Introduction to Islamic Finance. Learn one of the fastest growing segment of global financial system | Timur K. | Skillshare

Introduction to Islamic Finance. Learn one of the fastest growing segment of global financial system

Timur K., Teacher, Life-Long Learner, Traveller

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15 Lessons (56m)
    • 1. Introduction

    • 2. History of Islamic Finance

    • 3. Terms and Main Principles

    • 4. Mudarabah

    • 5. Musharakah

    • 6. Murabaha

    • 7. Ijarah

    • 8. Future Contracts. Salam and Parallel Salam

    • 9. Islamic Bonds. Sukuk

    • 10. Islamic Insurance. Takaful. Overview and History

    • 11. Why Conventional Insurance is not Shariah compliant

    • 12. How Takaful works. Wakala, Mudaraba and Hybrid models.

    • 13. Comparison of Takaful and Conventional Insurance

    • 14. Investing in Stocks from Shariah perspective

    • 15. Conclusion


About This Class

Although Islamic finance is a relatively small player in global terms, most analysts agree that it has been growing in the last decades at a rate of between 15% and 20% and shows no sign of reducing in the short to medium term. This continued growth has been supported by the actions of many governments around the world, including the UK, Germany and the USA, keen to see the development of this alternative financial system. 

Islamic finance is in some ways similar to the traditional financial system, yet it uses different mechanisms which in difficult financial times prove to be more viable in comparison to conventional banking. 

Take this short course to learn the fundamental differences between the conventional and Islamic banking and get acquainted with the most common modes of Islamic financing in more detail.   

Who is the target audience?

  • Students interested in understanding the difference between conventional (traditional) and Islamic banking
  • Anyone who is interested in how the global financial system is functioning


