List of Figures xv
List of Tables xvii
Acknowledgements xix
About the Author xxi
Preface xxiii
About the Website xxv
CHAPTER 1: Introduction to Islamic Finance and Islamic Economics
1 Introduction 1
Creation of Money and Conventional Finance and Banking 2
Definition of Islamic Finance and Banking 3
Distinctive Features of Islamic Finance 3
Economics and Islam 4
Economics in Ancient Times 4
Modern Economics 5
Islamic Economics 6
History of Islamic Economic Thought 6
Principles of Islamic Economics 7
Islam’s Solution to the Classic Economic Problem 7
Islam and the Welfare Economy 8
Property Ownership in Islamic Economics 8
Zakat and Sadaqah 8
Ban on Interest versus Cost of Capital in Islam 9
Conventional Economics versus Islamic Economics 9
Evolution of Islamic Finance 11
Early Days 11
Birth of Modern Islamic Finance 12
Institutional Developments During the Revival of Modern Islamic Finance 12
The Mit Ghamr Experiment 13
Tabung Haji 13
Islamic Development Bank 14
Dubai Islamic Bank 14
Rapid Growth of the Islamic Finance and Banking Industry 14
Islamic Finance and Banking in Muslim Communities and Countries 15
Islamic Finance and Banking in Non-Muslim Countries 16
Sub-sectors in the Islamic Finance and Banking Industry 16
Current Status of Modern Islamic Finance and Banking 17
Timeline of Development of Contemporary Islamic Finance and Banking 18
Key Terms and Concepts 21
Chapter Summary 21
CHAPTER 2: Shariah Law and the Shariah Supervisory Board 27
Introduction to the Islamic Law – Shariah 27
Sources of Shariah 28
Schools of Islamic Jurisprudence 29
Ethics in Shariah-Compliant Business and Finance 30
Major Shariah Prohibitions and Principles and their Implications 31
Prohibition of Interest or Riba 31
Prohibition of Uncertain Dealings or Gharar 32
Prohibition of Speculative Behaviour or Maysir 33
Shariah Supervisory Board (SSB) 34
Introduction to the SSB 34
Formation of the SSB 35
Status of the SSB Within the Industry 36
Functions of the SSB 36
Corporate and Shariah Governance 38
Shariah Governance Process 38
Key Terms and Concepts 39
Chapter Summary 39
CHAPTER 3: Islamic Banking versus Conventional Banking 47
Introduction to Islamic Banking 47
Islamic Banking versus Conventional Banking 49
Similarities Between Conventional and Islamic Banks 49
Differences Between Conventional and Islamic Banking 49
Relationship with the Central Banks 50
Risks of Banks – Generic and Specific to Islamic Banks 51
Generic Risks 51
Risks Specific to Islamic Banks 52
Financial Intermediation 54
The Definition of Financial Intermediation 54
Conventional Financial Intermediation 54
Islamic Financial Intermediation 54
Islamic Financial Intermediation Models 56
Distribution of Islamic Banking Products 58
Conventional versus Islamic Financial Intermediation 58
Balance Sheet of an Islamic Bank – Sources and Uses of Funds by an Islamic Bank 59
Sources of Funds 59
Application of Funds 60
Contracts in Shariah Law 61
Contracts of Exchange in Shariah-Compliant Commerce and Finance 62
Common Islamic Banking Products 63
Retail Islamic Banking Products 63
Corporate Islamic Banking Products 64
Financial Accounting in Islamic Banking 65
Objectives of Islamic Financial Accounting 66
Features of Islamic Financial Accounting 66
Challenges Faced by Islamic Banks 67
Islamic Finance and the Financial Crisis 68
International Islamic Regulatory and Standard Setting Bodies 68
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) 69
Islamic Financial Services Board (IFSB) 69 Liquidity Management Centre (LMC) and International Islamic Liquidity Management (IILM) 70
International Islamic Financial Market (IIFM) 70
International Islamic Rating Agency (IIRA) 70
General Council for Islamic Banks and Financial Institutions (CIBAFI) 71
International Islamic Centre for Reconciliation and Commercial Arbitration for Islamic Finance Industry (IICRCA) 71
Islamic Development Bank (IDB) 71
International Islamic Fiqh Academy 72
Key Terms and Concepts 73
Chapter Summary 73
CHAPTER 4: Murabaha 79
Introduction to Murabaha 79
Conditions Related to Murabaha 81
Calculation of Murabaha Profit 83
The Murabaha Process 83
Practical Applications of Murabaha 85
Tawarruq, Reverse Murabaha or Commodity Murabaha 85
Challenges and Problems Associated with Murabaha 86
Comparison of Murabaha with Conventional Loans 88
Key Terms and Concepts 90
Chapter Summary 90
CHAPTER 5: Mudaraba 95
Introduction to Mudaraba 95
Use of Mudaraba for Financial Intermediation of Islamic Banks 96
Profit Calculation in Mudaraba 97
Provisions and Reserves Related to Mudaraba 98
Mudaraba as a Limited Recourse Debt Finance 99
Types of Mudaraba 99
Shariah Conditions Related to Mudaraba 100
Additional Conditions Related to Mudaraba 101
Challenges and Problems Related to Mudaraba 102
Practical Applications of Mudaraba 102
Comparison of Mudaraba with Interest-Based Conventional Banking 102
Accounting Issues Related to Mudaraba 104
Key Terms and Concepts 104
Chapter Summary 105
CHAPTER 6: Musharaka 111
Introduction to Musharaka 111
Types of Musharaka 112
Shariah Rules and General Principles Guiding Musharaka Contracts 114
Problems Related to Musharaka 115
