating Lease:
o Form of simple lease.
o Most Islamic banks do not practice it.
o Some Leasing Mudarabas in Pakistan use it for industrial machinery.
Module 26: Hire Purchase
• Ijara Muntahiya Bittamlik:
o Lessee becomes owner of leased asset at lease period’s end.
o Rental includes pure rent and asset price component.
• Important Considerations:
o Lessor remains owner during lease period.
o If asset perishes before ownership transfer, lessor returns asset price
component (if lessee not responsible).
• Financial Lease:
o Example of financial lease, subject to jurisdictional accounting laws.
o Used by Islamic banks for car, home, and durable goods financing.
Module 27: Forward Lease
• Ijara Mausufa Fidzimma:
o Forward lease contract is permissible, unlike forward sale.
o Lessor receives rental for an asset yet to exist.
o Used in property market and Sukuk.
• Important Considerations:
 o Credible evidence required that leased asset will exist during lease period (e.g.,
construction schedule).
o Once delivered to lessor, asset remains available for lessee’s use during lease
agreement.
Module 28: Lease to Gift
• Ijara wa Iqtina’:
o Used for hire purchase; lessee becomes owner if lease obligations are fulfilled by
lease period’s end.
o Lessor may inflate rental to include asset price.
o Lessee has right to own asset at lease end.
• Important Considerations:
o Binding contract for gifting asset.
o If lessee fulfills obligations, lessor cannot retract gifting.
o Used by Islamic banks for home, car, and durable goods financing.
Module 30: Lease to Gift
• Ijara wa Iqtina’:
o Used for hire purchase; lessee becomes owner if lease obligations are fulfilled by
lease period’s end.
o Lessor may inflate rental to include asset price.
o Lessee has right to own asset at lease end.
• Important Considerations:
o Binding contract for gifting asset.
o If lessee fulfills obligations, lessor cannot retract gifting.
o Used by Islamic banks for home, car, and durable goods financing.
Module 31: Investment Contracts
• Basic Principles:
o No fixed return allowed on investments.
o Losses shared per investment shares.
o Profit sharing per partners’ agreement.
• Investment Agency:
o Simplest form is Wakala for investment activity.
 o Fund manager invests for investor without profit sharing; fixed or proportionate
fee agreed.
• Mainstream Islamic Investment Contracts:
o Mudaraba, Musharaka, Wakala Istithmar.
Module 32: Mudaraba
• Mudaraba:
o [No specific details provided in slide content.]
Module 33: Musharaka
• Musharaka:
o [No specific details provided in slide content.]
Module 34: Investment Agency
• Investment Agency:
o [No specific details provided in slide content.]
Module 35: Video 1
• Objectives:
o Deepen understanding via a YouTube video on prohibition of interest.
o Explain why controversies around Riba are invalid, focusing on Riba theme.
o Encourage students to watch other videos to form own opinions.
• Video Link:
o [YouTube link provided in slide].
• Important Points:
o Interest executed through bilateral contract; both giving and taking interest
prohibited.
o Incorrect to argue only charging interest is prohibited, not giving it.
o Interviewee correctly distinguishes between rent and interest.
Module 36: Time Value of Money
• Controversy over Time Value of Money:
o Confusion in Islamic economics, banking, and finance circles.
o Some accept TVM in Islamic framework; others oppose.
• What is TVM?:
o Value of $1 decreases in future, not due to inflation but due to discount formula
for Present Value.
 • Present Value Formula:
o PV = FV / (1 + r), where r is typically interest rate.
o FV = PV (1 + r).
• TVM and Justification of Interest:
o Justifying interest with TVM is tautological, like defining a calf as a calf.
Module 37: Applications of Islamic Legal Contracts
• Islamic Legal Contracts and Modes of Financing:
o Cannot be used in original forms as banking tools.
o Contemporary Shari’a scholars developed opinions on their use.
o Shari’a Standards by Accounting and Auditing Organisation for Islamic Financial
Institutions provide best compendium.
• Combining Contracts:
o Most Islamic financial products combine multiple contracts.
o Well-defined rules for combining contracts must be observed.
