Embed Size (px)
Citation preview
Introduction to Islamic Banking & Finance
Abdulazeem Abozaid
Basis of IBF
Islamic Finance is based on principles that are derived from the Quran and Sunna of the Prophet peace be upon him.
The basic principle in Islamic Law is permissibility. Under this principle all commercial and financial transactions are permissible except those that contain prohibited elements.
3
How does Islamic Finance differ from conventional finance ?
Islamic Modes of Finance & Investment are committed to all Sharia Prohibited Practices
Prohibited Practices1. Riba ( Interest )2. Sale of Debt 3. Ghabn (Fraud)4. Gharar (Uncertainty)5. Dealing in unlawful properties
What is Riba?
Literally: Increase. Technically: stipulated increase over the loan
which a debtor agrees to pay to his creditor in relation to time.
Rationale: Money does not have an intrinsic value. It is a
measuring tool, a store of value unit and a medium of exchange, not a commodity that could be bought or sold
Lending = renting money
Sale of Debt
Sale of debt occurs in:
Discounting commercial papers Dealing in bonds Sale of Sukuk, shares or fund units when
they do not represent tangible assets, usufructs or services
Uncertainty (Gharar)
Gharar: Uncertainty/Ambiguity in a contractExamples of Gharar: Selling unknown goods - The contents of a sealed box are sold; presumably, the box
contains a collection of goods, without specifying the quantity of each.
- Buying an a commodity for unknown price; what’s in one’s wallet/pocket.
Gambling The gambler is ignorant of the result of the gamble; the outcome
depends on chance and not efforts.
Rationale: Uncertainty is likely to lead to dispute between contracting parties.
GHABN
Deception that leads the seller to underestimate or the buyer to overestimate the price of the good.
It can be divided into two kinds:
- Slight or minor Ghabn (الغبن اليسير). It is tolerated in contracts.
- Large, excessive, or major Ghabn (الغبن الفاحش). Not tolerated.
Examples:- Selling at higher than the market value by means of
cheating- Bidding a price without intending purchase, just to increase
the price payable by the actual purchaser (Najash).- Covering defects and selling as defect free.
Dealing in Unlawful Properties
Liquor
Intoxicants
Lawful properties but used for unlawful purposes
SOME allegations of
similarities with
conventional finance
DIFFERENT PRICING FOR CASH AND CREDIT SALES
Price in deferred sale is higher than spot sale.
The bank purchases goods on cash and sells them on credit. The forward price depends on the repayment period. The longer is the maturity, the higher the price.
Such price difference, being dependent upon repayment time, is it similar to the interest charged on conventional loans?
Why price should be higher with spot than deferred payment?
In fact, price difference is similar to the difference between the price of the same commodity under present and future delivery.
Price difference is due to the degree of urgency of benefiting from the direct use of real commodities.
Similarly, prices charged with deferred payment should justifiably be higher than with spot payment. The difference is not Riba.
Cont’d
The misconception stems from misunderstanding of the prohibition of Riba
Modern capitalist theory does not differentiate money and physical commodity– Both are seen as factors of production,
money is a form of commodity
Cont’d
In Islam, money is differentiated from commodities Money has no intrinsic utility. It cannot be utilized directly . As a means of exchange, money can only be used to:
Acquire goods and services. Store some wealth, As a unit of account to measure the monetary value of
things.
Cont’d
• Commodities, on the other hand, have intrinsic utility and can be utilized directly.
• Because money has no intrinsic utility, present money does not command a higher value than future money when money is exchanged for money.
• Present money cannot therefore be sold for a higher quantity of future money, as both have no value of their own.
• Conclusion: Sharia acknowledges time value of money in sale contract, not in loan contracts since money cannot be treated as commodity.
Classification of Islamic Banking Products:
Deposit (Wadi’a) products: Current account; based on Loan Saving account; based on Mudaraba Time deposit; based on Mudaraba/wakala
(agency in investment)
Financing Products
Sale-based financing contracts: Murabaha Forward Sale Salam Istisna Ijara FinancingEquity-based financing contracts: Mudaraba MusharakaFee based Financing Wakala
PRODUCTS OF ILL REPUTE IN
ISLAMIC BANKING
Buy-Back Sale (Einah)
Einah refers to selling a commodity on a deferred basis then buying it bank on a spot basis at a lower price.
Obviously, it is meant for extending interest-based debt.
This legal trick cannot be condoned by Shariah.