Practical Uses of Musharaka 116
Examples of the Use of Diminishing Musharaka 118
Securitization of Musharaka 121
Comparison of Musharaka with Interest-Based Financing 121
Comparison of Musharaka with Mudaraba Financing 122
Key Terms and Concepts 123
Chapter Summary 123
CHAPTER 7: Ijara 129
Introduction to Ijara 129
Ijara in Islamic Banks 130
Types of Ijara 130
Ijara, Regular Ijara or Operating Lease 130
Ijara wa Iqtina, Ijara Muntahia Bittamleek or Financial Lease 131
Ijara Thumma al Bay 132
Shariah Rules and General Principles Guiding Ijara Contracts and their Characteristics 132
Documentation Related to the Ijara Contract 136
Main Differences Between Ijara and a Conventional Lease 136
Differences Between Ijara and a Conventional Loan Contract 138
Differences and Similarities Between Ijara Wa Iqtina and Diminishing Musharaka 139
Practical Applications of the Ijara Contract 139
Calculation of Lease Rentals 139
Practice Calculations 139
Key Terms and Concepts 140
Chapter Summary 140
CHAPTER 8: Salam 145
Introduction to Salam 145
Important Characteristics of the Salam Contract 146
History of the Salam Contract and its Shariah Acceptability 147
Benefits of the Salam Contract 148
Role of Islamic Banks in Salam and the Parallel Salam Contract 148
Salam and Parallel Salam Diagram and Process 149
Practical Application of Salam 150
A Practical Example 150
Problems Related to Salam Contracts 151
Comparison of Salam Contract with Conventional Banking 151
Key Terms and Concepts 151
Chapter Summary 152
CHAPTER 9: Istisna 155
Introduction to Istisna 155
Shariah Rules and General Principles Guiding Istisna Contracts and their Characteristics 156
Role of Islamic Banks in Istisna and Parallel Istisna 158
Description of the Process 159
Problems Related to Istisna and Parallel Istisna 160
Comparison of Istisna with Interest-Based Finance, Salam and Ijara 161
Difference Between Salam and Istisna 162
Comparison of Istisna with Ijara 163
Practical Application of Istisna 163
Key Terms and Concepts 164
Chapter Summary 164
CHAPTER 10: Takaful 169
Background of Takaful 169
Modern Takaful Industry as an Alternative to Conventional Insurance 170
Parties in Takaful 171
Shariah Rules and General Principles Guiding Takaful Contracts and their Characteristics 172
The Development of Takaful 174
During the Time of the Prophet 174
The 18th and 19th Centuries 174
20th Century 174
The 21st Century and Moving Forward 175
Challenges Faced by the Modern Takaful Industry 176
Types of Takaful 177
General Takaful 177
Family Takaful 178
Operational Structure of Takaful 180
Takaful Models 181
Pure Wakala Model 181
Pure Mudaraba Model 183
Wakala and Mudaraba Combined or Hybrid Model 185
Waqf–Wakala–Mudaraba Model 185
Comparison of the Different Takaful Models 187
Underwriting Surplus or Deficit and Technical Provisions 189
Allocation of Underwriting Surplus 189
Management of Underwriting Deficit 190
Conventional Mutual Insurance and Takaful 190
Similarities and Difference Between Takaful and Conventional Insurance 191
Similarities 191
Differences 191
Retakaful 196
Similarities Between Retakaful and Reinsurance 197
Differences Between Retakaful and Reinsurance 197
Key Terms and Concepts 198
Chapter Summary 199
CHAPTER 11: Islamic Investments and Sukuks 205
Investment Markets and Products 205
Islamic Investments 207
Money Markets – Islamic Perspective 207
Capital Markets – Islamic Perspective 208
Dealing with Non-compliant Stocks 209
Purification of Income Distribution 210
Islamic Asset and Fund Management 210
Islamic Unit Trust or Mutual Fund 211
Common Types of Islamic Investment Fund 212
Islamic Real Estate Investment Trusts 213
Similarities Between REITs and I-REITs 214
Differences Between REITs and I-REITs 215
Risks and Challenges Inherent in the Islamic Capital Markets 216
Shariah Governance and the Shariah Supervisory Board in Islamic Investment 216
Comparison of Islamic Investments with Conventional Investments 217
Introduction to Sukuks 218
Characteristics of the Islamic Investment Product – Sukuk 218
Types of Sukuks 220
Ijara Sukuk 220
Istisna Sukuk 222
Salam Sukuk 223
Murabaha Sukuk 223
Mudaraba Sukuk 224
Musharaka Sukuk 226
Controversy Related to Sukuks 227
Rating of Sukuks 229
Trading of Sukuks on the Secondary Markets 229
Comparison of Sukuks with Conventional Bonds 230
Common Advantages of Both Conventional Bonds and Sukuks 230
Differences Between Conventional Bonds and Sukuks 231
Key Terms and Concepts 235
Chapter Summary 235
CHAPTER 12: Global Standing of Islamic Finance and Banking 241
Background of Modern Islamic Finance and Banking 241
Conventional versus Islamic Finance 242
Global Growth of the Islamic Finance and Banking Industry 243
Islamic Finance and Banking and the Muslim Community 245
Banking and Islamic Banking in the Middle East and the GCC 246
Banking and Islamic Banking in South and South-East Asia and Beyond 247
Achievements and Opportunities in Global Islamic Finance and Banking 247
Challenges Faced by Islamic Finance and Banking 248
Social Responsibilities of Islamic Finance 253
Going Forward 254
Key Terms and Concepts 255
Chapter Summary 255
GLOSSARY 257
REFERENCES 271
INDEX 277
