Islamic Financial System
In a changing economics and
political environment
ECO 6226
Summer 04
Mohammed Dasser
MS/MIS
Introduction
 Latest political and economic events:
9/11
US PATRIOT ACT
Afghanistan
Iraq
 Islamic Economics:
1400 years old concept, newly introduced in 70’s
“Terrorist Money Laundering”
Misunderstanding of Islamic Finance
Impact of political and economic events
Islamic Financial System

Islamic Financial Institutions:



Islamic Financial Instruments:




Banks
Non-Bank Institutions
Equity-Like Instruments
Financing Working Capital
Leasing
Islamic Financial Market
Islamic Financial Institution
Governed by the Islamic laws (Shariaa & Hadith) , and
must bond to the same widely accepted rules[1]:
 The absence of interest-based transactions (riba).
 The avoidance of economic activities involving
speculation (ghirar).
 The introduction of an Islamic tax (zakat).
 The discouragement of the production of goods and
services which contradict the value pattern of Islam
(haram).
[1] (Nasser M. Suleiman, 2000) “CORPORATE GOVERNANCE IN ISLAMIC BANKS” ARAB gateway.
Retrieved from http://www.al-bab.com/arab/econ/nsbanks.htm on June 9, 2004
Islamic Financial Instruments:
Equity-Like Instruments


Musharakah: is a standard partnership, like any
corporation agreement, all profits and losses are to
be shared by all partners and all associates having
the right to co-manages their common project
investments.
Mudarabah: is a silent partnership, similar to a
standard financing contract between the investor
(rab-ul-mal) who provides the entire funding and the
entrepreneur (mudarib) who is the sole responsible
of the management and receive a share of profit as
agreed with the investor. But losses are endured by
investor only.
Islamic Financial Instruments:
Financing Working Capital



Murabaha: is what known as a sale against deferred
payment for cost plus mark-up or profit margin which
is negotiated preceding transaction.
Salam: Stand for future sale, where a sale in which
the price is paid on the spot and the delivery is
deferred, usually used to allow financing a producer
before the production of the goods ( i.e. agriculture).
Istisna: The other type of sale where transaction are
made before product is manufactured, with two main
differences, the money doesn’t have to be paid
before receiving and the contract can be canceled
before the manufacturing of the goods starts.
Islamic Financial Instruments:
Leasing

Leasing


Ijara: It’s the lease-based financing very
similar to the conventional leasing contract
with few minor differences.
Can be used with other Instruments to
constitut a hybrid instrument like Diminishing
Musharakah
The Islamic Financial Market
 Industries and their financial instruments must consistent
with Islamic Law guidelines.
 Prohibiting investments involving in these activities[1]:
 Alcohol
 Tobacco
 Pork-related products
 Conventional financial services (banking, insurance, etc.)
 Weapons and defense
 Entertainment (hotels, casinos/gambling, cinema, pornography,
music, etc.)
 unacceptable level of debt and impure revenues from interest
rate incomes
[1] (Dow Jones,2004), “Guide to the Dow Jones Islamic Market Index”. Retrieved from
http://www.dowjones.com/index_products.htm on June 9, 2004
Analysis
Goals:
the IFM vs. The US market.
The impact of Major events on the IFM
Methods:
Historical Data : 3 years (3/2001 to Present)
Indexes: S&P 500, IMUS (DJ Islamic Market)
Correlation: Highly correlated
Regression result: No evidence of Impact
Regression Equation: Dow Jones Islamic Index = Constant + S&P 500 + Event (0 or 1)
5/14/2004
3/14/2004
1/14/2004
11/14/2003
9/14/2003
7/14/2003
5/14/2003
3/14/2003
1/14/2003
11/14/2002
9/14/2002
7/14/2002
5/14/2002
3/14/2002
1/14/2002
11/14/2001
9/14/2001
7/14/2001
5/14/2001
Historical Data:
3 years (3/2001 to Present)
12000
10000
8000
6000
DJIA
S&P 500
NASDAQ
IMUS
DJICA
DJIM
4000
2000
0
Correlation result: Highly correlated
DJIM
Dow Jones Islamic Market World Index
IMUS
Dow Jones Islamic Market U.S. Index
DJIM
IMUS
DJIA
0.972815905
0.944738241
S&P 500
0.99245222
0.99445279
11/14/2002
10/14/2002
9/14/2002
8/14/2002
7/14/2002
6/14/2002
5/14/2002
4/14/2002
3/14/2002
2/14/2002
1/14/2002
12/14/2001
11/14/2001
10/14/2001
9/14/2001
8/14/2001
7/14/2001
6/14/2001
5/14/2001
Historical Data : 9/11 events
2500
2000
1500
S&P 500
9/11 events
1000
IMUS
DJIM
500
0
6/4/2004
5/4/2004
4/4/2004
3/4/2004
2/4/2004
1/4/2004
12/4/2003
11/4/2003
10/4/2003
9/4/2003
8/4/2003
7/4/2003
6/4/2003
5/4/2003
4/4/2003
3/4/2003
2/4/2003
1/4/2003
12/4/2002
11/4/2002
10/4/2002
9/4/2002
8/4/2002
7/4/2002
6/4/2002
5/4/2002
4/4/2002
3/4/2002
Historical Data : Iraq events
2500
2000
1500
S&P 500
Iraq invasion
IMUS
DJIM
1000
500
0
Regression Result:
No evidence of Impacts
Coefficients
Intercept
Standard Error
t Stat
P-value
-196.6931125
25.20402352
-7.804036224
2.25E-11
9/11 related event
13.51182979
5.924714575
2.280587465
0.025303154
S&P 500
1.730402963
0.021238102
81.47634695
3.09E-77
Coefficients
Standard Error
t Stat
P-value
Intercept
1.675998047
12.75400658
0.131409533
0.895678992
S&P 500
1.534932473
0.013349146
114.9835664
2.27E-121
7.30572235
2.791512696
2.617119514
0.01004871
Iraq invasion
 This is a two tail test: Wish to see Impacts in any direction.
 At the 95% confidence level 2P( T >|1.96|): These events are not
statistically significant.
 Islamic Financial Market’s Investors are no different from other
investors: Profit seeking.
Conclusion:
 The IFIs are in full rise in the US because increasing
Moslem population.
 High Correlation with Broad Benchmarks: The Dow
Jones Islamic Market Indexes perform similarly to
broader market indexes.
 The events of 9/11 & Iraq created a certain distance
between the US and the Moslem world, but the market of
investment of the United States remained accessible.
 Lack of receptive atmosphere and Scarcity of research:
Need more awareness initiative from Islamic Institutions
and more research funding for Moslem scholars.
Thank you for your attention.