Introduction to System and

Institution in Islamic Finance

Week 1
Diyah Putriani is inviting you to a scheduled Zoom meeting.

Topic: Islamic Financial System and Institutions

Time: Aug 27, 2021 01:30 PM Jakarta
Every week on Fri, 7 occurrence(s)
Aug 27, 2021 01:30 PM
Sep 3, 2021 01:30 PM
Sep 10, 2021 01:30 PM
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Course Description
• Credits: 3sks
• This course is offered to undergraduate students of Faculty of Economics and
Business UGM as a foundation of knowledge and application in Islamic
Finance. The issue of system and institution on Islamic Finance shows a
notable growth in the last decade and take great attention from many
economists and organizations in the world. It is considered will give the huge
impact for the human prosperity in the future.
• These upcoming topics are developed to help students to learn the
fundamental of Islamic finance. Ranging from the basic lecture for economic
system, financial instruments, and the comparison of the similar instrument
of both conventional and Islamic finance. This class also cover the topics such
as Islamic Financial Intermediation and Banking, Capital Markets, Regulation
of Islamic Financial Institution, and also Islamic Insurance and the Micro
Financial Institution.
Course Outline
Week Topic Reference Course Materials
1 Introduction to System and Institution in Islamic Finance Syllabus Prescribed textbook:
Ref.1 p.1 (Ch.1) Iqbal, Z. and Mirakhor, A. 2011. An
2 The Economic System Ref 1, p.29 (Ch.2) Introduction to Islamic Finance: Theory
3 Riba vs. Rate of Return Ref 1, 57 and Practice. Singapore: John Wiley &
4 Financial Instruments Ref 1, 75 Sons [Ref.1]
5 Risk Sharing as an Alternative to Debt Ref 1, 99
6 The Islamic Financial System Ref 1, 113n(Ch.6) Recommended textbooks and readings:
7 Concept and Application of Islamic Insurance Kettell, B. (2011a), Introduction to Islamic
8 The Stability of the Islamic Financial System Ref 1, p. 137(Ch.7) Banking and Finance, West Sussex: John
9 Capital Markets Ref 1, 178Ch.9 Wiley & Sons
10 Bank and Non-Bank Financial Intermediation Ref 1, p.151 and p.207 Kettell, B. (2011b), Case Studies in Islamic
Banking and Finance, West Sussex: John
11 Micro Financial Institutions in Islamic Perspective
Wiley & Sons
12 Financial Engineering Ref 1, 245; Ref 1, 275
13 Regulation of Islamic Financial Institutions Ref 1, 289
14 Corporate Governance and Global Challenges Ref 1, 323 (Ch.15)
Ref 1, 351 (Ch.16)
Teaching Method
• Lecture
• Individual assignments: Random assignment will be marked 100%.
• Presentation
• Tutorials : Discuss assignment

Consultancy by email
diyah.putriani@ugm.ac.id
Faculty Policies Grading
• Absence from class meetings • Mid Exam 30%
shall not exceed 25% • Final Exam 40%
• Students may not record • Assignments 10%
classroom lectures, discussion
and/or activities without the • Presentations 20%
advance written permission of 100%
the instructor and any such
recording properly approved Grade % Cumulative
in advance can be used solely
Range Weighted Grade
for the students own private
use. A ≥90 4,0
A- 85 3,75
• There is no tolerance for
plagiarism or academic A/B 80 3,5
dishonesty in any form, B+ 75 3,25
including cheating during B 70 3
exam. B- 65 2,75
B/C 60 2,5
Week 1: Coverage
Introduction to System and Institution in Islamic Finance
- Why study Islamic finance?
- What is Islamic finance?
- Foundational Concept
- Shariah - The Law
- Islamic Economic and Financial Systems
- Modern History of Islamic Banking and Financial Services
Why study and What is Islamic Finance?
Why study Islamic Finance?
• If we asked someone why study “finance”, we will probably get a number of responses such as:
“It is all about money”
“It concerns resource allocation, management, acquisition and investment”.
• This is because “finance” is a broad term and takes into account many aspect of the economy and financial
system since it deals with matters related to money.

