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: 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).  (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: 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  (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.