1. Introduction: the principle that income can be derived from lending money to another person and getting the money back after some period of time, where surplus has been an essential part of our daily lives for centuries. The whole global economic infrastructure is built around interest on loans. Interest on a loan shall be paid, irrespective of whether the lender or adventure for which the money was given has been successful or not. That means that a person can make money out of the mere fact that he has money and another person doesn't. This leads to the outcome where the rich get richer while the poor get poorer. Even in the difficult financial times, the debtor is obliged to return the loan and pay the interest. Although the system over manifests A is considered as a commodity seems natural to us, another financial system with its own principles and women is just the medium to buy or sell. The commodity has been established in the second half of the 20th century. Firstly, it appears in the Islamic countries only, but credit We reached the western world and now London and Luxembourg, along with Dubai, Abu Dhabi behind and Kuala Lumpur can be considered as the centers of the Islamic financial system. Interesting to note that despite its name, Islamic banking is not religious banking. Calm your charity it has. The same goal is to satisfy the economic needs of individuals, companies and society as a whole, but according to certain principles which are derived from Islamic teachings. So how large is the Islamic banking can finance? Although it's timing finances, a relatively small player in global terms, most analysts agree that the market size offense that's held in Islamic financial institutions is between 1.7 trillion to 2.1 trillion U. S. Dollars. It has been growing in the last decades that rate of between 15 to 20% and shows no sign of producing in the short to medium term. These continued growth has been supported by the actions of many governments around the world, including the UK, Germany and the U. S. A. Keen to see the development of these alternative financial mechanisms. Nowadays, there are more than pre Congress, Islamic banks and so called Islamic financial windows as well as 250 Sharia compliant mutual funds that are present in a 3 60 countries the growth of Islamic fans worldwide has been supported by the launch of several Islamic induces by permanent providers over the past few years. The first was the Dough Jones Islamic Market Index launched in 1999 followed by the Footsie Global Islamic Index, serious the same year in the 2000 and six by the Standard and Poor's. Sharon in This is So how is this loving finance different from the traditional banking and financial system? Islamic finance is in some ways similar to the traditional financial system, yet it uses different mechanisms, which in difficult financial times proved to be more viable in comparison to conventional banking. Firstly, money is considered to be the medium only and not the community per se. It's such all assets in Islamic finance should be backed up by tangible answered, such as property, land or sharing business. Secondly, you cannot derive money just from lending it to another person or entity. In Islamic finance. The person who gives money usually becomes a partner and shares the profits or possible losses. Finally, Islamic financial system is strongly connected with ethical, competent ventures which are related to gambling, alcohol and those that beer a high degree of uncertainty are not dirigible for financing. We're going to learn about these and some other fundamental differences in the following fractures and will discuss the most common moves off Islamic finances in more detail. 2. History of Islamic Finance: more than the Islamic finance emerged in the 19 sixties with the establishment of the first Islamic banned in Egypt by a model Nadja in the set up offline Baga Tabung Haji Malaysia, which mostly deal with investments off funds into sherry compliant ventures and businesses . However, the real origins of Islamic financial mechanisms date back to the Prophet Mohammed in the early years of Islamic civilization in seventh century a D. At that time, training was very popular and Prophet Mohammed himself used to carry goods from Mecca to neighbor. In credence in caravans, these caravans were assembled on a partnership basis with other merchants. Since that time, trading and partnership have been one of the pillars of the Islamic economy. Another source of income for early Muslims was agriculture. They used forward contracts in which they agreed on. The price is volume and quality of goods which were to be delivered after one or two years . Today, this form of contract is still widely used in both Islamic world and Western countries. They're known as better Salam Islamic contract, in which full payment is made in advance for specific goods, often able agricultural products, which are to be delivered to the future date. Starting from the eighth century and onwards, the Islamic civilization developed a number of financial instruments such as promissory knows, Jack's hawala and trust. However, until the 19 seventies is signing, banking was mostly focused on the retail market. They were partnership agreements between separate individuals or companies, but they're hardly was any global interconnected system of Hassan in banking and finance, which was governed by harmonized troops and which provided the amplitude various financial instruments for public and enterprises. Islamic finance started to develop much more actively with the world crisis in the late 19 seventies. It was the time of increasing core prices and there's a result lots of capital coming to oil producing countries, especially in the Middle East. In 1975 more than 50 countries established deciding Development Bank aimed at providing funding the projects in the member countries and Muslim communities around the world. As of 2017 I'd be comprises off 57 member countries and its total assets are approximately 24 billion U. S. Dollars and authorized capital is more than $134 billion. It supports infrastructural projects worth billions of dollars as well as provides financial assistance in other areas, including education, health care and so on. The first more than commercial Islamic ban, Dubai Islamic Ban was established in 1979 in the same year. The first Islamic insurance or takaful, company, the Islamic Insurance Company of Sudan, was set up in year 1990 the first Islamic culture and if the conventional bones so cook were issued by sharing the years in Malaysia, which meant the emergence of Islamic bond market where bones could be traded. So Cook Instrument immediately became very popular in Islamic countries, both among sovereign and corporate issuers these days, because issued for billions of dollars every year, not only in Islamic countries battles in the Western world. The larger U. S based Citibank began to offer Islamic banking services in 1996 when it established the Citi Islamic Investment Bank in Bahrain, the first time in commercial bank outside the Muslim world was established in Britain in 2000 and four and was called the Islamic Bank of Britain. Significant efforts heralds have been made to harmonize Islamic financial products and services. These efforts include creating accounting standards for Islamic financial products for the Accounting and Auditing Organisation for Islamic Financial Institution, known as I O Fee, which was set up in 1990 integration off those standers with Global Cooperate Risk Management Standers, which