• Islamic Modes of Financing:
o Murabaha as financing differs from classical Murabaha.
o Musharaka for home financing involves multiple arrangements.
o Murabaha, Musharaka, Mudaraba are main contracts in respective structures.
Module 38: Mudaraba-based Investment Accounts - 1
• Profit Sharing Investment Accounts (PSIAs):
o Based on Mudaraba, two types: Restricted and Unrestricted PSIAs.
• Restricted PSIAs:
o Offered to public with known terms and conditions.
o Funds used for specific activity (e.g., car financing).
o Indicative (non-guaranteed) rate of return offered.
o Customers deposit money, pooled in Mudaraba Pool (may include bank
shareholders’ contribution).
o Pool used for specific financing activity.
• Distribution of Profit to Restricted PSIA Holders:
o Profit distributed pro rata per agreed profit distribution ratio.
o Losses borne pro rata per investment shares.
 • Example (Restricted PSIA):
o Individual account: $1; Mudaraba Pool: $1,000,000; Car Financing: $1,000,000.
o Profit: $250,000; Indicative Rate: 10%; Profit Distribution Ratio: 50:50.
o Bank’s Share: $125,000; PSIA’s Share: $125,000; Excess Pool: $0.
o Alternative scenario: Profit Distribution Ratio 10:90, Distributable Profit 13.88%,
PSIA’s Share $90,000, Excess $35,000.
Module 39: Mudaraba-based Investment Accounts - 2
• Unrestricted Profit Sharing Investment Accounts (UPSIAs):
o More flexible than Restricted PSIAs.
• Unrestricted PSIAs:
o Offered to public with known terms and conditions.
o Funds used for any legitimate activity.
o Indicative (non-guaranteed) rate of return offered.
o Customers deposit money, pooled in Mudaraba Pool (may include bank
shareholders’ contribution).
o Pool used for general banking activities.
• Distribution of Profit to UPSIA Holders:
o Profit distributed pro rata per agreed profit distribution ratio.
o Losses borne pro rata per investment shares.
• Example (UPSIA):
o Individual account: $1; Mudaraba Pool: $1,000,000,000; Various Financing:
$1,000,000,000.
o Profit: $250,000,000; Indicative Rate: 10%; Profit Distribution Ratio: 50:50.
o Bank’s Share: $125,000,000; UPSIA’s Share: $125,000,000; Investment Risk
Reserve: $0.
o Alternative scenario: Profit Distribution Ratio 10:90, Distributable Profit 13.88%,
UPSIA’s Share $90,000,000, Investment Risk Reserve $35,000,000, Profit
Equalisation Reserve $25,000,000.
o Another scenario: Profit $150,000,000, Distributable Profit 8.33%, Bank’s Share
$75,000,000, UPSIA’s Share $75,000,000, Investment Risk Reserve $10,000,000,
Profit Equalisation Reserve $5,000,000.
• Ownership of PER and IRR:
o Investment Risk Reserve (IRR) belongs to UPSIA holders.
 o Profit Equalisation Reserve (PER) belongs to shareholders and UPSIA holders pro
rata per profit distribution ratio.
Module 40: Recap 1
• Assessment of Learning Achievement:
o Short quiz to gauge student achievement and provide feedback for course
delivery.
• Quiz Question:
o Which cannot be bought/sold on a Salam basis?
▪ A. Burj Khalifa
▪ B. Ribawi Commodities
▪ C. Cars
▪ D. Items sold through Amazon
• Correct Answer:
o A. Burj Khalifa: Specific items cannot be bought/sold on Salam; only generic
items with specified details.
• Incorrect Answers:
o B. Ribawi Commodities (wheat, barley, salt, dates, silver, gold) can be sold on
Salam, though exchanged on spot among themselves.
o C. Cars can be sold on Salam if not specific (e.g., specified model, color).
o D. Generic Shari’a-compliant items on platforms like Amazon can be sold on
Salam; specific plots/houses (e.g., on Zameen.com) cannot.
Module 41: Practical Issues in PSIAs - 1
• Questions:
o Is it permissible to open a PSIA with a conventional bank?
o Is it permissible for a bank to change profit sharing ratio unilaterally?
o Treatment of funds in Profit Equalisation Reserve and Investment Risk Reserve?
o Can Islamic banks guarantee capital and return on PSIAs?
