1. Principles of Islamic Finance
Transactions
Fundamentals & Evolution
Institutions
1 1/12/2012

2. Islamic Finance Defined
 A system of financial laws, markets, and institutions
that has formed and developed in Islamic cultures
around the world
 A form of economic organization built upon the
behavioral rules, norms, and principles of Islamic
society
2 1/12/2012

3. Central Theme:
Prohibition of Charging Interest (Riba)
 No detailed definition exists in the Quran
 Arabic for “excess, addition, surplus”
 Money is a medium of exchange and not created to
be sought for its own sake: gambling, loansharking
 Specific rules defined through jurisprudence in
Islamic law
 Un-conventional from a Western lens as it prohibits
debt financing vehicles
3 1/12/2012

4. Central Theme:
Elimination of contract ambiguity (Gharar)
 Legal and religious theme
 Shariah: Man is faithful to his word
 Quran: Contracts should be in writing and have
witness at final agreements
 Takes the form of risk management & due diligence
4 1/12/2012

5. Common Financial Instruments
Transactional
 Building blocks of Islamic
Sale of Sale of Right
Ownership
Currency
to Use finance
Lease
Property Spot
(Ijarah)  Credit sales involve
financier to take title of
Price for Sale Barter
inventory
Spot Credit Future  “Mark up” rate depends
on credit
Cost Plus Bay’ al-
worthiness, security and
(Murabaha) Muajjil collateral
Lump Sum
 Cashflows replicate
conventional debt
Installment securities & Mirakhor, 2007)
(Iqbal
5 1/12/2012

6. Islamic Bank Balance Sheet
Assets Liabilities
Trade Financing
Demand Deposits
Salam Murabahah
Ijarah / Istisna
Real Estate Lease/Manufacture
Investment Accounts
Mudarahbah
P/L Sharing Investments
Musharakah
Special Investment
Equity Partnerships
Services
Capital
Reserves
Jo’ala, Wikala, Kifala
(Iqbal & Mirakhor, 2007)
6 1/12/2012

7. Islamic Financial Markets:
Top 10 Participant Countries
$5,000,000
$500,000
Annual Revenue (log scale)
INDONESIA
$50,000
$5,000
$500
BRITAIN
UAE
$50
PAKISTAN
QATAR
$5
JORDAN INDIA KUWAIT
$1
BAHRAIN
0 2 4 6 8 10 12 14 16
# of Institutions
= Relative Market Capitalization
Source: Bloomberg LP
7 1/12/2012

8. Market dominated by conventional banks
Insitutions (#) Market Capitlization ($B)
$483
89
$59
22
Islamic Banks Conventional Banks
Source: Bloomberg LP
8 1/12/2012

9. UAE Financial Institutions
Market Cap Annual Revenue
Name ($MM) ($MM)
NATIONAL BANK OF ABU DHABI $8,200 $10,242
MASHREQBANK $4,670 $6,581
ABU DHABI COMMERCIAL BANK $4,240 $10,625
ABU DHABI ISLAMIC BANK $1,980 $4,518
DUBAI ISLAMIC BANK (*) $1,960 $5,003
UNION NATIONAL BANK/ABU DHAB $1,940 $4,508
DUBAI FINANCIAL MARKET (*) $1,680 $144
COMMERCIAL BANK OF DUBAI $1,530 $2,353
UNITED ARAB BANK $987 $628
SHARJAH ISLAMIC BANK $542 $843
TAMWEEL PJSC $155 $583
DUBAI ISLAMIC INSURANCE CO $23 $38
EMIRATES ISLAMIC BANK $0 $1,013
9 1/12/2012

10. Evolution
 Industry has weathered financial crisis better than
conventional banking
 Adapts well to micro-financing in many economies
 Promotes equity and risk sharing
 Growth is strong: $0.5B in revenue, growing 10-15%
 Need for innovation & efficiency
10 1/12/2012