is better equipped 12 and free for the Islamic Financial Services Board established in 2000 and to the International Monetary Fund. IMF and the World Man have also recently included Islamic finance on their scope of activities. Finally, the creation of Islamic market in this is in 1999 in 2006 by Joe Jones, Footsie and Standard and Poor's mark that there was now authoritative benchmarks and many sunk investment funds appeared slight after that, ready to invest their abundant capital into sherry compliant international businesses in the years 8 4009 means growing global financial crisis. Islamic banks were reported not to be initially in back that since they didn't have from their balance sheets, any so called toxic assets which were not share a compliant. However, after some time, Islamic financial institutions were also here as the global financial prices. Also, after the sharp decreasing valuation off real estate and private equity, the two segments, which Islamic companies used to invest in Today Islamic Finance represent a small but growing segment of the global finance industry estimated that 1 to 2% of the global financial access worldwide it grows at an annual rate of 15 to 20% and the forecast for the industry is mostly positive. There are more than three comically sandbanks and so called Islamic financial windows as well. It's additionally over 250 sherry compliant mutual funds that are present in at least 60 countries. Nowadays, Islamic finance is still little known and one quieter population, especially in the western countries. However, there's a number of Western multi nation financial institutions which have already started off frank Islamic financial products in the international Islamic financial market. Quite recently, Islamic finance has seen some sophisticated financial product innovations, which proves that it is developing steadily and there is a growing market. In the next lectures, we're going to dive deep into the specific financial instruments which are used today in standing banks 3. Terms and Main Principles : Islamic finance is a term that reflects financial business that is not contradictory to the principles of the SH area. The Sharia is a framework off Islamic low, which is based on the following primary sources, the Koran and the teachings of the Prophet Mohammed. The letter is known. Assume now. In addition to these primary sources, there is dynamic secondary source of common low rulings and scholarly interpretations, which are known as fat. For us, fatwahs represented our wings of schoolers concerning certain issues, including economic ones. Front was represent how Islamic low can exist along with than your realities in the world and your economic framework that share. It combines both solid, fundamental principles, such as those in Koran and sooner, as well as dynamic rulings known as well for us, which tried to bring together the fundamental principles and contemporary social and economic realities. Based on this legal share, a framework early slamming schoolers developed key principles which would become the keystone for the further growth office. Slamming finance and economy first and probably the central tenant of Islamic finance is the proclamation off usury. There is a specific Arabic term which refers to usually, and it is called Reba Fariba, is any unjustified increase of capital in the loan. It means that any guaranteed increase in the amount of principle connected to the maturity or due date, regardless, the performance of the investment is considered as river and is strictly prohibited. It means that if the loan is given to the debtor and it is stated that he will have to return the loan of the surplus, not depending on whether the purpose for which yes tank in the world has been successful or not, will be regarded as Reba or usually contract. Thus, this key principle of prohibition of river is that it encourages profits only area as a result of successful activities which result in the formation of a final product or service , and not from merely lending the money. Second key principle of Islamic finance is sharing off risks and profits. Since Islamic finance prohibits interest. Capital lender is not a mere lender of money, but rather an investor in the common venture who shares the risk that eventually not be successful. So he doesn't have the guarantee off regular income and they only get his share of profit engaged. The project is successful. That's why in Islamic finance, the due diligence off the project is performed more accurately than in conventional banking system, since the investor is truly interested in this project becoming profitable after he provides necessary investments. Another term that is worth understanding when doing for Islamic finance is the concept of governor. Governor in Arabic is anything which is connected with uncertainty, and it is also prohibited in financial operations in financial contacts. Garnered refers to the same off items whose existence is not certain, for example, buying insurance premiums to ensure again some form off event which may or may not happen or purchasing derivatives used to hedge against possible outcomes. These two examples will fall under the concept of God are, and they cannot be used in Islamic finance. In conventional financial system, derivative financial instruments are widely used, but since they have significant risk level, they lead to rapid development of speculation in financial market. By prohibiting these risky instruments, Islamic Finance stands as a conservative market area, but at the same time ensures the long term stability off the system. Since Islamic finance is based on Sharia, it also prohibits any financial transactions which relate to any productor service or activity which do not comply with Sharia. In this way, operations with such products as alcohol, poor arms gambling are not within the scope of Islamic finance. When Islamic banks want to investigate an intervention or an existing company, they can sell their Sharia councils, which is a special obligatory department in each Islamic financial institution. The sherry consoles will analyze the business and decide if investing into the venture will comply with the Sharia principles. So Islamic institutions sometimes do face certain challengers when investing in such activities as hospitality and entertainment industry. So these are the main terms and principles which are used in Islamic finance, their the corner store or favorite Islamic financial institution, and of the industry as a whole. Based on these key principles, Islamic schoolers and economists have developed over the years a number of financial products which both comply with Shari principles and satisfy the economic needs off individuals, businesses and the state. We're going to learn about these products in the upcoming lectures 4. Mudarabah: The first financing instrument, which can be often encountered in Islamic finance, is moderate bar. It is also called profit and loss sharing contract. Madonna was one of financial mechanisms that was quite popular in the Middle Ages. It was even used before Islam to finance caravan trade in Arabian Peninsula. It was later approved by Islamic scholars as legal means of financing, since even the Prophet Mohammed used mood. A remote off transactions similar to Medora mechanisms were also used in medieval Europe, especially by Venice merchants in 11th century and onwards, to carry goods for trade. Such contracts were known as commander. Contracts are similar to trust based financing in conventional financial system. In