Principles of Islamic Finance

1/12/20121

Fundamentals

Transactions &

Institutions

Evolution

Islamic Finance Defined

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A system of financial laws, markets, and institutions

that has formed and developed in Islamic cultures

around the world

A form of economic organization built upon the

behavioral rules, norms, and principles of Islamic

society

Central Theme:

Prohibition of Charging Interest (Riba)

1/12/20123

No detailed definition exists in the Quran

Arabic for “excess, addition, surplus”

Money is a medium of exchange and not created to be sought for its own sake: gambling, loansharking

Specific rules defined through jurisprudence in Islamic law

Un-conventional from a Western lens as it prohibits debt financing vehicles

Central Theme:

Elimination of contract ambiguity (Gharar)

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Legal and religious theme

Shariah: Man is faithful to his word

Quran: Contracts should be in writing and have

witness at final agreements

Takes the form of risk management & due diligence

Common Financial Instruments

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Transactional

Sale of Ownership

Property

Price for Sale

Spot Credit

Cost Plus (Murabaha)

Bay’ al-Muajjil

Lump Sum

Installment

Future

Barter

Currency

Spot

Sale of Right to Use

Lease (Ijarah)

Building blocks of Islamic

finance

Credit sales involve

financier to take title of

inventory

“Mark up” rate depends

on credit

worthiness, security and

collateral

Cashflows replicate

conventional debt

securities (Iqbal & Mirakhor, 2007)

Islamic Bank Balance Sheet

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Assets Liabilities

Trade FinancingDemand Deposits

Salam Murabahah

Ijarah / Istisna

Real Estate Lease/ManufactureInvestment Accounts

Mudarahbah

P/L Sharing Investments

Musharakah

Equity Partnerships

Special Investment

Services

Jo’ala, Wikala, Kifala

Capital

Reserves

(Iqbal & Mirakhor, 2007)

Islamic Financial Markets:

Top 10 Participant Countries

1/12/20127

$1

$5

$50

$500

$5,000

$50,000

$500,000

$5,000,000

0 2 4 6 8 10 12 14 16

An

nu

al

Reven

ue (

log

scale

)

# of Institutions

BRITAIN

QATAR

UAE

INDONESIA

KUWAITINDIA

BAHRAIN

JORDAN

= Relative Market Capitalization

PAKISTAN

Source: Bloomberg LP

Market dominated by conventional banks

1/12/20128

22

89$59

$483

Islamic Banks Conventional Banks

Insitutions (#) Market Capitlization ($B)

Source: Bloomberg LP

UAE Financial Institutions

1/12/20129

Name

Market Cap

($MM)

Annual Revenue

($MM)

NATIONAL BANK OF ABU DHABI $8,200 $10,242

MASHREQBANK $4,670 $6,581

ABU DHABI COMMERCIAL BANK $4,240 $10,625

ABU DHABI ISLAMIC BANK $1,980 $4,518

DUBAI ISLAMIC BANK (*) $1,960 $5,003

UNION NATIONAL BANK/ABU DHAB $1,940 $4,508

DUBAI FINANCIAL MARKET (*) $1,680 $144

COMMERCIAL BANK OF DUBAI $1,530 $2,353

UNITED ARAB BANK $987 $628

SHARJAH ISLAMIC BANK $542 $843

TAMWEEL PJSC $155 $583

DUBAI ISLAMIC INSURANCE CO $23 $38

EMIRATES ISLAMIC BANK $0 $1,013

Evolution

1/12/201210

Industry has weathered financial crisis better than

conventional banking

Adapts well to micro-financing in many economies

Promotes equity and risk sharing

Growth is strong: $0.5B in revenue, growing 10-15%

Need for innovation & efficiency