Islamic Finance LT Wesley A. Brown NS3041

Historic Foundations Shari’a -Tawhid (divine unity) -Khilafah (viceregency) -Adalah (justice) -Qirad (profit sharing) -Riba -In the Qur’an -(30:39, 4: , 3: , 2:275, )

Historic Foundations -Gharar -Qur’an (2:219, 5:90, and 5:91) –Ahadith The Messenger of God forbade the “sale of the pebble’ [hasah, sale of an object chosen or determined by the throwing of a pebble], and the sale of gharar. Do not buy fish in the sea, for it is gharar. Whoever buys foodstuffs, let him not sell them until he has possession of them.

Instruments of Islamic Finance Primary Instruments of Islamic Banking –Musharaka –Mudaraba –Murabaha –Ijara –Salam –istisna’

Musharaka Sharing Joint enterprise in which the profit or loss of a joint venture is shared by the partners in pre-determined proportions

Mudaraba A special profit-sharing enterprise where one partner serves as the investor and only provides the capital and the other partner is the entrepreneur and provides the management and labor.

Murabaha The most widely-used of all the shari’a- compliant financial instruments One person sells another a commodity at cost plus a certain profit with payment being made on the spot or in the future

Ijara Another term of Islamic fiqh that means “to give something on rent,” applying either to a person, as in the case of hired services, or assets and property, as in a lease situation

Salam Salam and istisna’ are the two exceptions to the rules regarding the existence and possession of a commodity prior to entering a contract to sell it. In a salam transaction, a buyer pays an increased price at spot in return for specific goods to be delivered at a future date.

istisna’ The second exception to the existence and possession rules, involves ordering manufactured products.

Banking Two types of deposits –Transaction: a conventional checking account –Investment: shares or equity in the bank, with no fixed or promised rate of return

Banking Today there is a convergence of conventional and Islamic finance –Choices: conventional or Islamic –Creation of Islamic subsidiaries by large western firms (Merrill Lynch, Citicorp) – Islamic institutions trying to attract non-Muslim customers –Islamic banks have spread to areas outside of the Islamic world to participate in long-term industrial and infrastructure projects –conventional and Islamic institutions are cooperating in conducting much of the new ijtihad (legal reasoning) to develop new Islamic financial tools

Questions??