• Answer to Question 1:
o Permissible to open a PSIA with a conventional bank if Mudaraba pool is
segregated (not mingled with other funds).
o Mudaraba allowed between legal persons (individuals or companies, including
non-Muslims).
o Acceptable with conventional bank’s Islamic Banking Window or similar setup.
Module 42: Practical Issues in PSIAs - 2
• Questions:
o Is it permissible to open a PSIA with a conventional bank?
o Is it permissible for a bank to change profit sharing ratio unilaterally?
o Treatment of funds in Profit Equalisation Reserve and Investment Risk Reserve?
o Can Islamic banks guarantee capital and return on PSIAs?
• Answer to Question 2:
o Profit sharing ratio in Mudaraba cannot be changed unilaterally.
o New ratio can be agreed mutually with PSIA holders’ consent.
• Consent Process:
o Decision made with Shari’a Supervisory Committee/Board approval.
o Publicly announced or communicated via letter, email, or text to PSIA holders.
o PSIA holders must explicitly accept offer.
o No response by specified date deemed acceptance if account not redeemed.
Module 43: Practical Issues in PSIAs - 3
• Questions:
o Is it permissible to open a PSIA with a conventional bank?
o Is it permissible for a bank to change the profit sharing ratio unilaterally?
o What is the treatment of funds in Profit Equalisation Reserve and Investment
Risk Reserve?
o Is it permissible for an Islamic bank to offer guarantee of capital and return on
PSIAs?
• Answer to Question 3:
o Excess funds in Profit Equalisation Reserve (PER) shared between shareholders
and PSIA holders.
o Funds in Investment Risk Reserve (IRR) belong to PSIA holders.
• Example:
o Individual Account: $1; Mudaraba Pool: $1,000,000,000; Various Financing:
$1,000,000,000.
o Profit: $250,000,000; Indicative Rate: 10%; Profit Distribution Ratio: 50:50 or
10:90.
o Distributable Profit: 10.5%; Bank’s Share: $125,000,000; Shareholders’ Share:
$105,000,000.
 o PSIA Holders’ Share: $90,000,000; IRR: $500,000; PER: $20,000,000; Share of
PSIA Holders and Shareholders: $10,500,000.
Module 44: Practical Issues in PSIAs - 4
• Questions:
o Is it permissible to open a PSIA with a conventional bank?
o Is it permissible for a bank to change the profit sharing ratio unilaterally?
o What is the treatment of funds in Profit Equalisation Reserve and Investment
Risk Reserve?
o Is it permissible for an Islamic bank to offer guarantee of capital and return on
PSIAs?
• Answer to Question 4:
o Not permissible for Islamic bank to guarantee capital or fixed return on PSIAs.
o Mudaraba does not allow capital guarantee or fixed return.
o PER and IRR are profit smoothening reserves for certainty, not guarantees.
• Regulatory Context:
o Some regulators treat PSIAs as deposits, requiring Islamic banks to manage
them as such absent specific PSIA regulations.
Module 45: PSIAs – Complete Story
• Objective:
o Understand complete application of Mudaraba in Islamic banking via PSIA funds
flow.
• PSIA Details:
o Indicative Rate of Return: 10%; Profit Distribution Ratio: 50:50.
o Term: 3 years; Profit Distribution Frequency: Yearly; Minimum Investment:
Rs10,000.
• Funds Flow Example:
o PSIA Account: Rs10,000; Mudaraba Pool: Rs1 billion; Shareholders’ Equity: Rs100
million.
o Financing Activities: Rs1 billion; Profit: Rs250 million (25%).
o Distributable Profit: 10.5%; Bank’s Share: Rs125,000,000; Shareholders’ Share:
Rs105,000,000.
o PSIA Holders’ Share: Rs90,000,000; IRR: Rs500,000; PER: Rs20,000,000.
o Individual Share: Rs999.99; Shareholders: Rs2 million; PSIA: Rs18 million; PER
Share: Rs198; IRR Share: Rs5.5.
 • Profit Distribution:
o Some profits distributed, some retained for profit smoothening.
o Final distribution at term end based on PER and IRR funds.