this arrangement, these timing bank pulls the money of different investors together and investment, for example, in a share, a compliant mutual fund or another venture or business. The income which is generated from the invested money is distributed between the investors and the bank. The ratio at which these income is divided between the bank and the investors is usually set up in the agreement, which the parties signed prior to sign the model of a contract. The bank is entitled to the profit because it manages the whole investment process, including choosing the funds due diligence and so on. Inwood Arab arrangements Investors are called probable model that is, the owners of the capital, while the bank is called moderate for agent, which means the person or the party managing the capital or the tryst in conventional terminology according to moderate agreements, as we mentioned in case there is profit, it is distributed at the ratio and greet upon by mutual consent. However, in case of Lost on the rubble model, that is, the investor bears the capital loss and moderate or the bank or the agent bare slopes of getting nothing for his expended time and first and labor. However, in modern times seems the banks diversify their assets, provide your diligence. And since they are interested in maintaining and growing their customer and investor base, it is highly unlikely that investors will lose their money or there will be a significant closing their investments. And, of course, if the loss was caused by the moderates with the banks negligence, then in this case the bank will take the responsibility for the loss as well, in terms off money with Arabic contracts are divided into two main types. Restricted mode Araba and Unrestricted Mood Araba in restricted mode. Araba, the moderate over the band, is limited in his actions by certain terms and conditions and greed before with rubble model and in unrestricted Madaba moderate or the bank is free to conduct the project and invest money as he sees feet. Nowadays, Islamic banks use Motorola is their key instrument off investment deposits. As an investment deputy, adorable allows its investors or depositors to get some return on their investments. Unlike conventional banking and ordinary saving deposits in traditional banks where there is a fixed interest rate, Islamic banks pay the return in form of proportion of perfect share. It might seem that it will be difficult for the investor to know what amount of return to expect from Islamic bank. However, Islamic banks give the average rate of their profitability on investments, and since this right is based on previous years and they have a diversified portfolio of investments in the bank, want to keep the customer base and increase it? As a rule, the investor gets the return that the bank had promised him and that he expected so How does the skin off Madonna but look like first the customer deposit his fans to an Islamic bank under moderate agreement. Then the bank uses the funds to invest in share a compliant businesses to generate profit. These business generate positive or negative profits. Although negative scenarios are very rare, positive profits are shared between depositor and bent at a pre agreed ratio. If there are any negative profits, then they are represented, as the decline off there said created with its investments and the value of the polities decreased. Actually, when we say that the bank invest assets off its depositors into some business or adventure , the bank also excess rubble model or the owner of the funds. That's why the model of a scheme, which is used these days by Simon Financial Institutions, is also known as A to tire Madaba. On the one hand, the Islamic bank receives deposits as an agent or moderate of its customers, and on the other hand, the Simon Bank provides financing to its clients who come to the bank to request financing in this case, the bank actors rubble model or sleeping partner. This is what is called to tire Madonna, and it is common for most Islamic banks these days. So to wrap up Adorable is one of the most widely used mechanisms used by Islamic financial institutions. It is based on profit and loss sharing between the bank and the customer. Unlike conventional banking system, instead of a fixed interest on the investment, the Bend provides share off the profits. That's the summing banking system, Iran's on profit and close trading mechanism and stays away from the interest based schemes . 5. Musharakah: Mutharika comes from the Arabic war Cherica, which means partnership in more than financial terms. Machar Community Joint venture off the Islamic financial institution and the entrepreneur where both parties share profits and losses. It is quite similar to moderate BA, but unlike Mode, Araba were only one partner in this money and the other partner invest his time and efforts to manage this investment in a shark, a scheme Both parties are funding the project together. Profits and losses are divided in proportion to the participation of the parties in the financing, so the partners do not necessarily have equal participation in the project. The project may have more than two partners and can be managed by all participants or buy one off them. In this case, the managing participant can receive a bigger share of profits for his additional work responsibilities. These days, Mutharika contracts are often used in business settings to provide additional working capital for the company or for joint investments, for example in real estate or agriculture. In consumer financing, Mutharika contracts are often used to finance the purchase off home, for example, in this case, the bank and the family purchased the home jointly but over time is the Ben gradually transfers its portion of the equity off the home to the customer who in return makes installment payments to the bank to purchase these portions. This is also known as diminishing Mutharika, which ends up with the complete ownership off a nested by one partner in case of home for chasing that would be an individual or a family. 6. Murabaha: another very popular mode of financing in Islamic banking is called Maraba. In common terms, it can be called cost plus sale. Sale agreements existed long before he signed civilization, and Islamic financial system uses them very widely, since debt based instruments and products cannot be properly acquired. Today, about 70 to 80% of all transactions in Islamic finance are based on Maraba contracts in rubber arrangement on behalf of the client, the bent purchases a house, a car, some equipment or raw materials with free and clear title to eat. Then the bank agrees to resell this product of the buyer who needs this product for the bend to make profit. The price for the buyer includes a certain markup for bank services. The purchase of the product from the band can be arranged as a full lump sum or via the instalments or deferred payments. The price of the goods is determined in advance and specifies the markup or the reward of the bank for the services rendered. From the other perspective, it looks similar to the ordinary loan from a conventional bank to buy a house or a car. But in fact it's different in the case with the conventional banking the Ben cleanse the money. The principal, together with interest, are subject of the loan contract between the bank and the border, where, in contrast in Islamic banking Bank becomes the rightful owner of the product, which the bank later cells to the client and therefore the subject of the contract is a product or in asset, and it is the