Badalotti Ilaria
Eddal Adil
Gracco Giovanni
Manente Alberto
Montanari Giulia
Paolicelli Ivana
Puccio Alessandro
Università degli Studi di Parma
International Business and Development
International Financial Markets and Institutions
1) Make a brief overview of the Islamic financial
system
2) Describe the institutions dealing IF instruments
in Europe
3) Display the most important financial (banking
and non-banking) instruments
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not a geographical denomination
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financial system based upon the principles of
Shari’ah
Islamic law = framework for everyday life for
Muslims
40s
early 60s
early 70s
1975
since then
political, ideological and cultural genesis within
British India = idea that Islamic religion should not
be just private, but has to concern every aspect of
everyday life, finance included
conventional birth of IF with Tabung Haiji Bank
(1962, Malaysia) and Mit Ghamr Bank (1963, Egypt)
extremely slow development of Shari’ah-based
finance
foundation of the Islamic Development Bank by
OIC (Organization of Islamic Conference), with the
aim of promoting economic and social development
IF becomes more and more important and some
countries (e.g. Pakistan, Iran, Sudan) “islamize” their
whole banking system
Islamic Finance displays a turnover
equal to nearly 1 trillion $, with
average growth rates around 15-20%
per year
It is fair to say that Islamic
Finance has gone global,
with 300 institutions
covering more than 65
countries
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Prohibition of usury (riba)
Ban on hazard and uncertainty (gharar)
Risk- and loss-sharing between lender and
borrower
Promotions of ethical investments and
prohibition of forbidden assets (haraam)
Real asset-backed finance
Disclosure of information as a sacred duty
1.
Prohibition of usury (riba)
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2.
fundamental and most widely known principle
any level of interest is considered to be usurious and is
prohibited, in contrast with the conventional forms of
finance
Ban on hazard and uncertainty (gharar)
•
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uncertainty in contractual terms and conditions is not
allowed
in a financial transaction, all the terms and conditions
of risk must be clearly understood by all parties
3.
Risk- and loss-sharing between lender and
borrower
•
•
4.
prevent an uneven distribution of risks and losses
risks and profits of the business are proportionally shared
between the two parties
Promotions of ethical investments and
prohibition of forbidden assets (haraam)
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principle of almsgiving (zakat)
prohibited activities reprehensible from an ethical or
religious stand point: alcohol, pornography, gambling,
leisure industry (music, cinema, etc), finance industry and
pork-based products
5.
Real asset-backed finance
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6.
each financial transaction must be tied to a “tangible,
identifiable underlying asset”
strict link between finance and real economy
Disclosure of information as a sacred duty
•
•
transparency intended as a form of sanctity of
contracts
feature intended to reduce the risk of asymmetric
information and moral hazard, common problem on
the financial markets
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Islamic banking refers to a system of banking or banking activity that is
consistent with the principles of the Shari'ah (Islamic rulings) and its practical
application through the development of Islamic economics.

It has the same purpose as conventional banking except that it operates in
accordance with the rules of Shari’ah, known as Fiqh al-Muamalat (Islamic
rules on transactions).
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The principle source of the Shari’ah is The Qur’an followed by the recorded
sayings and actions of Prophet Muhammad (pbuh) – the Hadith. Where
solutions to problems cannot be found in these two sources, rulings are made
based on the consensus of a community leaned scholars, independent
reasoning of an Islamic scholar and custom, so long as such rulings do not
deviate
from
the
fundamental
teachings
in
The
Qur’an.
When the Muslim world came into contact with the West, Muslims
had two choices:
1. To accept commercial banking, arguing that the interest charged
by them did not contain the element of riba prohibited in the
Qur'an; or,
2. To accept that interest charged was riba and try to develop an
alternative system of banking.
 But ancient Muslim institutions, such as the Shari'ah courts, had
been made ineffective by the colonial powers. Muslims had no
alternative but to work with the colonial institutions, including
commercial banking.
