Foreword xv
Preface xvii
Acknowledgments xxi
Product Offerings xxiii
Introduction 1
CHAPTER 1 The Islamic Finance Space 5
Modern Phase of Islamic Finance 8
CHAPTER 2 Bai al Inah 13
Definitions of Bai al Inah 13
Bai al Inah Process Flow 15
Legal Issues with Bai al Inah 17
Bai al Inah as a Financial Product 19
Transfer of Ownership 20
Documentation Involved 21
Resolutions on Bai al Inah 21
Conclusion 22
CHAPTER 3 Murabahah, Bai Mu’ajjal, and Bai Bithman Ajil 23
Murabahah Sale/Credit Sale/Credit 25
Enhancements to Murabahah 26
Murabahah Working Capital 28
Credit-Based Sale/Markup or Riba 28
Bonafide Murabahah/True Sale 29
Trading House Model 31
Financial Services Division of a Manufacturer or Retailer 32
Bai Bithman Ajil 32
BBA with Inah 32
Conclusion 34
CHAPTER 4 Tawarruq 35
Issue of Price Fixing 37
Transfer of Title 38
Payment of Sales Tax 39
Applications of Tawarruq in Banking Products 40
Real Economic Activity 43
Conclusion 44
CHAPTER 5 Deferred Payment Sale or Credit Sale 45
Accounting Entries for Murabahah by Purchase Orderer 47
Accounting Entries for a Bai al Inah Contract 48
Pricing of Deferred Sales under Murabahah, BBA, Inah, and Tawarruq 49
Risk Treatment of Deferred Payment Sales 53
Fixed Income Portfolio 57
Conclusion 58
CHAPTER 6 Bai Al Wafa 59
Financial Assets as Subject of Sale 60
Bai Al Wafa and Sale of Equities 60
Bai Al Wafa and Sale of Sukuk 60
Conclusion 61
CHAPTER 7 Salaam and Istisna: Deferred Delivery Sale 63
Salaam 63
Istisna 68
Conclusion 70
CHAPTER 8 Bai al Sarf 75
Basic Rulings on Bai al Sarf 75
Conclusion 77
CHAPTER 9 Bai al Dayn 79
Purchase Price, Rental Payments, Receivables, and Debt 80
Rental Payments Due in an Ijara Contract 81
Financial Products 81
Sale of Equity 82
Conclusion 83
CHAPTER 10 Bai al Urbun 85
Conclusion 89
CHAPTER 11 Ijarah and Its Variants 91
Normal Ijarah 92
Accounting Entries for Ijarah Contract 93
Ijarah Muntahiya Bi Tamleek 95
Al Ijarah Thumma al Bai (AITAB) 95
Sale and Leaseback 96
Conclusion 97
CHAPTER 12 Wadiah 99
Forms of Wadiah 100
Enhancements to Wadiah 100
Money Creation 104
Conclusion 108
CHAPTER 13 Qard 111
Applications of the Contract of Qard 112
Qard as a Deposit Instrument 113
Recording of Qard 113
Conclusion 114
CHAPTER 14 Mudharabah 115
Simple Application of Mudharabah 117
Perpetual Mudharabah 118
Re-Mudharabah 118
Restricted Mudharabah and Unrestricted Mudharabah 118
Mudharabah as a Deposit 120
Mudharabah as a Fund 121
Interbank Mudharabah Placements 122
Indicative Rate of Return 122
Profit Sharing Ratio 123
Importance of Disclosure and Accounting Treatments 123
Mudharabah as an Asset Product 124
Accounting Treatment of Mudharabah Transactions 126
Conclusion 126
CHAPTER 15 Musharakah 129
Musharakah and Banking 130
Mushrakah as Asset Product 132
Pooling of Assets in Mushrakah 132
Mushrakah Mutanaqisah 133
Conclusion 138
CHAPTER 16 Hibah 139
Forms of Hibah 139
Restrictions on Hibah 140
Applications of Hibah in Banking 140
Enhancements to Hibah 142
Conclusion 143
CHAPTER 17 Kafalah 145
Who Can Be a Guarantor? 147
Products Based on Kafalah 148
Back-to-Back Guarantees 148
Conclusion 149
CHAPTER 18 Wakalah, Hawalah, Ibra, and Rahn 151
Wakalah 151
Hawalah 153
Ibra 156
Rahn 159
Conclusion 161
CHAPTER 19 Shariah: Sources, Interpretation, and Implementation 163
Modern-Day Ijtihad 165
Whose Shariah Is It, Anyway? 167
Conclusion 171
CHAPTER 20 Islamic Asset Management and Shariah Screening 173
Capital Markets 177
IPO Stage 177
Market Integrity 180
Market Regulation 183
Valuations 187
Zero Sum Game 188
The Role of Capital Markets in the Sphere of Islamic Finance 189
Farmer Sukuk or Equity Notes 189
Conclusion 190
CHAPTER 21 Pricing, Income Distribution, and Risk Sharing in Islamic Banks 191
Pricing of Islamic Financial Products 191
Price versus Shariah 194
Benchmark for Pricing 195
Criticism on Pricing Models 195
Profit Equalization Reserve 196
Income Distribution 199
Risk Sharing in Islamic Banks 208
Conclusion 208
CHAPTER 22 Sukuk and Rights of Sukuk Holders 209
Rights of Lenders in Debt Financing 210
Rights of Equity Holders 212
Rights of Bondholders 214
Use of Subsidiary Companies and Special-Purpose Vehicles 216
How Sukuk Financing Could Work? 221
Sale and Leaseback 223
The Role of the SPV 227
Other Sukuk Structures 228
Istisna Sukuk 228
Simple Sukuk 229
Conclusion 233
CHAPTER 23 Risk Management for Islamic Banks 235
Credit Risk 235
Market Risk 257
Liquidity Risk 269
Profit-Sharing Investment Account 269
Conclusion 273
References 273
CHAPTER 24 Asset/Liability Management for Islamic Banks 275
Gap Limit 279
Spot Rates and Forward Rates 279
Funding Scenarios 281
Short-Term and Long-Term Rates 281
Time Value of Money 288
Conclusion 290
CHAPTER 25 Takaful 291
Contract of Agency 291
Shariah Issues with Insurance 292
Contract of Tabarru 293
Product Menu 295
General Takaful Business Model 300
Concepts Related to Takaful 300
The Rights of the Fund over the Participant and the Rights of the Participant over the Fund 302
Pricing General Takaful Plans 304
Observations of General Takaful 310
Family Takaful 311
Basic Accounting Entries for Takaful 314
Takaful Operator Models 315
Distribution of Underwriting Surplus 316
Conclusion 317
CHAPTER 26 Pricing of Takaful Policies and Retakaful 319
Case Study 1: Corporate Medical Takaful Plan under General Takaful 319
Case Study 2: Corporate Medical Takaful Plan under General Takaful 322
Case Study 3: Corporate Family Takaful Plan 323
Detailed Mortality Table for Life Takaful 325
Mortality Tables and Probability Calculations 327
Risk Profiling 331
Conclusion 336
Afterword 337
About the Authors 341
Bibliography 343
Index 347
