Islamic Finance

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Islamic Finance

• LT Wesley A. Brown
• NS3041

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Historic Foundations

• Sharia
• Tawhid (divine unity)
• Khilafah (viceregency)
• Adalah (justice)
• Qirad (profit sharing)
• Riba
• In the Quran
• (3039, 4160-161, 3130-131, 2275,278-280)

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Historic Foundations

• Gharar
• Quran (2219, 590, and 591)
• Ahadith
• The Messenger of God forbade the sale of the
  pebble hasah, sale of an object chosen or
  determined by the throwing of a pebble, and the
  sale of gharar.
• Do not buy fish in the sea, for it is gharar.
• Whoever buys foodstuffs, let him not sell them
  until he has possession of them.

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Instruments of Islamic Finance

• Primary Instruments of Islamic Banking
• Musharaka
• Mudaraba
• Murabaha
• Ijara
• Salam
• istisna

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Musharaka

• Sharing
• Joint enterprise in which the profit or loss of a
  joint venture is shared by the partners in
  pre-determined proportions

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Mudaraba

• A special profit-sharing enterprise where one
  partner serves as the investor and only provides
  the capital and the other partner is the
  entrepreneur and provides the management and
  labor.

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Murabaha

• The most widely-used of all the sharia-compliant
  financial instruments
• One person sells another a commodity at cost plus
  a certain profit with payment being made on the
  spot or in the future

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Ijara

• Another term of Islamic fiqh that means to give
  something on rent, applying either to a person,
  as in the case of hired services, or assets and
  property, as in a lease situation

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Salam

• Salam and istisna are the two exceptions to the
  rules regarding the existence and possession of a
  commodity prior to entering a contract to sell
  it.
• In a salam transaction, a buyer pays an increased
  price at spot in return for specific goods to be
  delivered at a future date.

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istisna

• The second exception to the existence and
  possession rules, involves ordering manufactured
  products.

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Banking

• Two types of deposits
• Transaction a conventional checking account
• Investment shares or equity in the bank, with no
  fixed or promised rate of return

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Banking

• Today there is a convergence of conventional and
  Islamic finance
• Choices conventional or Islamic
• Creation of Islamic subsidiaries by large western
  firms (Merrill Lynch, Citicorp)
• Islamic institutions trying to attract
  non-Muslim customers
• Islamic banks have spread to areas outside of the
  Islamic world to participate in long-term
  industrial and infrastructure projects
• conventional and Islamic institutions are
  cooperating in conducting much of the new ijtihad
  (legal reasoning) to develop new Islamic
  financial tools

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Questions??