Structuring Islamic Financial Products

IFF Training

How long?

  • 16 weeks
  • online

IFF Training

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About the course

Islamic finance is a rapidly growing form of ethical finance, providing essential financing solutions in key markets. The main aim of the course is to enable you to compare and contrast how various Islamic toolkits – sale-based, lease-based and equitybased instruments - are applied in Islamic finance and ensure you grasp the core rules governing those tools. This flexible distance learning approach has been developed to help you bridge this learning gap wherever you are in the world with the unique opportunity for you to gain a postgraduate certificate from a leading UK university. Introducing the fundamental concepts and principles of Islamic finance, in both banking and capital markets, you will master the distinctive vocabulary and understand how the Islamic commercial rules impact financial market applications.

AT THE END OF THE COURSE YOU WILL BE ABLE TO:

  • Analyse the risk profile of different Islamic finance products offered in the market
  • Explain the rationale and Shariah contentions (if any) for different Islamic tools in the global market
  • Compare and contrast various Islamic Finance instruments
  • Develop a deeper knowledge base for better product structuring and creation
  • Examine Shariah issues in conventional finance products and suggest Shariah compliant alternatives

HOW YOU WILL LEARN

  • A new module is released every two weeks
  • You can study the units online, save them to your 33 computer or print them out
  • You set the pace for yourself
  • No need to travel or take time off work – cost effective
  • Apply the knowledge, skills and expertise to your work straight away

Course Content

UNIT 1 Overview of the market and its principles UNIT LEARNING AIMS AND OBJECTIVES

  • Define the market context and business opportunity for Islamic finance
  • Describe self-governance institutions
  • Discuss the key Shariah rules governing Islamic financial transactions
  • Differentiate between various Shariah contracts

Market Context

  • Brief history of modern Islamic finance
  • Current snapshot of the Islamic financial markets
  • Where is growth taking place?
  • What drives market expansion?

Shariah Principles

  • Riba: Prohibition of interest and its implications
  • Gharar: Rules for disclosure and transparency
  • Shariah prohibitions: Awareness of moral rulebook - underlying activities, usage of proceeds etc
  • Rules of Shariah contracts: Guideline on ownership, possession, promise, contract, price
  • Practical framework to understand different Islamic tools: Naturally Certain Contract (NCC) vs Naturally Uncertain Contracts (NUC)

Self-Governance Institutions

  • Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI): Issues Shariah and accounting standards for Islamic Financial Institutions (IFIs)
  • Islamic Financial Standards Board (IFSB: issues Basel equivalent standards for IFIs)
  • International Islamic Financial Markets (IIFM): Develops standardised documentation for Islamic treasury and markets

CLOSE ALL MODULES

UNIT 1 Overview of the market and its principles UNIT LEARNING AIMS AND OBJECTIVES

Define the market context and business opportunity for Islamic finance Describe self-governance institutions Discuss the key Shariah rules governing Islamic financial transactions Differentiate between various Shariah contracts Market Context

Brief history of modern Islamic finance Current snapshot of the Islamic financial markets Where is growth taking place? What drives market expansion? Shariah Principles

Riba: Prohibition of interest and its implications Gharar: Rules for disclosure and transparency Shariah prohibitions: Awareness of moral rulebook - underlying activities, usage of proceeds etc Rules of Shariah contracts: Guideline on ownership, possession, promise, contract, price Practical framework to understand different Islamic tools: Naturally Certain Contract (NCC) vs Naturally Uncertain Contracts (NUC) Self-Governance Institutions

Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI): Issues Shariah and accounting standards for Islamic Financial Institutions (IFIs) Islamic Financial Standards Board (IFSB: issues Basel equivalent standards for IFIs) International Islamic Financial Markets (IIFM): Develops standardised documentation for Islamic treasury and markets

Concept Illustration

Review of how key Shariah principles affect conventional financial markets

UNIT 2 Goods Murbahah - Credit Sale of Goods UNIT LEARNING AIMS AND OBJECTIVES

  • Explain Shariah rules governing Murabahah
  • Compare and contrast the risk profiles of different Murabahah structures
  • Analyse Murabahah applications in different business sectors
  • Identify tools used to manage market risks in Murabahah
  • Design solutions to solve various scenarios

Key Shariah Rules of Murabahah

  • Summary requirements relating to assets, price and transactional sequence
  • Murabahah structures
    • Classical Murabahah - the financial institution is the vendor
    • Murabahah to Purchase Order (MPO) - the financial institution buys against a customer’s purchase order or undertakin
    • Agency Murabahah - MPO with the customer acting as the financial institution’s agent to source the goods

