Islamic Finance Ppt by VCU

8/9/2019 Islamic Finance Ppt by VCU

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Islamic FinanceA very brief introduction


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History of Islamic finance

Not New 1500 years of development.

During Classical period, commerce

flourished under Islamic commercial law. Development languished under impact of

colonialism and huge Western firms.

Revival began in 1960s. Increasing rapid growth and sophistication.


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Islamic Finance Today

Although not fully developed for modern

business, Islamic finance has become a

widely used and flexible tool ininternational finance.

Devout Muslims have been locked out of

many individual financial vehicles.

Pent-up demand, unsuitable situations.

Many personal alternatives now available.


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Religious/Ethical/Legal

In the West, Religion/Ethics/Legal onlyloosely overlap.

Islamic Shariaa encompasses all three.

Shariaa is the body of islamic principleswith respect to lifes activities.

Derived from three sources:

Quran, revelations from God. Sunnah, authenticated sayings and actions of

the Prophet (Peace be upon him).


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Religious/Ethical/Legal

Individual saying are referred to as hadith.

Fiqh, collection of interpretations / rulings /

precepts based on the Quran and Sunnah.


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Religious Oversight

Oversight begins with the Sharia board

A committee of Muslim Scholars.

Works with parties to ensure that anundertaking is Islamically acceptable.

Issues a fatwa, a ruling as to whether a

particular undertaking is in accordance with

Islamic principles. A Sharia Board provides continuing oversight.


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Religious Oversight

Conflicting fatawa:

Several schools of thought, resulting in

sometimes inconsistent fatawa.

Agreement far outweighs disagreement.

Malaysia tends to be more liberal/Western

than the Middle East.


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Concept ofRiba

Probably best known and greatestpractical difference from Western finance.

Widely misunderstood: Riba is theprohibition of interest on money.

Underlying concept: money has nointrinsic value it is only a measure of

value. Since money has no intrinsic value, there

should be no charge (interest) for its use.


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Concept ofRiba

IMPORTANT! Riba is interest on moneyonly!!

Riba does not preclude a rate of return oninvestment.

Islamic finance is sometimes said to beasset-based instead of currency based.

I.e., an investment is structured onownership / exchange of assets, money isjust the payment mechanism.


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Concept ofRiba

An Example is a home mortgage:

Western: Bank gives you money. You buy thehouse. You pay interest on the money.

Islamic: a musharakah arrangement. Youand the bank buy the house together inpartnership. You make payments that arepartly rent and partly buyout of the bank.

Islamic: a murabaha arrangement. The bankbuys the house and sells it to you on adeferred payment schedule.


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Concept ofRiba

Islamic: an ijara arrangement The bank

buys the house and leases it to you on a

redeemable lease.

Note that the payments might be the same forall four alternatives, and the rate of return to

the bank might be exactly the same!

BUT: in the Islamic transactions the rate ofreturn is based on an asset transaction, NOT

based on interest on money loaned.


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Is it just playing with words?

To Western thought process, nearidentical financial impact says yes.

To Muslims, definitely not the same.

An case close to home:

Daughter A marries, has several children.

Daughter B runs off without benefit of clergy,

has several children. The result is the same: grandkids and your

daughter lives with a man. Do you see adifference?


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Prohibition of hidden riba.

Emphasis is not on getting aroundIslamic precepts.

Emphasis is on finding mutuallyacceptable and Islamically compatiblesolutions to mutual business needs.

An overarching concept is that thepurpose ofShariaa is not to set forthreligious prohibitions.


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Instead, the purpose ofShariaa is toassist in removing obstacles to a happierlife and reducing discord.

The unacceptability ofriba is not justbecause money has no intrinsic value.Rather, it is intended to avoid injustice and

civil discord caused by one party (thelender) becoming unfairly enriched at theexpense of another party (the borrower).


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Concept ofGharar

Defined as Preventable ambiguity or

uncertainty.

Western derivatives not permitted. Subject of a contract must exist, must be

specifiable and measureable.

Extends to the fairness and validity of acontract.

Similar to our consumer protection laws.


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Forbidden Activities

Activities that are considered harmful to

society:

Alcohol. Pork production.

Illegal / intoxicating drugs.

Gambling.

Pornography.

Arms production.


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Flexibility of Islamic finance

It is not dogmatic rule-making.

Attitude is: how can we make this

happen?, Lets do business. Exceptions are permitted (but not

encouraged) when no alternatives exist.

Example: Investing in the common stock of

leveraged firms is permitted, but the amount

of leverage permitted is limited and that

portion of investor return must be purified.


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The Islamic Market

20% of the world population.

Not just furriners domestically, between

6 million and 8 million people. 2.3 million households.

Rapid growth 6% annual.

Young, highly educated, professional. Affluent - above average income.


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Islamic Financial Services

We have seen that:

mortgages can be Islamically acceptable.

since one mortgage arrangement is a lease,leases can be islamically acceptable.

Investing in common stock can be Islamically

acceptable.

Are Islamic Financial Services available?

What about stocks, bonds, and Insurance?


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Google search on

Islamic Banking

yields this on the first

page.


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Islamic Banking and Mortgages

Well developed in Britain.

Available in the U. S., but not as welldeveloped

Mortgages have the blessing andEncouragement of the U. S. Treasury.

A list of Institutions is attached

Article in bibliography: Islamic finance inthe United States: A small but growingindustry, Chicago Fed Letter.


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Addresses for Islamic Mortgage

Web Resources Shape Financial

www.shapefinancial.com

Devon bank www.devonbank.com

Guidance Financial Group

www.guidancefinancialgroup.com

BBC CaseSt

udy http://news.bbc.co.uk/2/hi/business/2525635.stm


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Equity Investing

Acceptable if the firm does not engage in

prohibited practices mentioned above.

Some leeway is possible previousmention ofriba.

Dow Jones Islamic Indexes.

Listing of firms providing Islamicinvestments in bibliography.


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http://www.ftse.com/indices_marketdata/global_islamic/index_home.jsp

http://www.djindexes.com/mdsidx/index.cfm?event=showIslamic


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Sukuk Islamic Bonds

Conventional bonds are riba, and areforbidden.

But, again, a transacation structured on anasset base is permitted.

A series of payments arising from anasset-based transaction may be traded at

a market price! This type of arrangement is referred to as

Sukuk, sometimes called Islamic bonds.


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http://www.noriba.com/sukuk.htm

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http://www.euromoneybooks.com/default.asp?page=4&productID=3099


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Takaful- Islamic Insurance

Principle ofgharar, or avoidance of risk /uncertainty / gambling.

Gharardoes not apply to reasonable,unavoidable business risk.

Also, standard Insurance contracts oftenhave interest component.

It is quite acceptable, however, to form amutual group for self-help and riskavoidance.


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Takaful- Islamic Insurance

Resolution of the problem is that the

mutual form of insurance can be made

Islamically acceptable.

Stock Insurance companies are not

acceptable.


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http://www.takaful-malaysia.com/ (Malaysia)

http://www.imanlinc.com/ (U.S.A)

http://www.takaful.com/ (Indonesia)


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Conclusion

Islamic finance is not just for Muslims!

Already a sizeable but underserved

market, both domestic and international. Rapidly growing and developing.

Opportunity to do well while doing good!

Documents

Islamic Finance Ppt by VCU