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Fundamentals of Islamic Finance and Banking

Fundamentals of Islamic Finance and Banking

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9781119371007
  • Published In: July 2018
  • Format: Paperback , 312 pages
  • Jurisdiction: International ? Disclaimer:
    Countri(es) stated herein are used as reference only

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    A comprehensive and fully up-to-date introductory textbook to Islamic finance and banking

    Islamic finance and banking is being used increasingly globally — especially in the regions of Middle East and North Africa, South East and South Asia. To cater to the need of trained Islamic finance staff, a large number of Educational institutions are beginning to offer courses, majors and minors in Islamic finance and banking. The major challenge faced by these institutions are suitable textbooks for both undergrad and post-grad levels and especially with the relevant instructor resources (PPTs, test bank, practice activities and answer keys).

    Luckily, Fundamentals of Islamic Finance and Banking is here to cover the most important topics related to Islamic finance and banking (IF&B) that are relevant for students of business, finance and banking. 

    • Offers an historical background of Islamic finance
    • Covers the principles of Sharia Law as pertinent to finance and banking
    • Provides in-depth discussion of the six key Islamic banking products: Murabaha, Mudaraba, Musharaka, Ijara, Salam and Istisna
    • Discusses the Islamic insurance (Takaful)
    • Gives an overview of Islamic investment, especially Sukuks
    • Concludes with the global standing of the Islamic Finance and Banking industry

    Would-be colleges and universities offering this subject as a course within their finance and/or banking program can’t be without this invaluable guide.  

  • List of Figures xv

    List of Tables xvii

    Acknowledgements xix

    About the Author xxi

    Preface xxiii

    About the Website xxv

    CHAPTER 1: Introduction to Islamic Finance and Islamic Economics

    1 Introduction 1

    Creation of Money and Conventional Finance and Banking 2

    Definition of Islamic Finance and Banking 3

    Distinctive Features of Islamic Finance 3

    Economics and Islam 4

    Economics in Ancient Times 4

    Modern Economics 5

    Islamic Economics 6

    History of Islamic Economic Thought 6

    Principles of Islamic Economics 7

    Islam’s Solution to the Classic Economic Problem 7

    Islam and the Welfare Economy 8

    Property Ownership in Islamic Economics 8

    Zakat and Sadaqah 8

    Ban on Interest versus Cost of Capital in Islam 9

    Conventional Economics versus Islamic Economics 9

    Evolution of Islamic Finance 11

    Early Days 11

    Birth of Modern Islamic Finance 12

    Institutional Developments During the Revival of Modern Islamic Finance 12

    The Mit Ghamr Experiment 13

    Tabung Haji 13

    Islamic Development Bank 14

    Dubai Islamic Bank 14

    Rapid Growth of the Islamic Finance and Banking Industry 14

    Islamic Finance and Banking in Muslim Communities and Countries 15

    Islamic Finance and Banking in Non-Muslim Countries 16

    Sub-sectors in the Islamic Finance and Banking Industry 16

    Current Status of Modern Islamic Finance and Banking 17

    Timeline of Development of Contemporary Islamic Finance and Banking 18

    Key Terms and Concepts 21

    Chapter Summary 21

    CHAPTER 2: Shariah Law and the Shariah Supervisory Board 27

    Introduction to the Islamic Law – Shariah 27

    Sources of Shariah 28

    Schools of Islamic Jurisprudence 29

    Ethics in Shariah-Compliant Business and Finance 30

    Major Shariah Prohibitions and Principles and their Implications 31

    Prohibition of Interest or Riba 31

    Prohibition of Uncertain Dealings or Gharar 32

    Prohibition of Speculative Behaviour or Maysir 33

    Shariah Supervisory Board (SSB) 34

    Introduction to the SSB 34

    Formation of the SSB 35

    Status of the SSB Within the Industry 36

    Functions of the SSB 36

    Corporate and Shariah Governance 38

    Shariah Governance Process 38

    Key Terms and Concepts 39

    Chapter Summary 39

    CHAPTER 3: Islamic Banking versus Conventional Banking 47

    Introduction to Islamic Banking 47

    Islamic Banking versus Conventional Banking 49

    Similarities Between Conventional and Islamic Banks 49

    Differences Between Conventional and Islamic Banking 49

    Relationship with the Central Banks 50

    Risks of Banks – Generic and Specific to Islamic Banks 51

    Generic Risks 51

    Risks Specific to Islamic Banks 52

    Financial Intermediation 54

    The Definition of Financial Intermediation 54

    Conventional Financial Intermediation 54

    Islamic Financial Intermediation 54

    Islamic Financial Intermediation Models 56

    Distribution of Islamic Banking Products 58

    Conventional versus Islamic Financial Intermediation 58

    Balance Sheet of an Islamic Bank – Sources and Uses of Funds by an Islamic Bank 59

