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Transcript of Islamic Finance
Musharakah - Partnership Financing
Murabaha - Cost Plus Financing
Ijara - Leasing
Istithana - Commissioned Manufacture “It is estimated that about $700 Billion in assets are managed around the world in accordance with Islamic principles.”
-Standard & Poor’s Shariah “As the bank robber Willie Sutton said as to why he robs banks: That’s where the money is.”
- Tannenbaum Helpern Syracuse & Hirschtritt llp “We come from the desert, and we have been living on camel milk and dates.”
- King Faisal of Saudi Arabia “As of 2006, the Gulf economies alone had $1.9 Trillion in foreign assets…If the oil price per barrel for the period 2007—2020 averages only $70, the McKinsey Global Institute forecasts that the GCC (Gulf Corporation Council) will hold foreign assets of about $8.3 Trillion by 2020” (Rehman 26). Qur'an Prohibition Against the Charging of Interest - "Riba" Ethical Component to Capital No Speculation - "Masir" Subject Matter Uncertainty - "Gharar" Prohibited Enterprises - "Haraam" Purification or Dividend Cleansing Riba = “to exceed, to grow, to be more” Interest Seven Sins i) Shirk
iv) consuming Riba
v) unlawfully taking orphan’s money
vi) fleeing from battlefield
vii) accusing chaste believing women. The Global development of issue of Islamic bond The history of the development of Islamic finance Islamic finance Provider in the US Islamic investment products are at different stages of maturity Practiced predominantly in the Muslim world throughout the middle ages.
Influence on European financial system.
The term"Islamic financial system" appeared only in the mid-1980s.
The umbrella of either"interest free"or" "Islamic" banking. An emerging alternative to conventional interest-based banking.
Expanding rapidly over the last two decades in both Muslim and non-Muslim countries.
No accurate figures exist as to the actual extent of Islamic investment market.
Funds under Islamic financial institutions managment are growing at an annual rate of 15 to 20 percent per year.
The total value of Islamic funds management may well be over $300 billion. A pre-delivery financing and leasing structured mode that is used mostly to finance long-term large-scale facilities involving, for example, the construction of a power plant. The Islamic institution could either own the plant, charge the lessee (project company) a fee based on profits, or sell the plant to the project company on a deferred basis with a profit mark-up similar to a Murabaha transaction. A party leases a particular product for a specific sum and a specific period of time. In the case of a lease-purchase, each payment includes a portion that goes toward the final purchase and transfer of ownership of the product. PLS Modes (profit and loss sharing modes) --the core of islamic finance A trust based financing agreement whereby an investor (Islamic bank), entrusts capital to an agent (Mudarib) for a project. Profits are based on a pre-arranged and agreed on ratio. Mudaraba agreement is akin to Western-style limited partnership, with one party contributing captial while the other runs the business and profit is distributed based on a negotiated percentage of ownership. In case of a loss, the bank earns no return or a negative return on its investment and the agent receives no compensation for his/her effort. Western-style limited partnership Similar to a joint venture,whereby two parties (an Islamic financial institution and a client) provide captial for a project which both may manage. Profits are shared in pre-agreed ratios but losses are borne in proportion to equity participation. It conforms to the principle of profit and loss sharing and it is suitable for long-term project finacing. Joint Venture Employed in investment projects with short gestation periods and in trade and commerce Long-term project Non-PLS Modes, used in cases where PLS modes cannot be implemented A cost-plus profit financing transaction in which a tangible asset is purchased by an Islamic institution at the request of its customer from a supplier.The Islamic instituion then sells the asset to its customer on a deferred sale basis with a mark-up reflecting the instituton’s profit. The customer takes the responsibility of negotiating all of the key commercial terms with the seller of the asset. The mark-up on the asset cannot be altered during the life of the contract. The size of the mark-up is determined in relation to an interest rate index primarily for trade finance.
