Islamic Banking and
Financial Markets
Module 1
Introduction
Dr. Mustafa Disli
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Who am I?
• Background:
‒ MSc in Economics (Ghent University, Belgium)
‒ PhD in Economics (Ghent University, Belgium)
• Courses taught at CIS/HBKU:
‒ Risk Management with Applications to Islamic Banks (MSc 2 : 2019 – 2022)
‒ Advanced Risk Management with Application to Islamic Banks (PhD : 2019 – 2022 )
‒ Islamic Banking and Financial Markets (MSc 1: 2020 – … )
‒ Behavioral Islamic Economics and Finance (Msc2-Phd: 2022 – … )
‒ Advanced Topics in Islamic and Sustainable Finance (PhD: 2022 – … )
• Research interests:
‒ Islamic banking
‒ Islamic finance
‒ Behavioral economics/finance
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Program structure: MSc Islamic Finance
A 36-credit degree program taught over two years in English, that includes:
Four core courses (12 credits) A choice of three electives out of the following options (9 credits)
▸ Islamic Banking and Financial Markets ▸ Applied Quantitative Methods
▸ Islamic Financial Contracts ▸ Behavioral Islamic Economics and Finance
▸ Islamic Corporate Finance and Financial Engineering ▸ Fintech and its Islamic Finance Applications
▸ Research Methods ▸ Principles and Objectives of Islamic Law
▸ Internship
Islamic Finance Concentration (6 credits) ▸ Independent Studies
▸ Islamic Asset, Funds and Portfolio Management
▸ Analysis of Financial Statements with Applications Thesis (9 credits)
to Islamic Banks
Sustainable Finance Concentration (6 credits)
▸ Sustainable Finance and Impact Investing In total, 9 courses + thesis:
▸ Islamic Economics and Sustainable Development • 4 core courses
• 2 concentration courses
• 3 electives
• Thesis
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Course offerings by semester
Semester 1 Semester 2 Semester 3 Semester 4
(Fall 2024) (Spring 2025) (Fall 2025) (Spring 2025)
•Islamic Banking and •Research Methods •Analysis of Financial •Thesis (6 credits)
Financial Markets •Islamic Asset, Funds and Statements with
•Islamic Financial Portfolio Management Applications to Islamic
Contracts •Sustainable Finance and Banks
•Islamic Corporate Impact Investing •Applied Quantitative
Finance and Financial •Islamic Economics and Methods
Engineering Sustainable •Behavioral Islamic
Development Economics and Finance
•Principles and •Fintech and its Islamic
Objectives of Islamic Finance Applications
Law •Internship
•Internship •Independent Studies
•Independent Studies •Thesis (3 credits)
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Islamic Finance Concentration Student
Course offerings by semester
Semester 1 Semester 2 Semester 3 Semester 4
(Fall 2024) (Spring 2025) (Fall 2025) (Spring 2025)
•Islamic Banking and 🔒 •Research Methods 🔒 •Analysis of Financial 🔒 •Thesis (6 credits) 🔒
Financial Markets •Islamic Asset, Funds and Statements with
🔒
•Islamic Financial 🔒 Portfolio Management Applications to Islamic
Contracts •Sustainable Finance and Banks
•Islamic Corporate 🔒 Impact Investing ❓ •Applied Quantitative ❓
Finance and Financial •Islamic Economics and Methods
❓
Engineering Sustainable •Behavioral Islamic ❓
Development Economics and Finance
•Principles and ❓ •Fintech and its Islamic ❓
Objectives of Islamic Finance Applications
Law •Internship ❓
•Internship ❓ •Independent Studies ❓
•Independent Studies ❓ •Thesis (3 credits) 🔒
5
Sustainable Finance Concentration Student
Course offerings by semester
Semester 1 Semester 2 Semester 3 Semester 4
(Fall 2024) (Spring 2025) (Fall 2025) (Spring 2025)
•Islamic Banking and 🔒 •Research Methods 🔒 •Analysis of Financial ❓ •Thesis (6 credits) 🔒
Financial Markets •Islamic Asset, Funds and Statements with
•Islamic Financial 🔒 Portfolio Management ❓ Applications to Islamic
Contracts •Sustainable Finance and Banks
•Islamic Corporate 🔒 Impact Investing 🔒 •Applied Quantitative ❓
Finance and Financial •Islamic Economics and Methods
Engineering Sustainable 🔒 •Behavioral Islamic ❓
Development Economics and Finance
•Principles and ❓ •Fintech and its Islamic ❓
Objectives of Islamic Finance Applications
Law •Internship ❓
•Internship ❓ •Independent Studies ❓
•Independent Studies ❓ •Thesis (3 credits) 🔒
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Background reading material
Islamic banking and finance:
Iqbal, Z., & Mirakhor, A. (2011). An introduction to Islamic finance: Theory and
practice. 2nd Edition. John Wiley & Sons.