contract of sale and not the loan contract. This is the main difference between the conventional banking can Islamic banking A sales are allowed in Islam and interest bearing loans are prohibited. The other difference is that Islamic financial institutions bear more reeks than conventional banks because before the goods are received by the customer, the signing banks bears all risks associated with possible damage to the goods since after initial purchase, that then becomes the rightful owner of the goods. So if we go deeper into the Maraba conduct under this contract, a free party arrangement is made where the customer places in order with the financial institution to purchase goods from a supplier, the customer may pay a security deposit with financial institution, and the amount of financing outstanding can be secured either in the form of collateral or guarantee the financial institution having purchased the goods from the supplier, then cells into the customer at the price, including mark up with Ex credit period. So let's look into the more Alba Ha step by step scheme. First buyer and seller agreed on goods to be pure chaste. Second, by request, Islamic Band to purchase the goods and promises to purchase goods from assigning ban as soon as the goods have been purchased by the bank from the cellar. Next Islamic ban purchases specified goods from settler. Then the seller delivers goods to Islamic bank. At this stage, buyer is usually appointed as agent off Islamic ban to inspect and accept goods and their quality. Once the bar accepts the goods, the sending bank pays the seller for the goods. Now this land bank resellers these goods to the buyer, and his price includes the bank's profits, which was a great in advance between the buyer and the bank. On the final stage of the fire base for goods on payment terms agreed by buyer an Islamic bank, it can be a lump sum or deferred instalments 7. Ijarah: another mortal financing, which is often used by Islamic financial institutions. He's called Jara General, similar to leasing transaction in conventional financial system. In injury arrangement, Islamic financial institution purchases equipment, property house or a car in the customer's request and then rent it to the customer who pays regular fees for leasing the duration of the Reese. And 20 is agreed by the parties before they conclude that Crimmins. There is a variation of a jar, a contract which is called Jara Tina. And according to this contract, the lesser agrees to sell the least object and the end of the lease term at the predetermined Presidio Value. Unlike conventional banking, where both parties might be usually bound by this agreement in Islamic banking, only the lesser is bound by this promise, and the lesson is not obliged to purchase the item at the end of the least. Er, this is done because in Islamic finance, two contracts cannot be concluded between two parties at the same time regarding the same subject off the contract. So let's take two examples one example between Islamic Bank and individual and one example between the bank and the company. If you is an individual want to purchase a home. For instance, you will request the Islamic bank, the purchase it for you and after the purchase, to read it for you for a certain period of time, you know, normally conclude General in a contract, which means that after the lease term, you by the home and the predetermined to radio value, how is it different from a conventional mortgage contract? Well, in a mortgage contract, the subject of the contract is again, along with interest. Ben doesn't own the property. The property, which you, by using the mortgage, will act as a collateral to you alone. In the case of Islamic Bank, the bank will buy the property and please it to you. So the bank there's the possible risks off ownership connected with this property. Now, the second example, if a company wants to get financing from the standing bank, if the company has any property or tangible assets off its own, they will sell this essence to the slamming bank with the right to repurchase them and the end of the Jonah term. Then the company will start leasing this property or the asset from the bend and by the end of the lease term, they will get back the full share off ownership. The lease rate will of course include the markup of the bank so that the Islamic Bank will make profit while the client will get the necessary financing as a lump sum. And then we will repay this financing your ink and then create period of time, after which it will regain the full ownership rights. 8. Future Contracts. Salam and Parallel Salam: Another popular mode of financing in Islamic finance is the contract off Salam. This is a forward contract with the buyer or an Islamic financial institution on behalf off the buyer base for goods in full in advance, and the goods are delivered to the buyer at an agreed time in the future. Salam was known on the Arabic peninsula in pre Islamic times and it was also approved by salmon certain conditions in the past, The idea behind solemn contract was that poor peasants usually didn't have enough money to pay for their needs, and SELAM contracts made it possible for them to get money before their crops were grown. That's why Salam contracts were also known as contracts for the poor and the needy. At the same time, the buyers also found these contracts profitable Is the price for the goods was usually lower in some contracts in comparison towards in their contracts where the goods were delivered immediately after the signing of the contract. These days, this mode of financing is usually used to finance the cost of manufacturing of a product or construction of a building, or to finance farmers to produce the agricultural products. Since the payment is done in advance before the product is manufactured. The producer uses the money as working capital to purchase raw materials and pay salary. In order for some contract to be valid, it shall abide by some rules. First, the buyer must pay the full amount of price at the time of affecting the sale. This is required because if there is no full payment at the moment of contract signature, it means that there is a sale of death in form of goods against that in form of money, which is prohibited by Sharia. Second, the goods or commodities should be specified and described both in quantity and quality so that there is no dispute between the buyer and the seller. When the goods are delivered, things that cannot be specified in quality and quantity cannot be covered by solemn contract. Third, the delivery date and the place of delivery shall be specified since they affect the price . Finally, some contracts cannot be used to sell the things which must be sold it spot according to the Sharia. These include sale of money or gold and silver. In some contract, the buyer may ask the seller to furnish a security to ensure that the goods will be delivered. The security can be in the form of guarantee or in the form of more gauge. Salam contracts are often compared to future contracts in conventional financial system. They are indeed similar, but nonetheless have slight differences. First, in some contracts, the commodity can be resold until it is delivered to the buyer after it is produced. On the contrary, in conventional futures markets, reselling of goods which are not produced yet under a future contract is allowed. Moreover, these days in conventional financial system, futures markets are even separated from the commodity markets, which makes it more vulnerable in comparison to some contracts. Secondly, in