    Sources of Funds 59

    Application of Funds 60

    Contracts in Shariah Law 61

    Contracts of Exchange in Shariah-Compliant Commerce and Finance 62

    Common Islamic Banking Products 63

    Retail Islamic Banking Products 63

    Corporate Islamic Banking Products 64

    Financial Accounting in Islamic Banking 65

    Objectives of Islamic Financial Accounting 66

    Features of Islamic Financial Accounting 66

    Challenges Faced by Islamic Banks 67

    Islamic Finance and the Financial Crisis 68

    International Islamic Regulatory and Standard Setting Bodies 68

    Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) 69

    Islamic Financial Services Board (IFSB) 69 Liquidity Management Centre (LMC) and International Islamic Liquidity Management (IILM) 70

    International Islamic Financial Market (IIFM) 70

    International Islamic Rating Agency (IIRA) 70

    General Council for Islamic Banks and Financial Institutions (CIBAFI) 71

    International Islamic Centre for Reconciliation and Commercial Arbitration for Islamic Finance Industry (IICRCA) 71

    Islamic Development Bank (IDB) 71

    International Islamic Fiqh Academy 72

    Key Terms and Concepts 73

    Chapter Summary 73

    CHAPTER 4: Murabaha 79

    Introduction to Murabaha 79

    Conditions Related to Murabaha 81

    Calculation of Murabaha Profit 83

    The Murabaha Process 83

    Practical Applications of Murabaha 85

    Tawarruq, Reverse Murabaha or Commodity Murabaha 85

    Challenges and Problems Associated with Murabaha 86

    Comparison of Murabaha with Conventional Loans 88

    Key Terms and Concepts 90

    Chapter Summary 90

    CHAPTER 5: Mudaraba 95

    Introduction to Mudaraba 95

    Use of Mudaraba for Financial Intermediation of Islamic Banks 96

    Profit Calculation in Mudaraba 97

    Provisions and Reserves Related to Mudaraba 98

    Mudaraba as a Limited Recourse Debt Finance 99

    Types of Mudaraba 99

    Shariah Conditions Related to Mudaraba 100

    Additional Conditions Related to Mudaraba 101

    Challenges and Problems Related to Mudaraba 102

    Practical Applications of Mudaraba 102

    Comparison of Mudaraba with Interest-Based Conventional Banking 102

    Accounting Issues Related to Mudaraba 104

    Key Terms and Concepts 104

    Chapter Summary 105

    CHAPTER 6: Musharaka 111

    Introduction to Musharaka 111

    Types of Musharaka 112

    Shariah Rules and General Principles Guiding Musharaka Contracts 114

    Problems Related to Musharaka 115

    Practical Uses of Musharaka 116

    Examples of the Use of Diminishing Musharaka 118

    Securitization of Musharaka 121

    Comparison of Musharaka with Interest-Based Financing 121

    Comparison of Musharaka with Mudaraba Financing 122

    Key Terms and Concepts 123

    Chapter Summary 123

    CHAPTER 7: Ijara 129

    Introduction to Ijara 129

    Ijara in Islamic Banks 130

    Types of Ijara 130

    Ijara, Regular Ijara or Operating Lease 130

    Ijara wa Iqtina, Ijara Muntahia Bittamleek or Financial Lease 131

    Ijara Thumma al Bay 132

    Shariah Rules and General Principles Guiding Ijara Contracts and their Characteristics 132

    Documentation Related to the Ijara Contract 136

    Main Differences Between Ijara and a Conventional Lease 136

    Differences Between Ijara and a Conventional Loan Contract 138

    Differences and Similarities Between Ijara Wa Iqtina and Diminishing Musharaka 139

    Practical Applications of the Ijara Contract 139

    Calculation of Lease Rentals 139

    Practice Calculations 139

    Key Terms and Concepts 140

    Chapter Summary 140

    CHAPTER 8: Salam 145

    Introduction to Salam 145

    Important Characteristics of the Salam Contract 146

    History of the Salam Contract and its Shariah Acceptability 147

    Benefits of the Salam Contract 148

    Role of Islamic Banks in Salam and the Parallel Salam Contract 148

    Salam and Parallel Salam Diagram and Process 149

    Practical Application of Salam 150

    A Practical Example 150

    Problems Related to Salam Contracts 151

    Comparison of Salam Contract with Conventional Banking 151

    Key Terms and Concepts 151

    Chapter Summary 152

    CHAPTER 9: Istisna 155

    Introduction to Istisna 155

    Shariah Rules and General Principles Guiding Istisna Contracts and their Characteristics 156