Risk Profile of Murabahah in IFSB

  • Murabahah (exposed to market risk)
  • Non-binding MPO
  • Binding MPO (no market risk exposure)
  • Sale or return basis (Khiyar al-shart)

Application of Murabahah

  • Retail: Auto Finance
  • Corporate: Supply chain financing
  • Capital Markets: Shares Murabahah

Summary & Take Aways

  • Tools to manage market risks for Islamic instruments:
    • Purchase Undertaking
    • Khiyar al-Shart
    • Loan vs. Murabahah

UNIT 3 Tawarruq / Commodity Murabahah - Application of Credit Sales to Generate Cash UNIT LEARNING AIMS AND OBJECTIVES

  • Explain Shariah rules governing Tawarruq
  • Compare and contrast the risk profiles of Tawarruq to Murabahah
  • Analyse Tawarruq applications in different business sectors
  • Design solutions to solve case studies
  • Appraise Shariah sensitivity relating to Tawarruq

Key Shariah Rules of Commodity Murabahah/Tawarruq

  • What are these and how are they different from Goods Murabahah?
  • Bai Al-Inah vs. Tawarruq
  • Tawarruq variations
    • Tawarruq Al-Asli
    • Tawarruq Munazzam
    • Reverse Murabahah vs. Commodity Murabahah vs. Tawarruq are there any differences?

Risk Profile of Tawarruq in IFSB

  • Compare the risk profile of Tawarruq to Goods Murabahah

Application of Tawarruq

  • Retail: Islamic credit card
  • Corporate: Cash line facility
  • Capital market: Simple Sukuk Murabahah

Summary & Take Aways

  • Tawarruq Section Summary: Goods Murabahah vs. Tawarruq vs. conventional loan?

UNIT 4 Salam & Istisna'a

  • Explain Shariah exceptions that allow Salam and Istisna’a
  • Discuss the risk profiles of Salam and Istisna’a structures
  • Analyse Salam and Istisna’a applications in different business sectors
  • Design solutions to solve various scenarios
  • Articulate why Salam and Istisna’a are less common in the market

PART A: SALAM - FORWARD SALE

Key Shariah Rules of Salam

  • Summary requirements relating to asset, price and transactional
  • sequence
    • Salam structures
    • Simple Salam
    • Parallel Salam

Salam Risk Profile in IFSB

  • Simple Salam: Full market risk
  • Parallel Salam: Residual market risk due to performance risk
  • Salam against Purchase Undertaking: IFSB doesn’t discuss this - evaluate the risk profile of this structure

Application of Salam

  • Retail: Personal finance trend at some Islamic banks
  • Corporate and capital market: Understanding the benefits and reluctance to apply
  • Government securities: Why salam is useful for monetary policy

PART B: ISTISNA’A - CONSTRUCTION FINANCING CONTRACT

Key Shariah Rules of Istisna’a

Summary requirement relating to asset, price and transactional sequence

  • Istisna’a structures
    • Simple Istisna’a
    • Parallel Istisna’a

Istisna’a Risk Profile in IFSB

  • Simple Istisna’a: Market risk relating to material and labour cost
  • Parallel Istisna’a: No market risk given fixed sale contract, or matched provision to increase price

Application of Istisna’a

  • Construction finance
  • Manufacturing finance

Summary & Take Aways

  • Asset for the bank
  • Rate: Fixed, floating or both
  • Salam vs. Istisna’a

UNIT 5 Ijarah - Leasing

  • Explain Shariah rules governing Ijarah
  • Compare Ijarah and Murabahah risk profiles
  • Analyse Ijarah applications in different business sectors
  • Design solutions to solve various scenarios
  • Diagnose the flexibility of Ijarah in solving client needs

Key Shariah Rules of Ijarah

Summary requirement relating to asset, price, ownership duties and transactional sequence Ijarah structures: * Operating Ijarah * Ijarah Muntahiyya Bi Tamleek (Islamic “Financial” Leases) * Ijarah Mawsoofa Bi Zhimma (Described/Forward Lease)

Risk Profile of Ijarah in IFSB

  • Operating Ijarah
  • Ijarah Muntahiyya Bi Tamleek: binding & non-binding promise
  • Compare Binding MPO risk profile to binding IMBT risk profile

Applications of Ijarah

  • Retail: Ijarah for services
  • Corporate: Ijarah Mawsoofa Bi Zhimma (IMBZ) to minimise construction risk
  • Capital Market: Simple Sukuk Ijarah