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Nevertheless, during the 19th century, several religious scholars
argued that the term riba referred to loans for consumption,
which people found it difficult to repay, and not to commercial
banking loans, where the debtor can repay from the profits.
But the Qur'an makes no distinction between loans for
consumption and loans for productive purposes. So their views
were rejected. As a consequence, modern commercial banking did
not make much headway in Muslim countries and to this day the
presents of the conventional framework still dominates the
national financial system.
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1.
2.
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2.
3.
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In 1963, in Mit Ghamr, in Egypt, the first Islamic interest-free bank came
into being.
The tasks were:
To respect Islamic values concerning interest.
To educate the people about the use of banking.
Types of accounts accepted:
Savings accounts;
Investment accounts;
Zakat accounts;
The Mit Ghamr project was successful (deposits increased, default ratio
equal to “0”,)
But project was eventually abandoned for political reasons.
Nevertheless, it had shown that commercial banking could be organised
on a non-interest basis.
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The development of Islamic financial services in Western Europe .
The Netherlands:
a limited number of Islamic finance transactions have been
undertaken in the Netherlands;
limited number of retail asset management products;
the majority of transactions are associated with real estate
and private equity investments.
France:
introduction of Islamic Finance instruments was due to historic
ties with northwest Africa and the size of the Muslim
population in France;
IF products that are offered in France are undertaken from
French banks operating in the Middle East.
Germany :
The introduction of IF instruments is due to the size of Muslim
population in Germany;
 These products are offered by branches in the UK or in ME of
German Banks.
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The UK:
the UK is by far the most advanced country in developing IF;
had recognized the importance of IF as part of the overall financial
industry;
 there are fully Shari’ah compliant banks and banks opening a
“operating window” to offer IF instruments.
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INVESTMENT PRODUCTS
1)
Non-profit accounts “quard” (housing function):
 Small amounts withdrawable ( no notice needed)
 No interest payouts
 The borrower owns the funds
 The bank acts on behalf of the borrower
 The capital is refunded
a)
Current accounts “al-hisab al-gari”:
 The bank can invest the funds on behalf of the investor
 The refund of the capital is guaranteed
 At the end of the financial year, possibility for the investor
to get gifts in kind or privileged credit conditions
b)
Saving deposits “hisab al-tawfir”:
 Operations are registered on a bank book [daftar]
2)
Profit sharing accounts “hisabat almustaraka” (investment function):
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Minimum amount as entry requirement
Periodic withdraws (notice is compulsory)
The bank owns the funds and the borrower shares with it
profits and losses
Investment accounts “hisabat al-istihamar”
▪ Payouts are proportionally computed according to the
profits of the investment
3)
Mixed accounts
FINANCE PRODUCTS
Bank’s Liabilities
1)
Profit-loss sharing (PLS)
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Risk sharing
Collaterals not used as guarantees
Most common types:
a)
Trust financial contract “mudaraba”:

The bank finances the investor’s project
 Risk sharing (on a fixed percentage base)
 The investor contributes with his managerial skills and work
and he will be paid only with the investment’s profits
 Clausula “rebus sic stantibus”
b)
Equity partecipation contract “musharaka”:
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Partnership (bank – entrepreneur)
Risk sharing
 Decreasing contract “musharaka mutanaqisa” :
 for craftsman and small enterprises
 The bank’s share of profits decreases year by year until zero
 The entrepreneur’s share of profits increases until the total
amount of capital
c)
Agriculture trust financial contract “muzar’ah”:
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d)
Agriculture equity partecipation contract
“musaquat”:
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e)
Like mudaraba for agricultural activities
Profits divided between the two parties
Losses taken by the lender
Like musharaka for agricultural activities
Profits divided between the two parties according to the
share owned
Bond investment “mugarada”
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The bank buys mugarada bond to finance a specific project
(becomes a shareholder with no right to vote)
2) Non profit-loss sharing (non PLS) +
Mark-up
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Mark-up application on exchanges
Is used only when PLS instruments can’t be applied
Determined return and collaterals
Most common types:
Commercial credit contract “murabaha” mark-up
financing:
a)
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The bank buys a good at a given price and sells it to the
borrower at a major price (immediate or delayed payment)
The borrower acts on behalf of the bank and proceeds to
purchase the good, providing a collateral to the future
repayment
The bank owns the good until the borrower’s payment
covers the majored price of the good
Periodic commercial credit contract “bay’mu’aggal”:
b)
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The same
payment
as murabaha but with a defined periodic
Purchase differed delivery contract “salam”:
c)
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The bank anticipates goods’ payment to the
manufacturer and the goods are delivered within a
certain deadline
The bank makes its perfomance immediately while the
customer at the end
Leasing contract “ijara”
d)
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Operating leasing “ijara”:
 the transfer of the usufruct with fixed periodic payments
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Financial leasing “ijara-iqtina”
 gives the possibility to the borrower to take title of the
good after the payment’s period
 Trilateral relationship: producer-seller, lender-lessor
[mu’aggir], user-lessee [musta’gir]
 The lender shall give to the future landlord the mandate
to choose, in behalf of the lender, the property covered
by the contract, defining features and price
Sukuk:
Islamic Bond compliant with Shariah law,which
pays a return based on tangible assets instead of
an interest rate (asset-backed).
Each sukuk-holder owns a fraction of the entire
ownership of the good and he gains a periodic rent,
that are the profits derived from the project.
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14 Eligible Asset Classes according to AAOIFI are:
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SUKUK AL-IJARAH
SUKUK AL-ISTISNA’A
SUKUK AL-MURABAHA
SUKUK AL-MUSHARAKA
SUKUK IJARAH MOWSUFA BITHIMA
SUKUK MANFAA IJARAH
SUKUK MANFAA IJARAH MOWSUFA BITHIMA
SUKUK MILKIYAT AL-KHADAMAT
SUKUK AL-SALAM
SUKUK AL-MUDARABA
SUKUK AL-WAKALA
SUKUK AL-MUZRA’A
SUKUK AL-MUSAQA
SUKUK AL-MUQARASA
Actual Size of the Market ~ USD 53 Billion
Most common types of Sukuk are:
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Ijara sukuk:
 ownership of equal share in a rented real estate
 the sukuk-holder owns the real estate and receives the rent
 holder bears all costs (mantainance + damage)
 Fixed or floating rent
 Tradable on the secondary mkt
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Musharaka sukuk:
 ownership of musharaka equity
 Used for new or existing projects (businesses on partnership basis)
 Holder owns the project
 Tradable on the secondary mkt
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Istisna’ sukuk:
 Mobilizing funds required for producing products that are owned
by the certificate holder (financing large infrastructure projects)
 Holder owns the product and is entitled to the sale price of the
certificates
 Non tradable in the secondary mkt
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Murabaha sukuk:
 Issuer is the seller of the murabaha commodity
 Subscribers are the buyers of the commodity
 Holder owns the commodity and receives the final sale price upon
re-sale of the commodity
 Non tradable on the secondary mkt (represents a debt)
The insurance has developed in Islamic
countries since 1985, when the Islamic Fiqh
Academy has determined that insurance is
acceptable from a religious point of view.
Islamic insurance, known as takaful )‫( التكافل‬, is
based on the principle of mutuality:
partecipants choose to collectively protect
themselves from some risks by giving its
resources in a collective fund.
Policyholders cooperate among themselves for their
common good
• Every policyholder pays his subscription to help those
that need assistance
• Losses are divided and liabilities spread according to
the community pooling system
• Uncertainty is eliminated in respect of subscription
and compensation
• It does not derive advantage at the cost of others
• Takaful fund can be used both to manage the damage
insurance (takaful general) and the life insurance
(takaful family).
•
This type is characterized by the coexistence of two
separate funds:
•
The first part, which takes the form of a donation
(tabarru), converges in a risk fund, used to carry on
the insurance activities
•
The second part, which is insured property, gives
rise to a financial investment that will be paid to
the insured upon the occurrence of some terms of
the contract (such as death, retirement..)
