Islamic Finance: Theory and Practice

49 Pages Posted: 28 Dec 2010 Last revised: 25 Aug 2020

See all articles by Muhammad Hanif

Muhammad Hanif

National University of Computer and Emerging Sciences (NUCES or FAST-NU) - FAST School of Business

Date Written: December 27, 2014


Islamic banking was started in the last quarter of the 20th century to cater to the needs of Muslims around the world. It has shown marvellous growth and expansion worldwide. This book is the result of five years teaching of Islamic finance course to MBA Finance students. This book is written with a clear focus on learning of Islamic banking & finance by accounting, banking, business and finance students/professionals. Resources available, so for, on the subject have focused on the legal side and very negligible work is available on the financial front for a common user. This book is written from a financial perspective, and the author has focused upon financial impacts, generated by the application of Islamic financial laws. However, a summary of Islamic commercial laws of each chapter has been provided. Author has adopted balance sheet method to inculcate the knowledge; hence, understanding of elementary balance sheet is recommended to get maximum out of this book. This book is divided into five parts. Part-1 presents an update on Islamic finance, why and how Islamic banking started; What is current status; Meaning and prohibition of Riba (Interest & Usury) as reported in revealed books (Bible and Qur'an).

Part two is about asset-backed financing provided by IFIs. It includes trading (selling) modes of financing including Murabaha, Salam, and Istisna'a; it also includes Ijarah financing. At the start of part two, a summary of Shari’a rulings about sales is reported. Chapter two is about the Murabaha (cost plus profit) the most widely used financing tool by Islamic Financial Institutions (IFIs) world over and Muajjal (deferred sale). The average share of Murabaha is above 40% in portfolios of IFIs. Murabaha is a very useful tool to replace overdraft and short to medium term financing. Chapter two discusses the basic rules of Murabaha, necessary steps involved and comparative study with conventional short-term loans including bank overdraft facility. Chapter three is about Bai-Salam; a form of sale contract whereby IFIs purchase goods for spot payment with deferred delivery. Practically it is used in the financing of agricultural needs of farmers. Chapter four is about Istisna'a. This mode of financing is designed to transact business through an order to manufacture and/or supply. It is a sales contract except the existence of subject matter. This tool of financing is useful for infrastructure projects. Chapter five is about Ijarah; a rental contract whereby IFIs lease an asset for a specific rent and period to the client. Ijarah is very useful in replacement of leasing. The average share of Ijarah is 18% in portfolios of IFIs.

Part three of the book deals with profit and loss sharing modes of financing including Musharaka, diminishing Musharaka and Mudaraba. A special section is devoted to discussing the causes of lesser application of Musharaka in operations of IFIs, in addition to Shari’a rulings and financial impact. Chapter seven is about Diminishing Musharaka; a form of gradually declining partnership between an IFI and clients; generally used to finance real estates. Under diminishing Musharaka, I have discussed the basic Shari’a rulings, Islamic house financing, comparative study of conventional and Islamic mortgages and instalment calculation under different assumptions for house financing. Chapter eight is about Mudaraba. Under this scheme of financing, IFIs provide capital to financially weak but skilful people to do the business and share the outcome with IFIs.

Part four is about deposits management. Chapter nine presents various types of deposits collected by IFIs and profit sharing mechanism. Concepts of daily product and weight-age based profit systems are elaborated.

Part five of the book presents special topics in Islamic Finance. In this part areas of liquidity management and Islamic insurance are discussed. Under Islamic capital market two dedicated chapters have been included; each for equities and Sukuk. Shari’a compliance of equity securities, trading rules, and valuation mechanism discussed under equity chapter. Chapter-11 on Sukuk includes origin, development, types and Sukuk process along with Shari’a rulings. Chapter 12 offers solutions for cash finance provision to customers by IFIs. The last chapter has focused on Islamic insurance.

Keywords: Islamic Banking, Islamic financial system, Comparative Study, Features of Islamic banking, Prohibition of Interest, Pakistan

JEL Classification: R11, G15, G21

Suggested Citation

Hanif, Muhammad, Islamic Finance: Theory and Practice (December 27, 2014). Available at SSRN: or

Muhammad Hanif (Contact Author)

National University of Computer and Emerging Sciences (NUCES or FAST-NU) - FAST School of Business ( email )

A.K. Brohi Road
Sector H/11-4
Islamabad, 44000
+92 (051) 111 128 128 (Phone)

HOME PAGE: http://

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics