islamic finance: principles and practice rachida talal-azimi phd candidate it is the economy, stupid...
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Islamic Finance: Principles and practice
Rachida Talal-AzimiRachida Talal-AzimiPhD CandidatePhD Candidate
It is the Economy, Stupid 5: over Gharar, Riba en Murabaha | 9 October 2012
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“What we need is the application of Islamic finance principles, in particular a strong
preference for profit-, loss- and risk-sharing
arrangements and a rejection of ‘riba’ or
interest-bearing debt instruments.”
Financial crisis
Willem BuiterChief Economist, Citigroup (US)
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1980s Commercial Banking+ Project Finance+ Syndicates
1990s Commercial Banking Project Finance Syndicates+ Equity+ Sukuk al-Ijara+ Fund Management
2000 and beyond CommercialBanking Project Finance Syndicates Equity Sukuk al-Ijara Fund Management+ Several Sukuk models+ Islamic Microfinance
1970s
Commercial Banking
Development
Source: Thomas et al.(2005) Structuring Islamic finance transactions
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Development
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What is Islamic finance?
‘The discipline to perform financial transactions in accordance with the principles of Islamic law.’
What is Islamic Finance?
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Establishment of an Islamic Economic Thought
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Fundamentals of Islamic financial products
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• No investments in prohibited companies and/or products
• Encouragement of trade
• All transactions must be asset backed
• Mandatory independent Sharia board (Islamic supervisory board)
• Islamic Window!
Other prohibitions / principles
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Wat is islamitisch financieren?
Handel drijvenHandel drijven
Asset basedAsset basedWinst- & verliesdelingWinst- & verliesdeling
Onafhankelijke shari’araadOnafhankelijke shari’araad
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Islamic financial instruments
Partnership contracts
• Muđāraba (type of limited partnership)
•Mushāraka (type of equity participation)
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Islamic financial instruments
Real estate Bank
Customer
1
2
3
1 Down payment 10.0002 payment 90.0003 10 % of the units4 90% of the units5 rent*6 Unilateral commitment to purchase remaining units7 purchasing contract / sales contract re units
4
567
Mushāraka (type of equity participation)
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Islamic financial instruments
Mark-up contracts
• Murābaħa (mark-up contract)
• Bayc Salam (sale by advance payment for future delivery, i.e. buyer credit)
• Istisnāc (production contract)
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Islamic financial instruments
Goods for cash
Murābaħa basic contract
Purchase sale
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Islamic financial instruments
seller
financier
buyer
1
2
3
4
Murābaħa finance
13
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Islamic financial instruments
Other contracts
•Qarđ al-Ħasan (no-interest loans)
•Ijāra (leasing) ijāra wa iqtinā’ (hire-purchase)
•Şukūk (Islamic investment certificate)
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Conclusion
What is Islamic finance?
‘The discipline to perform financial transactions in accordance with the principles of Islamic law.’
In other words, more than just a ban on interest!
A system based on a completely different approach to the trading of money than the traditional system
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Conclusion
Rapid development of Islamic financial sector
Niche market
Not yet fully developed
Growth is undermined by a number of tough challenges, including:
•Lack of standardisation•Lack of qualified staff
Financial crisis has both a positive and a negative impact
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Thank you for your attention!
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