Introduction to Islamic Finance Sami Al-Suwailem IRTI, IDB 1429H

Introduction to IF2 Objectives of Islamic Finance Wealth creation Justice Benevolence

Introduction to IF3 Principles of Islamic Finance Economic transactions are generally acceptable unless otherwise stated Origins of prohibited dealings: Injustice: Riba Ignorance: Gharar  وحملها الإنسان إنه كان ظلوماً جهولاً 

Introduction to IF4 Acceptable Prohibited Economic Transactions

Introduction to IF5 Riba All religions prohibit riba Most legal systems put restrictions on interest: Interest ceiling Ban on compound interest  Why?

Introduction to IF6 What’s wrong with Riba ? Interest grows faster than wealth Why? Debt burden destroys the economy Impossibility of repayment

Introduction to IF7 $1 Borrowed at 5% in 1 AD 2,391,102,204,613,620,000,000,000,000,000,000,000,000,000 60,806,303,788,323,700,000,000,000,000,000 1,546,318,920,731,950,000,

Introduction to IF8 Borrow 1 pence at 4% in 1 AD In 1750 debt equals weight of the globe of gold In 1990 it equals 8190 globes!

Introduction to IF9 Money & Debt in the U.S.

Introduction to IF10 Debt Repayment Debt exceeds available money Repayment only with new debt Economy is servicing debt Interest exceeds 70% of exports African countries pay for debt services twice as health-care

Introduction to IF11 Debt Inverted Pyramid Debt wealth

Introduction to IF12 Restrictions on Debt E.U. requirements: Deficit < 3% of GDP Debt < 60% of GDP Intertemporal Budget Constraint: The present value of debt go to zero Prevents Ponzi financing Why this won’t work?

Introduction to IF13 Islamic Solution Finance is tied to real transactions Finance always serves real economy Return on financing is paired with wealth creation Address debt creation from the start

Introduction to IF14 Debt in Islamic Economy Wealth Debt

Introduction to IF15 Finance in Islam Finance is embedded in real transactions Islamic contracts: Deferred sale, leasing, Salam, Musharakah… Time value is in line with real value Lending is strictly a non-profit activity Lending vs. financing?

Introduction to IF16 Riba vs. Deferred Sale Def. SaleRiba Debt Tied to real exchange Not tied to real exchange Time Value Compensated by gains from trade Not compensated

Introduction to IF17 Types of Riba Debt riba: riba nasee’ah Incremental riba: riba al-fadhl

Introduction to IF18 Riba al-Fadhl Debt Riba consists of: unequal amount + delay Unequal amount = riba al-fadhl Delay = riba al-nassa’ Each component is prohibited to prevent any possibility of debt riba

Introduction to IF19 Riba al-Fadhl… Specific types of commodities: Gold and silver (money) Wheat, barley, date, and salt (staple food)

Introduction to IF20 GoldSilverWheatBarleyDatesSalt Gold     Silver     Wheat     Barley      Dates      Salt    

Introduction to IF21 Range of Riba al-Fadhl Applies to any fungible and necessary commodity Contemporary example? What about water?

Introduction to IF22 Reasons for Riba al-Fadhl Prevents the possibility of debt riba  How? Protects necessary commodities and goods

Introduction to IF23 The Principle of Similarity Similarity negates gain from trade Variety allows mutual benefit Diversity is essential for prosperity Stronger similarity imposes stronger restrictions of exchange Riba: imbalanced exchange of similars

Introduction to IF24 Similarity Low High Locate sale and riba

Introduction to IF25 Conclusion Roots of prohibited transactions: Riba Gharar Islamic principles promote better growth and more balanced wealth