Islamic Finance: Principles and practice It is the Economy, Stupid 5: over Gharar, Riba en Murabaha | 9 October 2012 Rachida Talal-Azimi PhD Candidate

Financial crisis “What we need is the application of Islamic finance principles, in particular a strong preference for profit-, loss- and risk-sharing arrangements and a rejection of ‘riba’ or interest-bearing debt instruments.” Willem Buiter Chief Economist, Citigroup (US)

Rabobank Wholesale PowerPoint design 20 April 2017 Development 2000 and beyond Commercial Banking Project Finance Syndicates Equity Sukuk al-Ijara Fund Management + Several Sukuk models + Islamic Microfinance 1990s Commercial Banking Project Finance Syndicates + Equity + Sukuk al-Ijara + Fund Management 1980s Commercial Banking + Project Finance + Syndicates 1970s Commercial Banking Source: Thomas et al.(2005) Structuring Islamic finance transactions

Rabobank Wholesale PowerPoint design 20 April 2017 Development

Rabobank Wholesale PowerPoint design 20 April 2017 What is Islamic Finance? What is Islamic finance? ‘The discipline to perform financial transactions in accordance with the principles of Islamic law.’

Establishment of an Islamic Economic Thought

Fundamentals of Islamic financial products QUR’AN Gharar (unnecessary risk / avoidable uncertainty) Maysir (gambling) Prohibited goods (i.e. Alcohol) Ribā (interest) SUNNAH SCHOLARS

Rabobank Wholesale PowerPoint design 20 April 2017 Other prohibitions / principles No investments in prohibited companies and/or products Encouragement of trade All transactions must be asset backed Mandatory independent Sharia board (Islamic supervisory board) Islamic Window!

Wat is islamitisch financieren? Handel drijven Onafhankelijke shari’araad Asset based Winst- & verliesdeling

Islamic financial instruments Rabobank Wholesale PowerPoint design 20 April 2017 Islamic financial instruments Partnership contracts Muđāraba (type of limited partnership) Mushāraka (type of equity participation)

Islamic financial instruments Rabobank Wholesale Powerpoint design 20 April 2017 Islamic financial instruments Mushāraka (type of equity participation) Real estate Bank Customer 1 2 3 1 Down payment 10.000 2 payment 90.000 3 10 % of the units 4 90% of the units 5 rent* 6 Unilateral commitment to purchase remaining units 7 purchasing contract / sales contract re units 4 5 6 7

Islamic financial instruments Rabobank Wholesale PowerPoint design 20 April 2017 Islamic financial instruments Mark-up contracts Murābaħa (mark-up contract) Bayc Salam (sale by advance payment for future delivery, i.e. buyer credit) Istisnāc (production contract)

Islamic financial instruments Rabobank Wholesale PowerPoint design 20 April 2017 Islamic financial instruments Murābaħa basic contract Purchase sale Goods for cash

Islamic financial instruments Rabobank Wholesale PowerPoint design 20 April 2017 Islamic financial instruments Murābaħa finance seller buyer 1 3 2 financier 4 3 1

Islamic financial instruments Rabobank Wholesale PowerPoint design 20 April 2017 Islamic financial instruments Other contracts Qarđ al-Ħasan (no-interest loans) Ijāra (leasing) ijāra wa iqtinā’ (hire-purchase) Şukūk (Islamic investment certificate)

Rabobank Wholesale PowerPoint design 20 April 2017 Conclusion What is Islamic finance? ‘The discipline to perform financial transactions in accordance with the principles of Islamic law.’ In other words, more than just a ban on interest! A system based on a completely different approach to the trading of money than the traditional system

Rabobank Wholesale PowerPoint design 20 April 2017 Conclusion Rapid development of Islamic financial sector Niche market Not yet fully developed Growth is undermined by a number of tough challenges, including: Lack of standardisation Lack of qualified staff Financial crisis has both a positive and a negative impact

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