    Role of Islamic Banks in Istisna and Parallel Istisna 158

    Description of the Process 159

    Problems Related to Istisna and Parallel Istisna 160

    Comparison of Istisna with Interest-Based Finance, Salam and Ijara 161

    Difference Between Salam and Istisna 162

    Comparison of Istisna with Ijara 163

    Practical Application of Istisna 163

    Key Terms and Concepts 164

    Chapter Summary 164

    CHAPTER 10: Takaful 169

    Background of Takaful 169

    Modern Takaful Industry as an Alternative to Conventional Insurance 170

    Parties in Takaful 171

    Shariah Rules and General Principles Guiding Takaful Contracts and their Characteristics 172

    The Development of Takaful 174

    During the Time of the Prophet 174

    The 18th and 19th Centuries 174

    20th Century 174

    The 21st Century and Moving Forward 175

    Challenges Faced by the Modern Takaful Industry 176

    Types of Takaful 177

    General Takaful 177

    Family Takaful 178

    Operational Structure of Takaful 180

    Takaful Models 181

    Pure Wakala Model 181

    Pure Mudaraba Model 183

    Wakala and Mudaraba Combined or Hybrid Model 185

    Waqf–Wakala–Mudaraba Model 185

    Comparison of the Different Takaful Models 187

    Underwriting Surplus or Deficit and Technical Provisions 189

    Allocation of Underwriting Surplus 189

    Management of Underwriting Deficit 190

    Conventional Mutual Insurance and Takaful 190

    Similarities and Difference Between Takaful and Conventional Insurance 191

    Similarities 191

    Differences 191

    Retakaful 196

    Similarities Between Retakaful and Reinsurance 197

    Differences Between Retakaful and Reinsurance 197

    Key Terms and Concepts 198

    Chapter Summary 199

    CHAPTER 11: Islamic Investments and Sukuks 205

    Investment Markets and Products 205

    Islamic Investments 207

    Money Markets – Islamic Perspective 207

    Capital Markets – Islamic Perspective 208

    Dealing with Non-compliant Stocks 209

    Purification of Income Distribution 210

    Islamic Asset and Fund Management 210

    Islamic Unit Trust or Mutual Fund 211

    Common Types of Islamic Investment Fund 212

    Islamic Real Estate Investment Trusts 213

    Similarities Between REITs and I-REITs 214

    Differences Between REITs and I-REITs 215

    Risks and Challenges Inherent in the Islamic Capital Markets 216

    Shariah Governance and the Shariah Supervisory Board in Islamic Investment 216

    Comparison of Islamic Investments with Conventional Investments 217

    Introduction to Sukuks 218

    Characteristics of the Islamic Investment Product – Sukuk 218

    Types of Sukuks 220

    Ijara Sukuk 220

    Istisna Sukuk 222

    Salam Sukuk 223

    Murabaha Sukuk 223

    Mudaraba Sukuk 224

    Musharaka Sukuk 226

    Controversy Related to Sukuks 227

    Rating of Sukuks 229

    Trading of Sukuks on the Secondary Markets 229

    Comparison of Sukuks with Conventional Bonds 230

    Common Advantages of Both Conventional Bonds and Sukuks 230

    Differences Between Conventional Bonds and Sukuks 231

    Key Terms and Concepts 235

    Chapter Summary 235

    CHAPTER 12: Global Standing of Islamic Finance and Banking 241

    Background of Modern Islamic Finance and Banking 241

    Conventional versus Islamic Finance 242

    Global Growth of the Islamic Finance and Banking Industry 243

    Islamic Finance and Banking and the Muslim Community 245

    Banking and Islamic Banking in the Middle East and the GCC 246

    Banking and Islamic Banking in South and South-East Asia and Beyond 247

    Achievements and Opportunities in Global Islamic Finance and Banking 247

    Challenges Faced by Islamic Finance and Banking 248

    Social Responsibilities of Islamic Finance 253

    Going Forward 254

    Key Terms and Concepts 255

    Chapter Summary 255

    GLOSSARY 257

    REFERENCES 271

    INDEX 277

  • SYEDA FAHMIDA HABIB, is currently an instructor at the School of Continuing Studies, York University, Toronto, Canada, specializing in finance, financial accounting and Strategic Management. Prior to this, she served as a senior lecturer at the Higher Colleges of Technology (HCT), UAE, for 19 years, specializing in various finance courses and especially involved in developing and team leading Islamic Finance and Banking. She holds an MBA, a Masters in Applied Finance and a DBA, is a member of CISI, and of the Institute of Islamic Banking and Insurance, London. She has written six books in the areas of finance, which were adopted as primary texts for HCT courses in the areas of Introduction to Finance, Financial Services Marketing in the Arab World and Personal Finance in the Arab World.

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