conventional future markets, full advance payment is not required. Where is in solemn contract, the buyer must pay the full price in advance. There is a variation off Salam contract these days, which is called Parlow Salon. In parallel Salam, the Boyer, who has just purchased commodity under one Salam contract, enters into a second term contract with another party to supply the same commodity at the future lead. This mechanism allows the buyer to recover his investment hedge against the price risk and even make some profit for the parallel Salam contract to develop that to contract should be separate and independent of each other. In the first contract, the financier is the buyer, and in the second contract, the financier is the seller. The performance of the contract shall not be contingent on each other barely. Osama is only allowed with 1/3 independent party. The seller in the first time contract cannot be the purchaser in the parallel, solemn contract because it will be equivalent to the buyback contract, which is often used in conventional financing and which is prohibited in Islamic finance. So that's it about son contracts see in the next lectures. 9. Islamic Bonds. Sukuk: If you follow global financial markets, then you have probably heard about the relatively new financial term, a product which is called So Cook. So Cook was first issued in Malaysia in 2000 and since then they have become important Islamic financial instrument in raising funds for long term project financing. In fact, the use of circle around the world has been growing at an enormous rate from 15 billion U. S. Dollars in 2000 and 8 to $350 billion in the year 2017 and in still has a huge potential for growth as it is still considered a niche market. So what is a cook? So cook comes from the Arabic court sac, which means certificates in modern financial terms. Support is commonly known as the Islamic equivalent of bonds, according to a higher fee International Organisation for Islamic Financial Institutions. So cook our certificates off equal value, representing undivided shares in the ownership of tangible assets, user franks and services, or in the ownership of the assets off particular projects or special investment activity, unlike conventional bones, which confirmed the ownership off a debt. So Cook confirmed that the investor owns a share, often SS, along with proportion profit, cash flow as well as risk. This game is fully converted with Sharia because, as we know, it is based on profit and risk sharing and doesn't deal with interest on a debt. Nowadays to cook instruments are very important in developing global finance as they connect issuers, primarily governments and corporations from the Middle East and Southeast Asia, with a white pool of investors who seek to diversify their portfolios. The assets may include facilities such as roads or bridges, real estate operating businesses and equipment to name. But of here, which are owned by the sea, cook investors until the SEC group maturity date. So how does trickle issuance work? The typical example, which is also used these days by famous international airlines such as Emirates, Dubai Airlines, Etihad is when the airline purchases some tangible assets, such as planes, and places them into a trust. Then it sells this planes to a pool of investors via so good certificates. Owners of the Plains investors received the profits based on the perfectibility of their said. When the souk has come to the maturity date, the airline repurchases the plane from the investors from the ultra perspective. So Cook certificate may seem similar to conventional bonds. However, there are certain important differences between them. First book means ownership, often asset, while Bonser if like the debt obligation. Secondly, so good assets are compliant with Sharia standards. In our previous lectures, we mentioned that all Islamic financial instruments are reviewed by sherry committees, which are present in every signing bank or financial institution. If we talk about conventional bonds, there is no such requirement to be sharing a friendly. Thirdly, the price of soup is based on the value off underlying assets. Where is the price of a conventional bond? Is based on the credit rating and some other factors. Fourthly, the price of so good can increase when the underlying assets increase in value. Profits from bonds correspond to fixed interest, making them rebar, which is prohibited in Islam. As far similarities are concerned both so cooking bones can be sold on the secondary market so that the holder can get cash if he wants to. Also, both bonds and Suk can have corresponding cranking based on companies, financial and business performance. These days, investors can find different types of Sue Cook based on the different structures off Islamic financial contracts. Whether it is a Jara Taraba robber, Orestis now, depending on the project that this book is financing, overall the market is set to growing. Future is large. Companies and sovereign governments are trying to finance their ambitious project, while institutional and private investors are willing to diversify their investment portfolios. 10. Islamic Insurance. Takaful. Overview and History: Islamic finance industry has been developing very quickly over the past decades and has come up with many sophisticated financial products that both meet Sharia standards and meet customers. Expectations in terms of proper investing, saving their money were mitigating financial risks. One of the most popular financial services thes days is insurance, whether it is car, house or life insurance. And Islamic finance also offers it Sharia compliant insurance services known as DACA full. The world take a food is derived from the Arabic verb kafala, which simply means to take a year off once need. Actually, insurance and Islamic countries has existed for quite a few centuries. It is known that medieval Arabic sailors used to ensure their vessels and goods during their sea voyages while trading with other countries by sea. Modern Islamic insurance Developing 19 seventies when Sudanese, Shara's colors prepares theoretical basis to reconcile Sharia and insurance via the scheme . When the nation's from individual members had to debate a mutual fund from each, the claims could be paid afterwards. These donations are commonly known and called as tomorrow in Arabic. Later on. In 1979 Islamic Insurance Company of Sudan was established, which was the first modern Islamic insurance company using Tucker Falls Kim. In the next decades, doctor for companies opened in ASEAN countries, primarily in Malaysia, Brunei and Indonesia. This was followed by Gulf countries and later on. Even some western countries started to offer tackle for insurance services. Today, take a full market is approximately estimated at $20 billion as for 2018 and is projected to double in the next five years. 