Islamic Finance LT Wesley A Brown NS 3041

Islamic Finance LT Wesley A. Brown NS 3041

Historic Foundations • Shari’a - Tawhid (divine unity) - Khilafah (viceregency) - Adalah (justice) - Qirad (profit sharing) - Riba - In the Qur’an - (30: 39, 4: 160 -161, 3: 130 -131, 2: 275, 278 -280)

Historic Foundations - Gharar - Qur’an (2: 219, 5: 90, and 5: 91) – 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.

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

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

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.

Murabaha • The most widely-used of all the shari’acompliant 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

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

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.

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

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

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

Questions? ?