Asset Based Financing

Islamic banking was started in the last quarter of the 20th century to cater the needs of Muslims around the world, although it is not limited to Muslims only. It has shown tremendous growth and expansion worldwide. The global volume of assets under the Islamic financial system has reached the figure of US$ 2.5 trillion by the end of 2018 (potential size is above US$ 9.0 trillion), depicting average yearly growth around 16% from 2010-18 [GIFR-2019]. Within eight years, the industry volume of assets is more than double. Islamic finance expands in allied financial sectors, including insurance, capital market operations (equity and Sukuk) and microfinancing in addition to the traditional banking sector. However, dominant share in assets under Islamic financial system is concentrated in the banking sector. According to IFSB (report-2019) share of banking in global Islamic financial services industry [volume 2.19 trillion] is 71.7%, followed by capital market operations with 27% [Sukuk 24.2% & Islamic funds 2.8%] and Islamic insurance (Takaful) 1.3%. Although it was started as merely an alternative option for Halal financing, now it has become a complete financial solutions industry and expanding day by day. Important regions which contribute in global Islamic financial services industry include GCC (42.3%), Asia (28.2%), MENA-ex GCC (25.1%) and balance (4.4%) from rest of the world [IFSB-2018]. This book is result of a decade of teaching Islamic banking & finance course to under graduation & Master in Business classes. The book is written with a clear focus on learning the concept of asset-based financing, as practiced by modern Islamic Banking industry, by the accounting, banking, business and finance students & professionals. This book is dedicated to asset-based financing offered by Islamic financial services industry. Asset-based financing contributes to financial stability. Asset-based financing is provided either through trading in assets or by provision of assets on rentals. At the beginning, a summary of Shari'ah rulings about trading is presented. Chapter one is about Murabaha (cost-plus-profit sale) the most widely used financing tool by IFIs world over. Murabaha is a useful tool to meet the requirements of overdraft and short-term financing. The chapter includes the basic rules of Murabaha, necessary steps involved and comparative study with conventional loans. Financial impact of Murabaha is illustrated. Chapter two is about Bai Salam; a form of sale contract whereby IFIs purchase goods for spot payment with deferred delivery. It is a recommended financing product to finance agricultural needs of farmers. Summary of Shari'ah rulings, steps in execution of contract and illustrated financial impact is presented. Chapter three 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 with the exception of the existence of subject matter. Istisna'a financing schemes have great potential to finance infrastructure projects, in addition to financing for manufacturing sector. Summary of Shari'ah rulings, steps in execution of contract and illustrated financial impact are elaborated. Chapter four is about Ijarah; a rental contract whereby IFI leases an asset for a specific rent and period to the client. Ijarah is a useful technique to replace conventional lease financing. Summary of Shari'ah rulings, steps in execution of contract and illustrated financial impact are elaborated. A special section has been devoted to study comparative accounting techniques for Ijarah and leasing. In this edition, due attention has been given to present material in reader friendly mode, in addition to thorough review of content, exercises and figures. For all chapters applied illustrations, exercises, essay questions and multiple-choice questions are included to develop understanding and the financial skills of readers.