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Islamic Finance LT Wesley A. Brown NS3041
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Historic Foundations Shari’a -Tawhid (divine unity) -Khilafah (viceregency) -Adalah (justice) -Qirad (profit sharing) -Riba -In the Qur’an -(30:39, 4:160-161, 3:130-131, 2:275,278-280)
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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.
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Instruments of Islamic Finance Primary Instruments of Islamic Banking –Musharaka –Mudaraba –Murabaha –Ijara –Salam –istisna’
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Musharaka Sharing Joint enterprise in which the profit or loss of a joint venture is shared by the partners in pre-determined proportions
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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.
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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
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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
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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.
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istisna’ The second exception to the existence and possession rules, involves ordering manufactured products.
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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
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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
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