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

3. 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)

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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

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Development

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What is Islamic Finance?
What is Islamic finance?
‘The discipline to perform financial transactions in accordance with the principles of Islamic law.’

7. Establishment of an Islamic Economic Thought

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

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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!

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

11. Islamic financial instruments
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Islamic financial instruments
Partnership contracts
Muđāraba (type of limited partnership)
Mushāraka (type of equity participation)

12. Islamic financial instruments
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Islamic financial instruments
Mushāraka (type of equity participation)
Real estate
Bank
Customer 1 2 3
1 Down payment
2 payment
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

13. Islamic financial instruments
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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)

14. Islamic financial instruments
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Islamic financial instruments
Murābaħa basic contract
Purchase
sale
Goods for cash

15. Islamic financial instruments
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Islamic financial instruments
Murābaħa finance
seller
buyer 1 3 2
financier 4 3 1

16. Islamic financial instruments
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Islamic financial instruments
Other contracts
Qarđ al-Ħasan (no-interest loans)
Ijāra (leasing) ijāra wa iqtinā’ (hire-purchase)
Şukūk (Islamic investment certificate)

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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

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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

19. Thank you for your attention!