Preface xi
About the Authors xix
CHAPTER 1 Epistemology of Finance 1
Epistemology of an Ideal Conventional Financial System 3
Epistemology of an Ideal Islamic Financial System 17
Risk-Sharing Finance in a World of Uncertainty 27
Summary and Conclusions 41
CHAPTER 2 Finance and Ethics 47
Renewed Interest in Ethical Finance 48
Embedded Ethical Issues in Financial Theory 50
Cases of Ethical Issues in Finance 51
Virtue Ethics Model 55
Islamic Framework of Business Ethics 58
Summary and Conclusions 69
CHAPTER 3 The Analytics of Finance 71
The Theory of Interest 73
The Concept of Time Value 76
Utility Theory, Risk Aversion, and Risk Premium 87
The Individual’s Optimal Consumption and Portfolio Choices 95
Market Efficiency and the Random-Walk Hypothesis 105
Risk Sharing in Finance 108
Summary and Conclusions 111
CHAPTER 4 Equity, Efficiency, and Firm Behavior 113
Methodological Issues in Islamic Economics 114
Theories of Firm Behavior in Islamic Economics 116
The Profit-Sharing Principle 122
A Theoretical Construct of Equity and Allocative Efficiency 125
Summary and Conclusions 126
CHAPTER 5 Asset Pricing and Corporate Finance 129
Capital Asset Pricing Model 130
Arbitrage Pricing Theory 151
Capital Structure Theory 155
Summary and Conclusions 167
CHAPTER 6 Scope of Financial Engineering and Derivatives 171
Risk Hedging with Forward and Futures Contracts 173
Properties of Options Contracts 188
Option Valuation Theory 200
Applications of Option Pricing Theory in Islamic Finance 210
Risk Hedging and the Scope of Financial Engineering in Islamic Finance 216
Summary and Conclusions 220
CHAPTER 7 Financing Models and Ownership Transfer 223
Structure and Dynamics of Outstanding Balances 225
Ownership Transfer 237
Hybrid Financing Models Based on Risk Sharing 241
Summary and Conclusions 255
CHAPTER 8 Securitization and Structured Finance 257
Risk Transfer with Credit-Default Swaps 258
The Mechanics of Securitization and Structured Finance 264
Complexity of Contract Structures 268
Securitization, Structured Finance, and Completeness of Contracts 273
Securitization, Risk Transfer with Wa’ad Structures, and Options Strategies 276
Summary and Conclusions 288
CHAPTER 9 Financial Stability 291
The Financial System and the Real Economy 292
Financial Crises and Debt Financing 299
Stability of the Islamic Financial System 305
Summary and Conclusions 313
CHAPTER 10 Financial Regulation 315
The Economics of Financial Regulation 316
The Complexity of Financial Regulation 323
The Regulatory Framework under Islamic Finance 329
The Regulatory Challenges in Islamic Finance 336
Summary and Conclusions 340
Appendix A 343
Appendix B 347
References 349
Index 375
