Islamic Banking and Finance
Scope
Islamic Banking and Finance tests Shariah-compliant structures, governance, and profit distribution. The exam distinguishes Islamic modes from interest-based lending and tests documentation sequencing.
Core rules
- Prohibitions: riba (interest), gharar (excessive uncertainty), maysir (gambling), and haram business activities. Risk sharing and asset-backing are central.
- Modes: Murabaha (cost-plus sale), Ijarah (lease), Musharakah (joint partnership), Mudarabah (profit-sharing), Salam (advance purchase), Istisna (manufacturing), and Diminishing Musharakah (home finance).
- Governance: SBP Shariah Governance Framework; Shariah Board/Advisor approval; Shariah audit; profit distribution; late-payment penalties go to charity, not bank income.
- Accounting and reporting follow AAOIFI Shariah standards and applicable IFRS, with SBP reporting.
Worked example
A customer needs PKR 1,000,000 to buy machinery. In Murabaha, the bank buys the machinery for PKR 1,000,000, takes ownership/risk, then sells it to the customer for PKR 1,150,000 payable deferred. The PKR 150,000 is a sale profit, not interest. If the bank simply advances PKR 1,000,000 and takes back PKR 1,150,000, the structure is a loan with riba and is not Shariah-compliant. Reasoning: asset ownership and sale sequencing create the Islamic return.
Traps
- Describing Murabaha profit as interest.
- Ignoring ownership/risk in Ijarah and Murabaha.
- Treating a late-payment penalty as bank income.
- Approving a product without Shariah Board approval.