Module 47: Uses of Murabaha - 1
• Uses of Murabaha:
o Applied in retail banking, liquidity management, and capital markets.
• Murabaha for Home Financing:
o Bank buys house from market, sells to customer for disclosed profit.
o Customer pays in monthly installments.
• Process:
o Customer identifies house, negotiates with vendor.
o Approaches Islamic bank for financing.
o Bank approves, buys house for cash, sells to customer for profit.
o Customer signs Purchase Undertaking (Wa’ad).
o Bank buys house via solicitor, sells to customer; profit is price difference.
Module 48: Uses of Murabaha - 2
• Classical Murabaha:
o Cost-plus spot sale with disclosed profit.
o Reduces information asymmetry, used in intra-group transactions.
• Contracts Used in Murabaha Financing:
o Application Form.
o Purchase Undertaking.
o Murabaha Sale and Purchase Agreement.
o Sale and Purchase Agreement (Bank and Vendor).
o Wakala Agreement.
o Takaful Agreement.
o Collateral Agreement.
o General Terms and Conditions.
o Transfer of Liability Agreement.
Module 49: Uses of Murabaha - 3 (Car Financing)
• Process of Murabaha Car Financing:
o Customer identifies car, negotiates with vendor/dealer on price and delivery.
o Approaches Islamic bank for financing.
o Bank approves, buys car for cash, sells to customer for disclosed profit.
o Customer pays monthly installments.
• Steps:
o Customer signs Purchase Undertaking (Wa’ad).
o Bank appoints customer as Buying Agent, informs vendor to deal with customer.
o Bank pays vendor, prepares sale documents with customer.
o Car delivered; profit is difference between bank’s purchase (P1) and sale price
(P2).
Module 50: Uses of Murabaha - 4 (Treatment of Default)
• Treatment of Default and Early Payment:
o No contractual default penalty; compensation for actual loss (decided by third
party, e.g., court).
o Credit seller not obligated to offer early payment rebate.
• Practice:
o Islamic banks apply default penalties (minus administration costs, donated to
charity).
o Regulators require early payment discounts.
• Example:
o Total Debt: Rs500,000; Tenure: 5 years; 47/50 installments paid; Outstanding:
Rs83,333.33.
o Late Payment Penalty Formula: 1% x [Days of Default/Total Days Left] x
Outstanding.
o Example: 1% x [90/210] x Rs83,333.33 = Rs357.14.
• Regulatory Note:
o Some jurisdictions use conventional bank rates for penalties to deter willful
default.
Module 51: Uses of Murabaha - 5 (Treatment of Early Payment)
• Treatment of Early Payment:
o Regulators require Islamic banks to offer early payment discount.
 o Seller has discretion to not offer discount once Murabaha price agreed.
o Rebate = Amount Outstanding minus Administrative Charge.
• Example:
o Total Debt: Rs500,000; Tenure: 5 years; 47/50 installments paid; Outstanding:
Rs83,333.33.
o Rebate Formula: Murabaha Rate x [Days Left/Total Days] x Outstanding.
o Example (10% rate): 10% x [300/1825] x Rs83,333.33 = Rs8.22.
• Settlement Amount:
o Total Outstanding - Rebate + Administrative Charge.
Module 52: Uses of Murabaha - 6 (Tawarruq)
• Tawarruq for Personal Finance:
o Islamic banking avoids cash credit; Tawarruq provides synthetic cash access.
• Process:
o Customer needs cash; Islamic bank buys Commodity X on spot from Broker 1.
o Bank sells Commodity X to customer on credit.
o Customer sells Commodity X on spot to Broker 2 for cash.
• Status:
o Compromised solution, increasing use in Islamic retail banking.
o Not allowed in Pakistan for personal financing.
Module 53: Uses of Murabaha – 7 (Tawarruq-based Personal Financing: Further Details)
• Tawarruq-based Personal Finance:
o Instant product, executable in minutes with IT.
o Complicated structure does not discourage use.
o Criticized as a bad product for Islamic banking.