If the risk fund is not sufficient to make the
payments
Qard Hasan
It is a free loan, granted by a management
company , which will be repaid (without
interest) with the surplus in the future.
The funds described above are managed by a
professional, paid according to different
contractual models:
1.
Mudarabah model
the takaful operator conducts all the activities ,
bearing the costs, in exchange for a portion of the
profits investment.
2.
Wakalah model
is the most common form of takaful: the operator
conducts all the activities with a commission
which covers the costs, so his profit is fixed
3.
Mixed model
Mudarabah is used for the management of the
investment fund while Wakalah is used for the
management of the risk fund
The uniqueness of Islamic insurance is also
characterized by the presence of
Shari’ah board
a council of teachers of Koranic law that ensures,
with veto power on all the activities of the takaful
company, ensuring and certifying that the
activities are in accordance with Qur'anic law
The Islamic world has accepted the organization
company of big business, based on the collection
of large amount of capital on the stock markets.
There are currently around 150 Islamic funds. Most of
them follow the Dow Jones Islamic Market Index of
the New York Stock Exchange, which is under the
supervision of a Shari’ah board of scholars.
Companies which have to do with alcohol, tobacco,
pork products, gambling, pornography, night-clubs
or armaments are out, as well as banks and
insurance companies which are based on interest.
Even airlines or hotels may be avoided, since they
offer alcohol to their guests.
In addition, it is forbidden to invest in companies
with more than 33 percent outside capital.
A potential obstacle to the proper functioning of stock
markets is the right, under Shari’ah law, of shufaah
(pre-emptive right), including the right of preference
of the members not only in the case of capital
increase, but also when a member decides to
withdraw from society.
However, observers note that the rigour with which
these rules are applied has meant that Islamic Funds
have avoided the major bankruptcies of recent
years, such as Worldcom or Parmalat. That has saved
them from substantial losses.
Islamic banks, according to the principles of
Sharia law, can manage the funds collected
from customers for investment purposes.
The collection of funds to be used in individual
projects, is carried out through investment
accounts (hisabat) or funds (amwal), or
through the issuance of securities
(sanadat),with participation in annual net
profit realized.
Certificates are most often issued by the bank
itself, which thus has the dual purpose of
providing means of investment to investors
and raise capital with which to finance the
projects.
The issuance of certificates is often related to a
transaction type "insurance" which addresses
the need to pursue a goal of solidarity
between the parties (takaful).
The contract is concluded on the one hand by
the participants and on the other by the
manager, the company that manages the
money raised through the issue of
certificates.
Objectives of this kind of operations are to
increase private savings, to invest it in
accordance with the rules of sharia, and to
promote solidarity among participants.
•
Equity Fund
the amounts are invested in the shares of joint stock
companies. The profits are mainly derived through the
capital gains by purchasing the shares and selling them
when their prices are increased. Profits are also earned
through dividends distributed by the relevant companies.
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Ijarah Fund
In this fund the subscription amounts are used to
purchase assets like real estate for the purpose of leasing
them out to their ultimate users. These certificates may
preferably be called ‘sukuk’
•
Commodity Fund
In the fund of this type the subscription amounts are used
in purchasing different commodities for the purpose of
their resale. The profits generated by the sales are the
income of the fund which is distributed pro rata among
the subscribers.
•
Murabahah Fund
‘Murabahah’ is a specific kind of sale where the
commodities are sold on a cost-plus basis. Islamic banks
purchase the commodity for the benefit of their clients,
then sell it to them on the basis of deferred payment at an
agreed margin of profit added to the cost.
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Mixed Fund
Another type of Islamic Fund may be of a nature
where the subscription amounts are employed in
different types of investments, like equities, leasing,
commodities, etc. This may be called a Mixed
Islamic Fund
Università degli Studi di Parma
International Business and Development
Badalotti Ilaria
Eddal Adil
Gracco Giovanni
Manente Alberto
Montanari Giulia
Paolicelli Ivana
Puccio Alessandro