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An introduction to Islamic Finance

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Emiljo Jazxhi

on 19 March 2015

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Transcript of An introduction to Islamic Finance

1.1 Sukuk
1.3 Murabaha
most common of sales modes
a form of trade credit
cilent requests the bank to purchase an item and resell it to the client for a predetermined price usually paid in installments
1.3
Ijarah
Lease or lease-purchase agreements
the bank purchases an item and leases it to the client
ownership of the underlying asset remains with the bank, unless we are talking
ijarah waiqtina
Origins of Riba and the Comparison of Development
Resource allocation in Islamic banking
1- Financial instruments (main principles)
1.1- Sukuk ( eq. bonds)
1.2- Musharaka and Mudaraba
1.3- Murabaha and Ijara
2- Islamic and other religious literature
3- Historical background
4- Recent developments in Europe and U.S.A - what makes it interesting to the West as well
5- Sources
Elisa Fischer
Emiljo Jazxhi
Samuel Preuss

1990
1999
2004
2002
1975
1963
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
set industry accounting and auditing standards


first tradable sukuk were issued by Shell MDS in Malaysia -> the Islamic bond market emerged.
the Dow Jones Islamic Market Index (DJIMI)

becoming the benchmark for the performance of Islamic investment funds.


first Islamic commercial bank established outside the Muslim world.
First modern Islamic Bank in the Arab world:
"Mit Ghamr Savings Bank in Egypt"







Table of content
Islamic finance Indonesia: Loss-sharing is not sine qua non for Islamic finance (2014). Online verfügbar unter http://islamicfinanceindonesia.blogspot.de/2012/04/singapore-opinion-loss-sharing-is-not.html, zuletzt aktualisiert am 07.10.2014, zuletzt geprüft am 16.01.2015.
Iqbal and Mirakhor (2007)
Islamic finance’s sukuk explained - FT.com. Online verfügbar unter http://www.ft.com/intl/cms/s/0/cec38bf2-440b-11df-9235-00144feab49a.html#axzz3P00WOOcF
(AAOIFI)* defines sukuk as “certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity”.
* The Accounting and Auditing Organization for Islamic Financial Institutions
Sukuk
Bond
Comparison
ownership of debt
Debt is payed out first in the event of default
ownership of real assets
almost no cases of default
not yet defined treatment of holders in case of default
can be equity or even debt, looking at the difference between asset-based and asset-backed sukuk
Islamic Finance | What Is the Difference Between Asset-Backed Sukuk and Asset-Based Sukuk? (2014): Online verfügbar unter http://investment-and-finance.net/islamic-finance/questions/what-is-the-difference-between-asset-backed-sukuk-and-asset-based-sukuk.html, zuletzt aktualisiert am 04.10.2014, zuletzt geprüft am 16.01.2015.
23.01.2015
Musharaka
1.2 Musharaka and Mudaraba
joint venture
both banks(providers of funds) and the entrepreneur can participate in the management of the project
Mudaraba
One party provides funds
the other provides the expertise and management
accrued profits are shared on a pre-agreed basis
Sharing modes
Sales mode
Sources: Kahf, Ahmad, and Homud (1998); El Gamal (2006); Khan (2010).
Sources
Gelbard, E. (©2014): Islamic finance in Sub-Saharan Africa. Status and prospects. [Washington, D.C.]: International Monetary Fund (IMF working paper, WP/14/148).
Leasing mode
Why is Islamic banking not all rainbows and butterflies?
higher than conventional transaction costs
difficulties in supervising and monitoring
different legal interpretations of principles across countries
Notwithstanding high demand, Islamic capital markets are virtually nonexistent
Main principles underpinning Islamic finance
Paying interest is prohibited, seen as a sign of usury (
riba
)
Profit and loss sharing concept => excessive losses and profits are minimised
prohibition of uncertainty or speculation (
Maisir and Gharar)
use of asset-backing
European Central Bank, 2013, Islamic Finance in Europe, Occasional Paper Series, No 146, June 2013.
European Central Bank, 2013, Islamic Finance in Europe, Occasional Paper Series, No 146, June 2013.

Gelbard, E. (©2014): Islamic finance in Sub-Saharan Africa. Status and prospects. [Washington, D.C.]: International Monetary Fund (IMF working paper, WP/14/148).
Islamic Financial Services Board (IFSB):

international standard-setting body for Islamic financial institutions
First international presence:

The Islamic Development Bank in Saudi Arabia.


- recruited member countries
- offers them financial products to promote economic and community development

Christian Origins for Doctrine on Interest
Pentateuch
Exodus 22:25
Lev 25:35-37
Deuteronomy 23:19
Gospels
Parable of the Talents
Luke 6:34-35
Development in Christianity
Council of Arles (314)
Christian Love
Thomas Aquinis and Scholasticism
Aristotle
Reformation
John Calvin
"Unconditional Change"
Islamic Origins for Doctrine Against Riba al-nasi'ah
What is
riba
?
Riba literally means in Arabic
increase.

Riba
is split into two kinds:
riba al-nasi'ah
like today's interest on loans
fixed charge for a delayed repayment
riba al-fadl
"usury of surplus"
exchanging two goods unequally at the same time



Quran:
Those who charge usury (riba al-nasi'ah) are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever. (Al-Baqarah 2:275)

Hadiths:
From Abu Burdah ibn Abi Musa: I came to Madinah and met 'Abdallah ibn Salam who said, "You live in a country where riba is rampant; hence if anyone owes you something and presents you with a load of hay, or a load of barley, or a rope of straw, do not accept it for it is riba". (Mishkat, op. cit., reported on the authority of Bukhari) (Chapra, pg 11, 12).

