1. Chapter 28
!
Islamic
Finance

2. Next Exam
!
Monday March 17
Chapters 28 and 29

3. Riyadh Financial District

4. Islamic Finance
Ebdat
Muamalat
Shariah - “Sacred Law”
Holy Quran
Sunna

5. Avoid
Riba and Gharar

6. Riba - Usury
Interest-based lending
where borrower repays
more than amount
borrowed to reflect
time delay in repayment

7. Gharar
Excessive uncertainty
and ambiguity about an
outcome
!
Gambling and Insurance

8. Haram
Forbidden practices
!
No interest
No selling what you do
not own
No selling of debts

9. Interest Prohibited
Profit and Loss Sharing
Permitted

10. Haram - Prohibited
Interest
Halal - Permitted
Profit and Loss Sharing

11. Avoid Riba
No interest elements
Null and void

12. Different cultures have
different definitions of
fairness and justice and
what is unfair and
unjust

13. Islamic definition of
fairness and justice
Money
Profit
Risk
Interest

14. Argument
1. Can only charge rent on something that is a commodity
!
2. Unfair to charge rent on something that is not a commodity
!
3. Money is not a commodity.
!
4. Therefore money cannot be rented
!
5. Rent on money is called interest
!
6. Therefore cannot charge interest

15. Avoid Gharar
Gambling - Zero Sum
Game
!
Seller should own what
they intend to sell

16. Objectives
Maximize profit and
wealth
!
Spread prosperity

17. Islamic Finance
Money does not have
intrinsic value
!
Just a measure of value or
medium of exchange

18. Islamic Finance
Must have an asset
involved in the exchange
!
No money for money

19. Participatory-type finance
Share profit and loss
Share risk
!
Equity position
Debt position

20. Zakat - Religious Tax
2.5 Percent on profits
!
Poor, orphans, charity
Finance projects

21. Operations
Islamic
Shariah - Interpreted
Non-Islamic
Secular - Elected

22. Interest Charging
Islamic
Not allowed
Profit and loss sharing
Non-Islamic
Allowed
Fixed and variable

23. Interest on Deposits
Islamic
Not allowed
May share in profits
Non-Islamic
Allowed
Interest plus principal

24. Risk Sharing
Islamic
Must share risk
Non-Islamic
May share risk

25. Penalty on Default
Islamic
Not allowed to charge
Non-Islamic
May charge

26. Gharar
Islamic
Forbidden
Non-Islamic
Allowed

27. Customer Relationship
Islamic
Partner and Investor
Non-Islamic
Partner and Investor
Creditor and Debtor

28. Shariah Supervision
Islamic
Requires Board
Non-Islamic
No Board

29. Islamic Banks
Maximize shareholder
wealth
!
Develop society

30. Source of Funds
Shareholders
Depositors

31. Deposits
Current
Savings
Investment

32. Hiba
A non-predetermined
return paid
!
Gift

33. Current Deposit Accounts
Receive funds on demand
Issue checks
No guarantee of return
Bank may give Hiba

34. Savings Deposit Accounts
Wadiah
Must get permission to
use for loans
Bank may give Hiba

35. Investment Deposit
Accounts
Mudarabah
Specific time period
Profit and loss sharing based
on predetermined ratio
Could lose deposit

36. Islamic
Profit and loss sharing system
!
Non Islamic
Profit and loss sharing system
interest-based system

37. Equity Financing
Musharakah
!
Mudarabah

38. Musharakah
Partnership
All contribute capital
Profit shared on prior agreement
Only lose invested capital
Charge a fee if manage
Project pays profit share to bank
Entrepreneur pays bank capital

39. Mudarabah
Partnership
Bank contributes capital
Entrepreneur contributes work
Profit shared on prior agreement
Bank bears all capital losses

40. Asset Financing
Must own before reselling
!
Murabahah
Salem
Ijarah Leasing

41. Murabahah
Bank buys the asset
Resells to customer
Price includes cost plus markup
profit
Full disclosure transparency
Customer pays installments or lump
sum at the end

42. Salem
Bank buys the asset today for
delivery in the future
!
Agriculture
!
Buyer responsible for delivery

43. Ijarah Leasing
Usufruct: temporary use and enjoyment
of a property
!
Bank (Lessor) buys the asset and
rents to client (lessee)
!
Client may return or receive asset
at the end of the term
!

44. Sukuk - Islamic Bonds
Regular bonds not permitted
Interest and reselling debt prohibited
Investor owns a proportionate
undivided share of the asset
!
Ownership equity position
not a debt position
!
No guarantee or fixed return

45. Takaful - Islamic Insurance
Distribute losses among participants
Participants pool funds
No insurer-insured relationship
!
Operator manages account fund
Participants pay premiums to create fund
Operator pays damages out of funds
!
Operator can charge an administrative fee

46. Future
Different views and interpretations
Evolving
No uniform consensus
!
Four schools of thought:
Shafi’i, Maliki, Hanafi,
and Hanbali