Post on 25-Dec-2015
Islamic Finance: Principles and practice
Rachida Talal-AzimiRachida Talal-AzimiPhD CandidatePhD Candidate
It is the Economy, Stupid 5: over Gharar, Riba en Murabaha | 9 October 2012
“What we need is the application of Islamic finance principles, in particular a strong
preference for profit-, loss- and risk-sharing
arrangements and a rejection of ‘riba’ or
interest-bearing debt instruments.”
Financial crisis
Willem BuiterChief Economist, Citigroup (US)
1980s Commercial Banking+ Project Finance+ Syndicates
1990s Commercial Banking Project Finance Syndicates+ Equity+ Sukuk al-Ijara+ Fund Management
2000 and beyond CommercialBanking Project Finance Syndicates Equity Sukuk al-Ijara Fund Management+ Several Sukuk models+ Islamic Microfinance
1970s
Commercial Banking
Development
Source: Thomas et al.(2005) Structuring Islamic finance transactions
Development
What is Islamic finance?
‘The discipline to perform financial transactions in accordance with the principles of Islamic law.’
What is Islamic Finance?
Establishment of an Islamic Economic Thought
Fundamentals of Islamic financial products
• No investments in prohibited companies and/or products
• Encouragement of trade
• All transactions must be asset backed
• Mandatory independent Sharia board (Islamic supervisory board)
• Islamic Window!
Other prohibitions / principles
Wat is islamitisch financieren?
Handel drijvenHandel drijven
Asset basedAsset basedWinst- & verliesdelingWinst- & verliesdeling
Onafhankelijke shari’araadOnafhankelijke shari’araad
Islamic financial instruments
Partnership contracts
• Muđāraba (type of limited partnership)
•Mushāraka (type of equity participation)
Islamic financial instruments
Real estate Bank
Customer
1
2
3
1 Down payment 10.0002 payment 90.0003 10 % of the units4 90% of the units5 rent*6 Unilateral commitment to purchase remaining units7 purchasing contract / sales contract re units
4
567
Mushāraka (type of equity participation)
Islamic financial instruments
Mark-up contracts
• Murābaħa (mark-up contract)
• Bayc Salam (sale by advance payment for future delivery, i.e. buyer credit)
• Istisnāc (production contract)
Islamic financial instruments
Goods for cash
Murābaħa basic contract
Purchase sale
Islamic financial instruments
seller
financier
buyer
1
2
3
4
Murābaħa finance
13
Islamic financial instruments
Other contracts
•Qarđ al-Ħasan (no-interest loans)
•Ijāra (leasing) ijāra wa iqtinā’ (hire-purchase)
•Şukūk (Islamic investment certificate)
Conclusion
What is Islamic finance?
‘The discipline to perform financial transactions in accordance with the principles of Islamic law.’
In other words, more than just a ban on interest!
A system based on a completely different approach to the trading of money than the traditional system
Conclusion
Rapid development of Islamic financial sector
Niche market
Not yet fully developed
Growth is undermined by a number of tough challenges, including:
•Lack of standardisation•Lack of qualified staff
Financial crisis has both a positive and a negative impact
Thank you for your attention!