Islamic Finance: Principles and practice
It is the Economy, Stupid 5: over Gharar, Riba en Murabaha |
9 October 2012
Rachida Talal-Azimi
PhD Candidate
Financial crisis
“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.”
Willem Buiter
Chief Economist,
Citigroup (US)
Development
2000 and beyond
1990s
1980s
1970s
Commercial
Banking
 Commercial
Banking
+ Project
Finance
+ Syndicates
 Commercial
Banking
 Project Finance
 Syndicates
+ Equity
+ Sukuk al-Ijara
+ Fund
Management
Source: Thomas et al.(2005) Structuring Islamic finance transactions
 Commercial
Banking
 Project Finance
 Syndicates
 Equity
 Sukuk al-Ijara
 Fund
Management
+ Several Sukuk
models
+ Islamic
Microfinance
Development
What is Islamic Finance?
What is Islamic finance?
‘The discipline to perform financial transactions in
accordance with the principles of Islamic law.’
Establishment of an Islamic Economic Thought
Fundamentals of Islamic financial products
QUR’AN
Ribā
(interest)
SCHOLARS
Gharar
(unnecessary risk /
avoidable uncertainty)
Prohibited goods
Maysir
(i.e. Alcohol)
(gambling)
SUNNAH
Other prohibitions / principles
• 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!
Wat is islamitisch financieren?
Handel drijven
Winst- & verliesdeling
Onafhankelijke shari’araad
Asset based
Islamic financial instruments
Partnership contracts
• Muđāraba (type of limited partnership)
• Mushāraka (type of equity participation)
Islamic financial instruments
Mushāraka (type of equity participation)
4
Real estate
Bank
2
1
3
Customer
5
6
7
1 Down payment 10.000
2 payment 90.000
3 10 % of the units
4 90% of the units
5 rent*
6 Unilateral commitment to purchase
remaining units
7 purchasing contract / sales contract re
units
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
Murābaħa basic
contract
Purchase
Goods for cash
sale
Islamic financial instruments
Murābaħa finance
seller
buyer
1
3
2
4
financier
1
3
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!