Some applications:• Personal Financing• Overdraft Facility• IPDS: ‘Islamic’ Private Debt Securities
19
EINA SALE
INDIVIDUAL
SAME SUPPLIER
PURCHASE GOODS,
DEFERRED PAYMENT
INCOLLUSION
WITH SUPPLIER
IMMEDIATELYAFTER
SELL FOR IMMEDIATE CASH
WANTS CASH
EINA SALE
IPDS: Creation of debt (dayn) via Einah
Investor (Financier)
Issuer
Sell Asset X for $100m
Cash payment $100m
Sell Asset X for $120m
Deferred payments $120m
Securities issued against the debt and made negotiable
Tawarruq
Tawarruq refers to purchasing a commodity from one
party on credit then selling it immediately to another for cash.
Tawarruq shares the same objective of Eina as both are meant for obtaining cash.
Some applications:• Personal & Corporate Financing• Overdraft Facility
INSTITUTIONAL TAWARRUQالمؤسسي التورق
CUSTOMER
LME
SELL ON MURABAHA
COLLUSION WITH BANK
PROMISE TO BUY
AGENCY AGREEMENTS
EL
L M
ETA
L F
OR
IM
ME
DIA
TE
CA
SH
NEEDS CASH
BANK
BU
Y M
ETA
L
Sale of Debt (Bay’ al-Dayn)
Although sale of debt is prohibited in the Shariah, it has been unlawfully practiced in Islamic finance, like in:
• ‘Islamic’ factoring• ‘Islamic’ accepted bills• ‘Islamic’ Debt Securities
With these arrangements, the underlying consideration is the permissibility of the sale of debt, by the creditor, at a discount
Based it on the assumption that Debt arising from sale of commodities is different from debt arising from a money loan.
The Criterion of the Non-Shari’ah Compliant Transaction
When a financing mode is structured in such a way that secures a guaranteed profit to the financier without taking any risks. Or, when the financier acts in reality as a creditor who provides money without being involved in the investment process; i.e. when the substance is interest-bearing debt.
This will render the transaction impermissible regardless of its legal form, e.g. sale, lease… .
Some banks’ Sharia boards attempt to validate transactions based on their legal forms.
Islamic Finance Products
DEPOSIT PRODUCTS
INVESTMENTDEPOSITS
PROFIT S
HARE PAYMENT
SERVICESCUSTOMERS
ISLAMICBANKS
DEMANDDEPOSITS
CA
SH
AS
M
UD
AR
AB
AO
R W
AK
AL
A
RESTRICTED
WAKALA F
EES
UNRESTRICTED
CA
SH
AS
QA
RD
HA
SS
AN
checks
debit cards
ATMMoney transfer
SIMPLE FINANCING PRODUCTS
EQUITY FINANCE,
MUSHARAKA
ISLAMICBANK
FUNDUSER
FIN
AN
CE
A SH
AR
E IN
PR
OFI
TS
A SH
AR
E IN
MA
NA
GEM
ENT
DIMINISHING
EXTI
NG
UIS
H g
radu
ally
MUDARABA
RESTRICTED
UNRESTRICTED
ISLAMICBANK
FUNDUSER
TRANSPARENCY
MONITORING
+- DO’SDO NOT’S
Promise to
Buy
SPOT DELIVERY
SPOT DELIVERY
DEFERRED PAYMENT LUMP-
SUM OR INSTALLMENTS
Sale
Contract
ISLAMIC BANK
SUPPLIER
Buyer
SPOT PAYMENT
Murabahah
contract
MURABAHA
DEFERRED-PAYMENT
SALE CONTRACT
SPOT DELIVERY
DEFERRED PAYMENT:
LUMP-SUM OR INSTALLMENTS
ISLAMIC BANK
BuyerDEFERRED PAYMENT
SALE
COMMODITIES
OWNS
CUSTOMERMANUFACTURER
BANK
CO
MM
ISS
ION
TO
M
AN
UFA
CT
UR
EIS
TIS
NA
’
REQUIRES AN ASSET WITH
CERTAIN SPECIFICATIONS
ASS
ET D
ELIV
ERY
REQUIRES AN ASSET WITH THE
SAME SPECIFICATIONS
ISTISNA’
DELIVERY O
F ASSET
INST
ALL
MEN
TS
CO
MM
ISS
ION
TO
M
AN
UFA
CT
UR
EP
AR
AL
LE
L IS
TIS
NA
PAYMEN
TS IN STA
GES
IJARAHFINANCING
BANK
DE
LIV
ER
Y, L
EA
SE S
TA
RT
S
PR
OM
ISE
TO
LE
ASE
US
UF
RU
CT
FO
RW
AR
D L
EA
SETITLE TRANSFER:
ASSET PRICE
RE
NTA
L PA
YM
EN
TS
= U
SU
FR
UC
T
AN
D P
AR
T O
F A
SS
ET
VA
LU
EPURCHASE
CUSTOMER REAL ESTATE OWNER
Co
nd
itio
nal
pro
mis
e to
gif
t
or
sell
at t
oke
n p
rice
DELIVERY