11. Why Conventional Insurance is not Shariah compliant: So why did the Islamic countries decided to create their own insurance schemes? The thing is that, as we already know from our previous episodes in these course, there are some basic rules in Sharia, which have to apply to all Islamic financial products and services. Conventional western type of insurance has certain features which are not share a compliant . Let's have a closer look at conventional insurance before we dive into take a full. In conventional insurance, policyholders pay a premium in exchange for a payout to them in case their car has an accident, their houses damaged where they happen to have an injury or even in case of death of the policyholder. Insurance covers a certain time period and engage none of the situations mentioned about happen, and the policyholder has nothing to claim. The premiums remain with the insurance company. Usually, insurance companies invested premiums into interest. Their Incan vestments, such as banking deposits or government or corporate that obligations. And this is riba, or interest, and Tribble is forbidden in Islamic finance. This is number one. Why conventional insurance is not share a compliant. It is also mentioned in the contract that the insurance company in case of claim from the part of the policyholder will have to pay the amount for larger than the premium paid, which is also deemed as profiting from the money directly, which is also forbidden in Sharia. The second point, which makes conventional insurance not Sharia compliant, is gore are or uncertainty insurance. It is unknown Either the insurer will gain. If no claim is made for, the policyholder will receive a great amount of money, although he had paid much less this level off uncertainty is ethically unacceptable in Sharia. Another point which is similar to Gerrard is kin are inequality here, one party gains and the expense of the other which contradicts to share our principles off shared risk, responsibility and gain. 12. How Takaful works. Wakala, Mudaraba and Hybrid models.: Now let's have a look at how the Tucker for insurance works in more detail. First of all, it is worth mentioning. The takaful insurance, like any other Islamic financial products, can be used by any person, her girls off his or her religion. So if a person wants to ensure his car, how was for his life? He comes to the doctor for company and makes a contribution to a mutual fund or pull instead of paying a premium. The amount of contribution that each participant makes is based on the type of coverage they require and their personal circumstances. As in conventional insurance attack, a full contract specifies the nature of the risk and time period of coverage. The contributions received by the Tech Awful company are split into three parts. The majority is paid into what's called walk, or it can also be called Takaful Fund, which is the joint pool from which the claims off all members are paid. Part of this money pool, usually about 25% is considered as a donation your pink voluntarily to provide aid to another policyholder without recompense. It means that all policyholders within the stalker full front agree to guarantee each other in case a risk A cures with one of the members. It also means that you can also claim from this pool if needed. These parts of the take a full fund is what can be called the protection part. The rest of the polar then goes to an investment structure managed by the tech awful operator. The third part is paid as a fixed management fee to the takeoff operator, and in this case that the couple scheme is called Qala. We're going to look at different takaful schemes and between during this episode. So apart from policyholders claims, which they receive from the protection pulled, policyholders also get financial benefits from their participation in two ways. They receive a share of the profits from the investment proceeds, either during or at the end of their policy term. Second the net rest of the underwriting surplus. That means that if you're in policy terms, the amount of money used to cover the claims on the unfortunate policyholders was less than the underwritten pool of premiums. Then these difference will be distributed between the policyholders and of course, nothing will be paid. Additionally, if there isn't underwriting close when the amount of claims was larger than the combined donations. So this is another significant difference between conventional insurance and Tucker full in conventional insurance. If there is surplus at the end of the term and perfect from the investments made, then all this additional money will go to insurance company. In contrast, in takaful, all surplus and profits from the investment will be distributed between policyholders. It means part of their money will be given back to them. So what else should be noted? Well, for the telephone operator to start working, it needs some initial investment for startup administrative and marketing corporations, just like any other startup would need. And this money is needed before they start to attract policyholders premiums. So the Tucker for company must have its own fund. Created with shareholders capital. This fund is also called Operating Fund has mentioned the shareholder fund, made from paid up capital base for companies administrative expenses. It must be completely separate from the Tucker Full fund, which is formed with the premiums paid by policyholders. It took a for operator experiences a deficit during its operations. It cannot take money from the tech awful fund. Instead, the Takaful operators shareholders will usually provide an interest free loan to the company, commonly known as Car Hassan. And when the deficit disappears and the surplus accrues, the shareholders will deduct the loan amount from the operating fund surpluses. We mentioned that there may be different takaful schemes, so the 1st 1 is called Qala or agent model. When the tackle for operator receives fixed management fee for managing the Tucker full front and investments, this model is more common in the Middle East. The second bundle is called Mood Araba Scheme. In this model, Tucker for operator can be paid for its services by part of the profit from the investments made. The share of the profit is discussed before signing the tech awful contract. Modern urban model is more practiced in Asia. There is also the first scenario when takaful operator will take both a fix management fee and share off the profit from the investments made. This is a hybrid scheme which is also quite commonly used these days. So it seems we have covered Tucker full and how it works. Just to recap, let me show you a table which compares the traditional or conventional insurance based on premiums on the one hand and Islamic Insurance or Tucker full on the other 13. Comparison of Takaful and Conventional Insurance: in Tucker Full. The contract is a combination of the nations and agency or profit sharing contract between policyholders and the takaful company in conventional insurance. This is an exchange contract, which is the same and purchase off a policy between insurance company and the policyholder . Tucker for Operator is only the fund manager. Participants mutual guarantee each other in conventional insurance. The insurance company provides all the guarantees in Tucker Full. The contributions belong to participants, but they are managed by the ticker for Corita. This taken for fund is separated from the company's shareholders fund in conventional insurance. All the collected premiums belongs to the insurance company in Tucker Full. All the claims arise by the policyholders are people from the Takaful Fund in conventional insurance. All the claims are Babel by the insurance company itself. In Tucker, full risk is shared among all the participants, while in conventional insurance, risk is transferred from the policyholder to the insurance company, which bears all the risks. In Tucker, full assets off the takaful funds are invested, only insurer compliant instruments and all the profits from these investments belonged to end distributed among policyholders only in conventional insurance, there is no restriction on where to invest. Apart from those imposed for Prudential