Principles of Islamic banking and finance/PIBF203/Overview

Unit 3: Non-Banking Islamic Financial Institutions

Welcome to unit 3, the last unit of Islamic banking and finance course. This unit deals with non-banking financial institutions and products in Islamic financial industry. Like its conventional counterpart, Islamic financial industry has introduced a number of non-banking financial institutions through which they offer products and services in accordance with Islamic law or shari'ah. During next five sessions you will learn about the rationale for launching these products as well as their operational details.

Session 1: Takaful (Islamic insurance)

The first session deals with the concept of insurance from Islamic perspective and discusses the controversies over the philosophy, products and practices of insurance companies developed under the capitalist system. It explains the issues raised against them by Islamic religious scholars and how different models of takaful (Islamic insurance) companies work in accordance of Islamic laws. The prospect and problems faced by the takaful industry will also be looked at.

Session 2: Sukuk (Islamic Bonds)

As conventional bonds are structured to generate fixed income periodically and/or at their maturity, they are unacceptable under Islamic law. Furthermore, as buying and selling of debt is also prohibited under shari'ah, creating secondary markets for bonds is also problematic. To overcome these objectionable features of conventional bonds, different types of sukuks are introduced that are often termed as Islamic bonds. This session will discuss the structure and features of different types of sukuks and explain current status of this increasingly important sector Islamic financial industry.

Session 3: Investment in stocks

This session highlights the objectionable features and procedures of public corporations and stock markets from Islamic perspective and explains how Islamic financial experts have come up with acceptable alternatives.

Session 4: Portfolio management under Islamic finance

According to Investopedia, "Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management is all about determining strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a given appetite for risk."[1] Under Islamic finance, portfolio must be managed in a way, so that, apart from the risk- return trade off and other considerations, it does not violate any religious or ethical injunctions. In this session you will learn how fund managers in Islamic financial institutions as well as those working independently are catering the needs and aspirations of Muslim investors.

Session 5: Hedging and derivatives in Islamic finance

Islamic religious scholars have serious reservations against financial derivatives used in mainstream finance due to their wide spread use for speculation rather than genuine vehicle for risk management. Their arguments and alternative suggestions will be explained in this session.

Leaning outcomes of unit 3

Through these sessions you will be able to

• Explain the structure and management of Islamic insurance

• Categorize different types of Islamic Bonds (Sukuk)

• Distinguish between conventional and Islamic approaches to investment and portfolio management