Notes: Islamic financial institution can not earn excessive profits from the client. If the profit is excessive, remedies may include a return of the “excessive” portion of the profit to the client. 20% of the world's population is Muslim
Islamic Finance represents less than 1% of total financial assets
Example In the past two decades, Islamic banks have recorded high growth rates both in size and number around the world. Islamic banks operate in over sixty countries, most of them in the Middle East and Asia. Now there is a move away from the Middle East and Asian areas towards the United States and Europe. In three countires, Iran, Pakistan, and Sudan, the entire banking system has been converted to Islamic banking. In other countries, the banking systems are still dominated by conventional banking institutions operating alongside Islamic banks. “If Islamic banks label their hamburger, a Mecca burger, as long as it still has the same ingredients as a McDonald’s burger, is it really any different in substance? The unfortunate reality is that while lawyers can craft documentation to make a transaction appear Sharia compliant in letter, if the spirit is missing, what exactly is the point of the entire enterprise?” (Saleem 26). Confusion between usury and interest From a historical basis, capital providers throughout the Islamic world have charged ordinary interest and it was not until the modern version of Islamic finance took hold in the late 20th century that riba became the subject of significant debate. “God has allowed trade and forbidden usury. Whoever on receiving God’s warning, stops taking usury may keep his past gains—God will be his judge—but whoever goes back to usury will be an inhabitant of the Fire, there to remain (Al Baqarah 2:276-280 ).” No evidence of the social concepts of economic development Development indicators in Islamic nations are among the lowest in the world.
-high poverty rates
-50% literacy rate
-30% unemployment rate
-very little higher education Financing instruments Islamic structures conform to the letter of the law, but the spirit of Shariah is non-existent. Murabaha: cost plus
-80% of Islamic Finance use this structure
-no real risk-sharing
-predetermined fixed rate of profit
-conventional interest benchmarks
no actual difference to the borrower
not more equitable
-loans secured by collateral
banks lend 80-90% of asset values
risk is the same as in conventional lending Interest disguised in Islamic garb LIBOR and Prime rate -Insurance required
-loans no more than 90% of the equipment cost -similar to venture capital structures Sharia advisors powerful cottage industry
provide rubber stamps for banks Idea of conventional banks holding no risk is patently false Islamic Finance, driven by Gulf capital, is simply too important to ignore
- new financial order
- Investers will deal with Islamic capital sources as counterparts and as competitors
- bankers will increasingly service them as clients as crucial sources of capital QUESTIONS? Thank you! Simon Deery
Zongyu Jiang Fairness Equality Morality You can not sell something you do not own! State the details of your goods! Many investors consider Islamic financing to be more reliable than conventional financing because Islamic finance integrated ethics and values into itself. & Giving certain proportion of profit to charities the use of Islamic Clerics in Islamic Finance + Shariah Supervisory Board (SSB)
Regulations vary across jurisdictions
Most influential Shariah Boards -Accounting and Auditing Organisation for Islamic Finance (AAOIFI)
-Malaysia Accounting Standards Board (MASB)
-Islamic Financial Standards Board (IFSB) An Islamic Cleric "The noble Islamic Shariah is practicable in every place and time… the book (Holy Quran) and Sunnah (Prophet Traditions) are its source; they are not for experiment, but for implementation"
- Ahmad Bazeia Al-Yaseen, TID Shariah Supervisor Board Chairman “A Sharia supervisory board is an independent body of specialised jurists in fiqh al muamalat (Islamic commercial jurisprudence). However the Sharia supervisory board may include a member other than those specialized in fiqh al muamalat but who should be an expert in the field of Islamic financial institutions and with knowledge of fiqh al-muamalat. The Sharia supervisory board is entrusted with the duty of directing, reviewing and supervising the activities of the Islamic financial institution to ensure that they are in compliance with Islamic Sharia rules and principles. The fatwas and rulings of the Board shall be binding on the Islamic financial institution.”(p. 76, Islamic Finance Innovation and Growth, ed. By Archer, S. And Abdel Karim, R.) Ijara premiums paid by borrower Mudaraba & Musharaka less than 10% of financing structures