What is IF?
What is Islamic Finance?
What is IF?
The expression “Islamic Finance” suggests two significant meanings

The noun of “finance” suggests that IF markets and
institutions deal with:
- resource allocation, management, acquisition and
investment
- the fundamental issue in finance which is risk
transformation and management.
Thus, IF is expected to essentially function similarly or at
least produce the same economic effect to that of its
conventional counterpart.
• The adjective of “Islamic” implies some fundamental
differences between IF and CF which includes: the
prohibition of riba, gharar (ambiguity) in contracts, the
prohibition of gambling (maysir)
• The prohibition conducting economic or investment which
are ethically and socially unacceptable albeit profitable:
• Pornography, gambling, alcohol and prostitution
• The prohibition of monopoly
• The introduction of ziswaf
• The development of halal products

IF is built upon some distinctive and unique

characteristics which are based upon certain
principles underlined by shariah.
Foundational Concept
Foundational Concept: Short history of IBF

• Historically, Islamic banks did not exist in early Arabia. Money-lenders lent their money by
charging high levels of interest. Usually the interest rate was charged from above 0 percent
to 10 percent or 12 percent.
• Consequently, the volume of money-lenders’ wealth was increasing significantly and hence
wealth was concentrated in the hand of a few rich people.
• This system made the poor became poorer and forced them to sell their properties to
payback their loan to money-lenders (Pramanik, 1997).
Foundational Concept: Philosophy of Islamic Bank
The interest-based system is prohibited in Islam as it promotes a zero sum game to establish an exploitation-
free society. As examined by (Meera and Larbani 2009) the international debt will never be paid back in
aggregate. Example:
• The total amount of money supply in the global economy as RM 15,000 billion, lent to some low-income countries
which plus 10 percent (per year) of interest rate. After the due date, the indebted countries should pay RM 16,500
billion; however, the total existing money is only RM 15,000 billion. If the extra money RM 1,500 is not printed to be
injected in the system, (some) borrower countries will be trapped into debt crisis. That is to say, there is a high
chance of default.

The reason why Islam condemns the practice of interest UAS: riba verses (15%)

In the Quran, there are many verses that the poor must be assisted to obtain his basic needs
and he has the right to get some wealth from the richer. If the poor wants to borrow money,
the lender is strictly prohibited to ask to pay more than the amount borrowed. In Islamic
teachings, when someone lend his money, it should be to help. By eliminating interest in the
system, a just wealth distribution is expected to be reached in an Islamic economy.
Foundational Concept

Understanding IFS

A full comprehension of its objectives and philosophy

Considering the current
condition, has Islamic financial
system already established?
Guided by the philosophy of islamic business

Understanding the overall Islamic economic system

Foundational Concept: Underlying IFS
Understanding IFS

Why ideology matters?

Understanding the
The philosophy of Islamic economic system
overall Islamic
which is based on shariah principles
economic system
Shariah principles prescribes specific patterns of
economic behavior for individual and society as a
whole. Thus, ideology in IFS matters.
The reason why IFS, including IB, is much more
than just refraining an institution from charging
interest and conforming to the requirements of
IF products.
• The strength of ideology determines the
strength of rule compliance, and thus the
strength of institutions, which, together with
technology, determine the performance and
efficiency of an economic system.
• Efficiency is measured by the cost of a given
level of economic performance.
• In an ideal situation, asymmetry and moral
hazard are minimized since a large part of
uncertainty will be eliminated with rule
compliance.

IFS is a system which aims at contributing to the fulfilment of

the socio economic objectives and the creation of the society

The objective  to enjoy eternal life, both physical

A just Economic system
and spiritual in heaven with Allah (God)  falah