O People, just as you regard this month, this day, this city as Sacred, so regard the life and property of every Muslim as a sacred trust. Return the goods entrusted to you to their rightful owners. Hurt no one so that no one may hurt you. Remember that you will indeed meet your LORD, and that HE will indeed reckon your deeds. ALLAH has forbidden you to take usury (interest), therefore all interest obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer any inequity. Allah has Judged that there shall be no interest and that all the interest due to Abbas ibn 'Abd'al Muttalib (Prophet's uncle) shall henceforth be waived... (Muhammad's Last Sermon)



Islamic Origins for Doctrine Against Riba al-fadl
Hadiths:
From Abu Sa‘id and Abu Hurayrah: A man employed by the Prophet, peace be on
him, in Khaybar brought for him janibs [dates of very fine quality]. Upon the
Prophet's asking him whether all the dates of Khaybar were such, the man replied that
this was not the case and added that they exchanged a sa‘ [a measure] of this kind for
two or three [of the other kind]". The Prophet, peace be on him, replied, "Do not do
so. Sell [the lower quality dates] for dirhams and then use the dirhams to buy janibs."
[When dates are exchanged against dates] they should be equal in weight". (Bukhari,
Kitab al-Buyu, Bab idha arada bay tamarin bi tamarin khayrin minhu; also Muslim
and Nasa’i) (Chapra, pgs 12, 13).

From Abu Umamah: The Prophet, peace be on him, said: "Whoever makes a
recommendation for his brother and accepts a gift offered by him has entered riba
through one of its large gates" (Bulugh al-Maram, Kitab al-Buyu, Bab al-riba,
reported on the authority of Ahmad and Abu Dawud) (Chapra, pg 13).
Implications for Development:
Things to think about

Shariah governs personal and criminal legal proceedings as well as the economy.
Riba is strictly and extensively forbidden in Islamic sacred writings
No complete agreement by Islamic jurists as to extent of riba ban
Countries governed by Sharia today do not penalize riba practiced by secular banks.
First Islamic insurance company

Islamic Insurance Company of Sudan
Islamic Bank of Britain

Corporate profile: http://www.tabunghaji.gov.my/en/web/guest/latarbelakang3

Chapra, M. Umer. "The Nature of Riba in Islam." ISDB.ORG. 1 Jan. 2006. Web. 18 Jan. 2015. <http://www.isdb.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IRTI/CM/downloads/Distance_Learning_Files/B4.4b The Nature of Riba in Islam.pdf>.

El-Gamal, Mahmoud A. (2006): Islamic finance. Law, economics, and practice. Cambridge: Cambridge Univ. Press. Online verfügbar unter http://www.loc.gov/catdir/enhancements/fy0642/2006005127-d.html.

European Central Bank, 2013, Islamic Finance in Europe, Occasional Paper Series, No 146, June 2013.

Evolution of Islamic Banking and Finance: http://www.mpac-ng.org/archived-article/636-evolution-of-islamic-banking-a-finance.html

Gelbard, E. (©2014): Islamic finance in Sub-Saharan Africa. Status and prospects. [Washington, D.C.]: International Monetary Fund (IMF working paper, WP/14/148).

History of Islamic Banking: http://homepages.uwp.edu/alhaj001/History%20of%20Islamic%20Banking.html

Jowett, Benjamin. "The Internet Classics Archive | Politics by Aristotle." The Internet Classics Archive | Politics by Aristotle. Web. 16 Jan. 2015. <http://classics.mit.edu/Aristotle/politics.1.one.html>.


Institute of Islamic Banking and Insurance | Prohibition of interest: http://www.islamic-banking.com/prohibition_of_interest.aspx


Islamic finance’s sukuk explained - FT.com. Online verfügbar unter http://www.ft.com/intl/cms/s/0/cec38bf2-440b-11df-9235-00144feab49a.html#axzz3P00WOOcF

Islamic finance Indonesia: Loss-sharing is not sine qua non for Islamic finance (2014). Online verfügbar unter http://islamicfinanceindonesia.blogspot.de/2012/04/singapore-opinion-loss-sharing-is-not.html, zuletzt aktualisiert am 07.10.2014, zuletzt geprüft am 16.01.2015.

Lewis, Mervyn K. "Comparing Islamic and Christian Attitudes to Usury." Economics Handbook. Web. 22 Jan. 2015. <http://202.154.59.182/mfile/files/Economics/Handbook of Islamic Banking/Chapter 5 Comparing Islamic and Christian attitudes to usury.pdf>.


Nomani, Farhad. "The Interpretative Debate of the Classical Islamic Jurists on Riba (Usury)." The Article. Web. 22 Jan. 2015. <http://www.luc.edu/orgs/meea/volume4/NomaniRevised.htm>.


Rothbard, Murray N. "Protestants and Catholics." An Austrian Perspective on the History of Economic Thought. Vol. I. Aldershot, Hants, England: E. Elgar Pub., 1995. 141. Print.


"The Never-Ending Debate on Usury." Spain.SLU.edu. Web. 16 Jan. 2015. <http://spain.slu.edu/academics/degrees_&_programs/divisions/docs/The Never-Ending Debate On Usury.pdf>.

Development in the Ottoman Empire
1979
15th century - 1920
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