reasons, all the profits from the investments belonged to insurance company in Takaful in case of surplus. When the amount collected by the contributions is more than the claims were made, then the surpluses distributed between participants only the operator cannot claim any off the surplus amount. In conventional insurance, the surplus belongs to insurance company. It is considered as profit when the claims are less than the premiums. In case of deficit. In Tucker, full card Hassan for interest free loan is given to the doctor for farming in conventional insurance. If there is a deficit, it is financed from shareholders fund, that is, by insurance company itself. Share a supervision is an integral part off any Tucker full set up, And in conventional insurance there is no share a supervision. So what can be said about Tucker Full is that it is definitely worth exploring when choosing between various types of insurances. It works differently from conventional insurance, but the basic idea that you make payments and then receive payment when in need is coming for both. Tucker, for first, a clearer ethical perspective than normal insurance YSL, The surplus and profits from the investments go back the participants or policyholders and not to the insurance company. 14. Investing in Stocks from Shariah perspective: Sharia law allows investing in companies, stocks and shares, but only in those companies that comply with Ciara principles off course companies which are located in Islamic countries where Sharia is the official legislation. Such companies automatically qualify for these criteria, however, what should Muslim investors do if they want to invest in foreign companies located in other jurisdictions, for example in Europe or the U. S. C. Which company can be investible from a Sharia compliance in perspective? Therefore, in order to understand where the investing in a company would be Sharia compliant or not, Islamic scholars and Islamic financial organizations have come up with two types of screening which define where the company can be investible. From a Sharia compliance perspective. The first type of screening is for the business activity we already mentioned in the previous lectures that the prohibited business activities include lending with interest, gambling, alcohol, tobacco in for production and weaponry. So any company who's main business includes these activities cannot be considered as a proper investment. However, we know that these days most companies used interest bearing debt financing, which is prohibited by Sharia. That's why Islamic scholars have come up with certain concessions were second type of fielders, which is financial screening. The broader set of fielders excludes companies that hold interest bearing debt, receive interest or trade. That's for more than their face values. So traditional banks, which use these instruments as their core business, certainly do not meet these criteria. The next and more strict set of fielders excludes companies whose debt to total s situation equals, or more than 33% companies whose interest based income and other non compliant sources of revenue equal or more than 5% and companies whose accounts receivable and cash are more than 50% of total assets. I think most of these criteria are easy to understand. But what's wrong, King Having too much cash on the company? Well, the argument is that if the proportion of cash and cash equivalents in the company's bank account is too large in relation to the total assets, say more than 50% it means that when you buy or sell the company's shares, then you're essentially buying course a link money because this is basically what the company can see stuff, and we know that Byington selling money at different prices is called Reba and is prohibited in Islamic finance. So even if the company's core business is permissible but to large aeration of its income comes from interest, then the company will not be eligible for investment by Islamic investors. Here's an example. Imagine that we have a company which makes and sells Christmas and New Year product companies businesses obviously very seasonal. And by the end of the year they have large surplus cash, which they decide to invest in interest during money market, for example, some ben deposits or bones. If the income from the interest that they will get will represent a significant part of their total income, then the company will not be eligible for investment from Sharon perspective, even though their core business is permissible. Another example is with real estate developers that use considerable debt financing in the form of loans and credits for construction. So even the real estate development itself is Sharia compliant. But if the company uses too much interest bearing debt, then it will be excluded from Sharia compliant investment. Since individuals cannot always screen thousands of companies out there on stock markets to understand what they can be investible from a sharp perspective and whether or not the meat the above mentioned screening criteria major global players on stock market have developed their especially Islamic induces that monitor which companies comply with the Sharia principles. These indices include in this is by accounting can't auditing organisation for Islamic financial institutions, commonly known as I o fee the Footsie Global Equity Share index serious the Dough Jones Islamic Market World Index s. And Bashar Ian this is and the Russell Ideal ratings Islamic in those, these induces may have slight variations in the methodology for screening stocks to be share a compliant, but all of them filter the stocks and companies for business activities, complaints and financial ratios. That's why individuals for mutual funds that want to invest in share compliant companies may use either of these indexes to select the appropriate stocks. 15. Conclusion: As you can see, Islamic finance is not very much different from conventional banking. It has the same goals is to provide financial assistance to companies and individuals while making profits for the slamming banks. Since Islamic banks are commercial institutions like any other commercial companies, what is different is the way the financial transactions are structured in Islamic financial institutions. Instead of flown in interest agreements which are prohibited, the Islamic Finance Islamic banks rely mostly on sales and profit central sharing contract in this regard. Unlike conventional banks, Islamic banks are usually regarded as trade houses or investment banks. Having commercial in the second half of the 20th century and relying on the principle set up in the Koran and sooner off the Prophet Mohammed. Islamic financial institutions have been growing at the spectacular rate of 10 to 20% annually. Nowadays, more and more Western financial institutions provide Islamic financial windows or products , which proves that Islamic finance can be a valuable pillar off the world financial system. With this in mind, we believe that Islamic finance is worth studying and we hope that you enjoy the short course. Please let us know if this course has been useful for you and give you learn valuable information. Do you want us to explain other financial instruments or other details of Islamic banking and finance? Shall we continue expanding this course? It was really very much appreciate if you could leave your review for this course so that we could make it even better with those, like the thing that walk fund Russia for making this course possible. Hope to see you in the next courses.