Conventional banking and finance:
Heffernan, S. (2005). Modern banking. John Wiley & Sons.
Matthews, K. G. P., & Thompson, J. (2005). The Economics of Banking. John
Wiley & Sons.
Journal articles and other materials
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Code of conduct
• Classroom participation is mandatory
‒ Active participation
• You are expected to be on time
• Negative externatilities are not allowed
• Classroom:
‒ Please avoid side-conversation with other students
‒ Everyone is entitled to their opinion. Classroom discussion is meant to allow
us to hear a variety of viewpoints. This can only happen if we respect each
other and our differences.
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Weekly schedule
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Grading
10
Function of Financial Markets
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Function of Financial Markets
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What is a bank?
conventional
• A bank is...
...an institution whose current operations consist in granting loans
and receiving deposits from the public. (Freixas and Rochet 2008)
• An Islamic bank is...
...an institution that mobilizes financial resources and invests them
in an attempt to achieve predetermined Islamically-acceptable
social and financial objectives. Both mobilization and investment of
funds should be conducted in accordance with the principles of
Shariah. (AlBaraka Banking group)
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Banking models
Conventional Islamic intermediation
intermediation
Deposit
DEPOSITORS Profit-
ors and-Loss
Sharing
Funds
Profit-and-
BANKS Loss
Sharing
Funds
BORROWERS
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Islamic banking – Prohibition of riba
Prohibition of interest is not due to any formal economic theory as but
is directly prohibited by the divine order in the Qur’an.
1. Element of injustice in financing productive activities
• Riba-based loan constitutes contract with unequal countervalues – certainty of
interest obligation vs. uncertainty of business outcome
• The lender's guaranteed return, contrasted with the borrower's risk from
uncertain business outcomes, is seen as unjust.
2. Element of exploitation in financing consumption
• The rich is able to generate more wealth through interest without exerting
much effort or contributing to productive activity.
• The borrower takes on the risk, while the lender gains wealth without
contributing directly to productive activities.
• Riba assumes money as a commodity, one which the rich has in abundance
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Islamic banking – Prohibition of riba
3. Negative effects of a “credit society”
• Easy availability of credit cultivates a materialistic society with excessive borrowing and
spending
• Banks exercise “control” over economic agents, people become “enslaved” to banks
• Islamic finance encourages helping each other, while riba exploits those in financial need,
worsening their difficulties.
4. Negative effects on production
• Impediment to healthy growth of the economy
– Riba-based lending is security oriented rather than growth oriented
– Lending is confined to established businesses with known creditworthiness and adequate security
(collateral)
– Discourages innovation
– Potential entrepreneurs without security to pledge are denied credit
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Islamic banking – What?
– A banking system that is based on the principles of Islamic law
(also referred to as Shariah law)
– Three principles:
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Islamic banking – What?
Principle of equity:
• the prohibition of the collection and payment of interest (“Riba”)
by lenders and investors
• Wealth increase only by engaging in a productive activity
• Investment in conventional bonds is prohibited
Principle of participation:
• reward (that is, profit) comes with risk taking
Principle of ownership:
• The ruling of “do not sell what you do not own” (e.g., short selling)
• Also forbidden: Maysir (ميسر, gambling), Gharar (غرر, uncertainty), and non-
ethical investments (pork, alcohol, and pornography)
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The Conventional Banking Intermediation
i SL SD: Supply of deposits curve
SD DL: Demand for loans curve
i*: the market clearing interest rate
SL: Supply of loans curve
iL
iL− iD: bank interest differential
between the loan rate (iL) and the
i*
deposit rate (iD) which covers the
cost of the bank's intermediation
iD
DL
0 Volume of
T B
loans/deposits 21
The Conventional Banking Intermediation
i SL Question 1:
Does this simple model of the deposit
SD and credit markets also apply for
Islamic banks?
Question 2:
iL If not, in what sense would it be different
for Islamic banks?
i*
Question 3:
iD For next week: figure out how we can
adapt this model for Islamic banks.
DL
0 Volume of
T B
loans/deposits 22
References
AlBaraka Banking Group. Website.
Heffernan, S. (2005). Modern banking. John Wiley & Sons.
Matthews, K. G. P., & Thompson, J. (2005). The Economics of Banking.
John Wiley & Sons.
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