Summary & Take Aways

  • Asset for the bank
  • Rate: Fixed, floating or both
  • Comparing Murabahah, Salam, Istisna’a & Ijarah

UNIT 6 Musharakah, Mudarabah, Wakalah Bil Istithmar UNIT LEARNING AIMS AND OBJECTIVES

  • Explain Shariah rules governing equity like instruments
  • Discuss the risk profiles of Musharakah, Mudarabah and Wakalah
  • Analyse MMW applications in different business sectors
  • Design solutions to solve various scenarios
  • Assess how MMW may be structured like debt
  • Articulate why MMW are less common in the asset side of banking book

Key Shariah Rules of MMW

  • Musharakah: Partnership
  • Mudarabah: Profit sharing managed partnership, akin to Limited Partnership
  • Wakalah bil Istishmar: Investment agency

Risk Profile in IFSB

  • Three types of Musharakah
  • Mudarabah including slotting method for Project Finance
  • Wakalah bil Istishmar: Compare to Musharakah risk profile

Tools Used to Structure Debt – Like MMW

  • Incentive fee: Cap the return for the investors
  • Liquidity facility: Provides a floor on investors’ return
  • Purchase undertaking at pre-determined price: Assures capital return to the investors
  • Note: Some of these tools may face Shariah objections from certain group of Shariah scholars

Application of MMW

  • Retail: Musharakah Mutanaqisah
  • Corporate: Running Musharakah or Mudarabah Working Capital Line
  • Capital market: Simple Sukuk Musharakah
  • Islamic funds: Application of Wakalah
  • Are MMW widely used in the financing activities of IFIs

Summary & Take Aways

  • Naturally Certain Contracts (NCC) vs. Naturally Uncertain
  • Contracts (NUC)

UNIT 7 Islamic Deposits & Investment Account UNIT LEARNING AIMS AND OBJECTIVES

  • Explain Shariah rules governing Islamic liability products
  • Compute profit allocation for Islamic liability products
  • Determine suitability of different products for cash management
  • Analyse the relationship between Displaced Commercial Risk and capital Adequacy Requirement of IFIs

Key Shariah Rules for Depository Tools

  • Qard al-Hassan (interest free loan)
  • Wadiah Yad Dhamanah: Guaranteed safekeeping
  • Mudarabah: Investment account
  • Wakalah: Investment account

IFSB Risks Issues for Investment Accounts

  • Profit Equalisation Reserves: Income smoothing
  • Investment Risk Reserves: Covering potential capital loss
  • Displaced Commercial Risk (DCR) & capital adequacy

Accounting for Unrestricted Investment Accounts

  • AAOIFI: Separate line disclosure between liability & equity
  • IFRS: Challenges with AAOIFI’s approach due to the substance of the unrestricted investment account

Applications of Islamic Deposits

  • General liability and cash management
    • Mudarabah investment account
    • Murabahah deposit
  • Treasury and Interbank
    • Tawarruq
    • Mudarabah and its issues
    • Wakalah

UNIT 8 Institutional Risk and Analysis UNIT LEARNING AIMS AND OBJECTIVES

  • Examine financial statements of different Islamic financial institutions
  • Conclude how an Islamic bank is affected by Basel
  • Explain sources of funding and analyse their gaps
  • Evaluate Shariah compliance at IFIs

Financial & Liquidity Analysis

  • Asset and liability models for Islamic banks and other types of financial institution
  • Review financial institutions ICAAP to understand Basel implications of the IFI model

Financial Reporting

  • Examine financial statements of different Islamic financial institutions
  • Compare reporting for Islamic windows in selected jurisdictions:
    • Balance sheet within balance sheet approach - firewall, leakage tracking etc.
    • Segmentised approach - the limitation of this approach

Shariah Compliance Reporting

  • AAOIFI Shariah Governance Framework
  • Malaysian Shariah Governance Framework
  • Shariah review/compliance vs. Shariah Audit Function
  • Comparing Shariah Committee reports from different jurisdictions
  • Internal vs. external Shariah compliance reports

Experts

Shabnam Mokhtar

Shabnam spearheads research and development activities at SHAPE®. Some of the projects that she managed include: Review and enhancement of Fatwa on Credit Guarantee Scheme delivered by a Scandinavian development fund in Somalia. Research for a bankruptcy case in the US and a criminal case in Ca...

Abdulkader Thomas

A global financial services expert, I apply critical thinking to start-ups, strategy, governance and risk management. An experienced non-executive director and committee chair, I seek to share my knowledge and strong commitment to support my board peers and management. A seasoned trainer, I am ac...

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