• Process:
o Customer needs cash; Islamic bank buys Commodity X on spot from Broker 1
(price P0).
o Bank sells Commodity X to customer on credit (price P1, paid in installments).
o Customer sells Commodity X on spot to Broker 2 (price P0).
• Steps:
o Application, account opening, commodity purchase, commodity sale, funds
transfer, customer sells commodity, monthly installments start.
 o Transaction takes minutes or half an hour based on exchange efficiency and
customer status.
Module 54: Commodity Murabaha
• Commodity Murabaha as Liquidity Management Tool:
o Popular for liquidity management by Islamic banks, unlike criticized Tawarruq for
personal finance.
o Structure same as Tawarruq.
• Process:
o Bank A (liquidity short) buys Commodity X on spot from Broker 1 (price P0).
o Bank A sells Commodity X to Bank B (excess liquidity) on credit (price P1, paid in
installments).
o Bank B sells Commodity X on spot to Broker 2 (price P0).
Module 55: Murabaha Products in Pakistan
• Murabaha Products:
o Offered by all 5 Islamic banks and 17 conventional banks with Islamic windows
in Pakistan.
o Examples: HBL Murabaha (businesses), NRSP Murabaha (SMEs), Bank Alfalah
Islamic Murabaha (working capital).
o Considered most authentic Murabaha application globally.
• Process:
o Client and Islamic bank agree on General T&Cs; dedicated Relationship Manager
(RM) appointed with commodity knowledge.
o Master Murabaha Agreement signed.
• Liquidity Management:
o Pakistan Mercantile Exchange implements Commodity Murabaha for Islamic
banks’ liquidity needs.
Module 56: Recap and Assessment - 2
• Assessment Objective:
o Gauge learning efficacy via short quiz to provide feedback for students and
instructor.
• Quiz Question:
o Islamic Modes of Financing are:
▪ A. Islamic nominated contracts in classical context.
 ▪ B. Banking products allowed by regulator.
▪ C. Modern applications of Islamic nominated contracts.
▪ D. Not Islamic due to different usage.
• Answers:
o A. Wrong: Islamic nominated contracts not used as centuries ago; modern
modes are composite structures.
o B. Wrong: Islamic modes are not just banking products; products are more
complex.
o C. Correct: Islamic modes are modern applications of Islamic nominated
contracts.
o D. Wrong: Islamic modes are Islamic; critics’ views questioning value proposition
are invalid.
Module 57: Uses of Musharaka 1
• Simple Musharaka:
o Joint investors in an investment fund managed by a fund manager.
o Example of Shirkat ul Milk (joint ownership); no direct contractual Musharaka
among investors.
o Profit and loss shared per investment shares.
• Structure:
o Fund manager uses Wakala (investment agency).
o Investors deemed partners among themselves.
• Scenario 1: Positive Return:
o Total Investment: $100 million; Investors: 200; Wakala Fee: 2% of AUM.
o Example: Investor 1 ($100,000, 0.001 share), Investor 2 ($50,000, 0.0005),
Investor 3 ($60,000, 0.0006).
o Net Return: $10 million; Fee: $2.2 million.
o Investor 1: $7,800; Investor 2: $3,900; Investor 3: $6,680.
• Scenario 2: Negative Return:
o Net Return: -$10 million; Fee: $1.8 million.
o Investor 1: -$11,800; Investor 2: -$5,900; Investor 3: -$7,080.
Module 58: Uses of Musharaka 2
• Diminishing Musharaka:
o Financing mode for home financing; example of Shirkat ul ’Aqd (contractual
ownership).
o Uses Ijara and other contracts.
• Process:
o Customer negotiates with vendor, agrees on house price.
o Approaches Islamic bank; application approved.
o Joint ownership established (e.g., Customer: $10,000, Bank: $190,000).
o Bank remains owner until contract end.
o Customer as lessee, bank as lessor; monthly payments (e.g., $500 = $200 rent +
$300 ownership share).
o Customer’s ownership reaches 100% by contract end.
Module 59: Uses of Musharaka 3
• Sukuk Musharaka:
o Capital market product for governments/corporates to raise funds.
o No pre-existing asset required, unlike other Sukuk structures.
• Process:
o Obligor sets up Special Purpose Vehicle (SPV).
o SPV issues Sukuk (Musharaka Certificates) to investors, detailing fund use,
indicative return, risk profile.
o Investors provide funds; SPV channels to project.
o Project returns distributed: Sukuk holders get indicative return or share
excess/loss.
o At period end, project sold to obligor; proceeds distributed to investors.
Module 60: Running Musharaka
• Running Musharaka:
o Working capital financing in Pakistan’s Islamic banks.
o Offers fixed returns to banks without capital loss exposure; example of risk
management.
• Process:
o Company A seeks working capital; Islamic bank finances via Musharaka.
 o Profit ratio favors bank (e.g., 90% bank, 10% company).
• Example Scenario 1:
o Financing: Rs100,000; Expected Return: 10%; Profit: Rs50,000.
o Bank’s Share: Rs45,000; Company’s Share: Rs5,000.
o Income Pool: Rs15,000; Reserve Pool: Rs5,000.
• Example Scenario 2:
o Profit: Rs10,000; Bank’s Share: Rs9,000; Company’s Share: Rs1,000.
o Income Pool: Rs9,000; Reserve Pool: Rs1,000.
• End of Contract:
o Reserve Pool: Rs4,000.
Module 61: Running Musharaka as an Overdraft - 1
• Running Musharaka as Overdraft:
o Meezan Bank offers facility (e.g., Rs1 crore); client draws down as needed,
returns when not needed.
o During drawdown, bank and client are partners; annual profit distributed per
agreed formula.
• Example:
o Company A seeks Rs1 crore overdraft; bank uses Musharaka.
o Drawdown: Rs10 lakh for 30 days; Partnership Ratio: 99.9% (company) to 0.1%
(bank).
• Drawdown Schedule:
o Mar 31: Rs1 million (30 days); May 11: Rs10 million (20 days); June 5: Rs2 million
(10 days).
o Aug 12: Rs10 million (30 days); Oct 11: Rs1 million (15 days); Dec 5: Rs5 million
(10 days).
• Points System:
o Company Points: 365 billion; Bank Points: 615 million.
o Investment Shares: Company 99.83%, Bank 0.17%.
Module 62: Running Musharaka as an Overdraft - 2
• Profit Distribution Formula:
o Company’s Share: (99.83% x 14% of Profit) + (99.9999% x 86% of Profit).
o Bank’s Share: (0.17% x 14% of Profit) + (0.0001% x 86% of Profit).
 • Example:
o Year-end Profit: Rs500 million.
o Company’s Share: (99.83% x Rs70 million) + (99.9999% x Rs430 million) =
Rs69.88 million + Rs429.99 million = Rs499.87 million.
o Bank’s Share: (0.17% x Rs70 million) + (0.0001% x Rs430 million) = Rs0.119
million + Rs0.001 million = Rs120,000.
Module 63: Uses of Ijara
• Sukuk Ijara:
o Capital market product for governments/corporates to raise funds.
o Most popular Sukuk structure based on Ijara.
o Has complicated structures, explained in Sukuk segments.
Module 64: Uses of Ijara - 2
• Ijara:
o Simple Islamic legal contract.
o Variants like Ijara Muntahiya Bittamlik and Ijara wa Iqtina’ have complicated
structures, used as Islamic modes of finance.
• Ijara Muntahiya Bittamlik:
o Hire purchase mode for financing household goods, industrial equipment,
aircraft.
o Commonly used in UAE for aircraft financing via Ijara Sukuk.
• Ijara wa Iqtina’:
o Hire purchase mode; lessee receives leased item as gift at lease end.
o Differs from Ijara Muntahiya Bittamlik where lessee buys item.
• Structure:
o Ijara Muntahiya Bittamlik: Lease contract + two undertakings (lessor, lessee).
o Ijara wa Iqtina’: Lease contract + promise to gift.
Module 65: Uses of Ijara - 3
• Car Ijara (Ijara Muntahiya Bittamlik):
o Bank purchases car from dealer, leases to customer.
o Customer makes monthly payments, buys car for nominal price at lease end.
o Payments cover car price, rental, depreciation.
o Customer holds insurance (bank’s responsibility, managed by customer).
 o Service Level Agreement (SLA) for car maintenance.
• Contracts and Documents:
o Application Form, Sale and Purchase Agreement (bank-vendor), Ijara Agreement.
o Purchase Undertaking (customer), Sale Undertaking (bank), Insurance/Takaful,
SLA.
• Monthly Payment:
o Includes car price, rental, adjusted for insurance and services.
o Example: Price Rs3 million + Rental Rs2,776,243 - SLA Rs100,000 - Takaful
Rs200,000 = Rs5,476,243; Monthly Installment Rs96,270 (12.79% annual return).
Module 66: Uses of Ijara - 4
• Service Ijara:
o Innovative financing for cash needs (e.g., school fees, medical expenses, hotel
accommodation).
o Replaces Tawarruq-based personal finance.
o Pioneered by Dubai Islamic Bank.
• Process:
o Bank forward leases services (e.g., kidney transplant) to customer.
o Customer procures services from vendor (e.g., hospital), makes monthly
payments.
• Benefits:
o Shari’a authentic, fulfills genuine need, connects Islamic banks to real economy,
more profitable.
• Contracts and Documents:
o Application Form, Forward Lease Agreement (bank-vendor), Ijara Agreement,
Insurance/Takaful.
Module 67: Uses of Ijara - 5
• Islamic Aircraft Leasing:
o Many UAE aircraft deals use Ijara.
o Simple transaction with Shari’a issues.
• Process:
o Bank leases Boeing 777 to Emirates via Lease Agreement.
o Emirates makes monthly payments; aircraft returned at lease end.
• Contracts and Documents:
 o Sale and Purchase Agreement (bank-Boeing), Lease Agreement (bank-airline),
Insurance/Takaful, SLA.
Module 68: Uses of Ijara - 6
• Shari’a Issues in Ijara:
o Rules governing lessor and lessee.
o Rules governing use of leased assets.
o Rules governing rental.
o Rules governing ownership and liabilities.
Module 69: Qard Hasan
• Qard Hasan as a Mode of Financing:
o Difficult for banks to use due to no immediate return allowed.
o Other limitations apply.
• Question:
o Can an individual, company, or bank extend Qard Hasan with condition that
borrower shares benefits of money use with lender?
Module 70: Practice on Qard Hasan
• Qard Hasan in Akhuwat Business:
o Excellent use by Akhuwat Foundation, generates returns.
o No Shari’a issues if no contractual compulsion on borrower to contribute beyond
borrowed amount.
Module 71: Recap 3
• Assessment Objective:
o Assess learning efficacy via short quiz for student and instructor feedback.
• Quiz Question:
o Excess funds in Profit Equalisation Reserve (PER) belong to:
▪ A. PSIA Holders.
▪ B. Bank Management.
▪ C. PSIA Holders, Bank Shareholders, Bank Management.
▪ D. PSIA Holders and Bank Shareholders.
• Answers:
o D. Correct: PER funds claimed by PSIA holders and bank shareholders per
Mudaraba pool shares.
 o A. Wrong: PSIA holders claim IRR, not PER.
o B. Wrong: Bank management has no claim on PER or IRR; bank’s share deducted
before allocation.
o C. Wrong: Only PSIA holders and bank shareholders claim PER funds.
Module 72: Video 2
• Objectives:
o Deepen understanding via YouTube video on prohibition of interest.
o Explain invalidity of Riba controversies.
o Encourage students to watch other videos to form own opinions.
• Video Link:
o https://www.youtube.com/watch?v=JqdYaCYCFYg.
• Important Points:
o Criticism that Islamic banking is 100% valid is questioned.
o Mudaraba is not cost-plus.
o Holding the nose this way or that way.
o Some Islamic banks are fraudulent.
o Fatwa shopping.
VIDEO LINKS:
1- https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwj
tv82r2oHzAhWMkxQKHan6AAMQtwJ6BAgGEAM&url=https%3A%2F%2Fwww.youtube.c
om%2Fwatch%3Fv%3DwH3Uz5VE2Ww&usg=AOvVaw14ILt9JFCQBwBy6xAK_Sf5
2- https://www.youtube.com/watch?v=JqdYaCYCFYg