Islamic Financial System Principles And Operations Pdf File
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- Islamic finance products, services and contracts
- Islamic financial system : principles & operations.
- Islamic banking and finance
Islamic finance products, services and contracts
Try it out for free. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available. Fatwa : A legal opinion or pronouncement made by a Sharia board, or an Islamic scholar on any matter pertinent to sharia law. Gharar : Describes a risky or hazardous sale, where the details of the sale contract are unknown or uncertain. Recently, Islamic banking has become a very important part of the global financial services industry.
This paper aims to clarify the concept of Islamic banking, highlight most popular features of Islamic transactions; how these transactions in practice are similar to the conventional banks transactions, and the experience of the Gulf Cooperation Council GCC in Islamic banking field.
Many writings argue that the practice of Islamic banking is so far from its theory. This paper also investigates the question of whether the key issue in Islamic banking is to meet certain procedures or to achieve the goals of Islamic law. Definition of Islamic Bank. Islamic banking stems from Sharia Law and all Islamic banking transactions should comply with Sharia Law provisions.
The key feature in Islamic banking is the Profit-Loss Sharing PLS which means that the role of the bank is not lending money to clients but participating in the business with the clients as a financier in different financial positions.
Thus, the philosophy of Islamic banking does not consider money as an earning asset by itself; but it is used to evaluate commodities[ 3 ]. Therefore, the main purpose of Islamic banking is to achieve welfare for all society and not to earn money[ 5 ]. Of course, this is the theory in Islamic banking; we will investigate whether the reality of Islamic banking matches the theory.
In the s Bahrain implemented Islamic banking within the framework of its existing system. As of early Islamic financial institutions were present in more than 70 States, and their assets exceeded the USD billion mark. Since the turn of the century, global assets of Islamic financial institutions have increased significantly. State s ukuk emerged around and quickly created a large market in several States, particularly in the GCC region[ 7 ].
GCC markets showed that customers are more attracted to the use financial instruments offered by Islamic banks. The GCC has a dual banking system where Islamic and conventional banks are operating side by side[ 8 ], other countries have different system where Islamic banks are separated from conventional banks, such as Jordan and Palestine.
The key challenge facing monetary authorities in GCC is how to bring the Islamic banks and activities under the same supervision imposed on conventional banks[ 9 ]. The development of Islamic finance industry since encompasses Islamic Takaful insurance , sharia-compliant asset management and investment banking. GCC legislations and regulations have facilitated the development of Islamic banking[ 10 ].
However, other countries, like Malaysia; have done much to encourage Islamic banking through legislations, tax exemptions and subsidies. In the Islamic Republic of Iran also introduced legislations to make its entire banking system sharia-compliant, a precedent that none of GCC states have done yet[ 11 ]. Islamic banks in GCC have been more innovative than their Iranian counterparts in terms of product development and providing a much more attractive range of services, because of the need to compete with conventional banks in their domestic markets and because the Iranian banks are state-owned, which makes them more bureaucratic than innovative banks[ 12 ].
GCC Islamic banks have rapidly expanded their branch network in the world. Dubai Islamic Bank has established branches in Pakistan, and it purchased the Bank of Khartoum in Sudan as well as three real-estate companies in Egypt. It also has a Dubai Islamic Bank has also a 43 per cent investment stake in real-estate companies in Turkey, Lebanon and the United Kingdom[ 13 ]. Features of Islamic Banking Transactions.
The essential feature of Islamic banking is the interest-free principle[ 14 ]. However, there are other features. The Islamic finance transactions must avoid the following matters:[ 15 ]. The nature of interest is not complying with sharia law, it is fixed and certain and the risk of loss is not available and the Islamic banking based on PLS.
The PLS principle assumes that the return is not predetermined but the profit-sharing ratio is predetermined. In general, any transaction should comply with the justice principles in the sharia law and some risk must be assumed to justify returns in the transactions; unconditional returns are not compliant with the sharia law. Many people cannot differentiate between Islamic transactions and normal transactions in conventional banks.
The following example clarifies the difference:. What is the difference between two transactions? In the Islamic transaction the bank possesses the car then resells it to the client which means that the bank bears a risk of loss.
In the conventional bank case it has no risk at all; the bank lends only money and gains money and does not deal with commodities. The question whether the Islamic bank takes a serious risk is a critical question and the answer is addressed in the next section. Islamic Banking Instruments. Muslim population, from Muslim communities and Western countries, used to use Islamic bank services.
The Islamic bank deals with various types of instruments, the following instruments are the most popular in Islamic banking field:. In such case the mark-up is permitted because it is a trade transaction with the risks associated in the sale of goods[ 17 ].
In practice, Islamic banks take actions to reduce the risks in murabaha transaction; such as:[ 18 ]. By using the above mentioned actions the return becomes fixed and predetermined; however, the transaction is still compliant with sharia law even by taking such actions.
The Islamic scholars did not address the actions that the bank may take to reduce its risk. Both parties will share the profits, if any, and losses, if any, however, will be borne wholly by the bank[ 21 ]. There are two aspects of mudaraba for the Islamic bank; the first one is the popular side in which the bank plays a role in the investment portfolio side. The second aspect is not popular, in which the bank uses mudaraba in trade finance and investment projects[ 22 ].
In this transaction the bank and its client use their capital jointly to generate a surplus. Both parties will share profits or losses according to how they agreed in the contract depending on the equity ratio[ 23 ].
Musharaka is similar to the idea of partnership and joint stock ownership. The parties may agree upon expiration of the period of the lease contract, the title of the equipment or machine may be sold to the lessee[ 24 ]. In ijarah transaction the ownership remains with the lessor bank and its usufruct transferred to the lessee for specific rental payments incorporating with profits.
The fixed leasing charge is allowed under sharia law because the financier assumed risks like a duty of repair and revoke the lease contract by the lessee. Some writings made analogy between the rent on property and interest on loan.
Indeed, such analogy is rejected by Islamic scholars, because the benefit to the lessee is certain, while the benefit for the borrower is uncertain[ 25 ]. However, the Islamic banks in lease operations take the following actions to reduce the risks to a minimum[ 26 ]:.
In practice there is a difference between what Islamic rules want to achieve and what the Islamic banks are doing to get around these rules to reduce their risks. In the OIC legitimized the use of sukuk , but the development of sukuk market took some years.
The Malaysian government issued the first Islamic global bond in Sukuk may be issued on behalf of governments and also on behalf of corporations. There are various types of sukuk, but the most popular one is sukukal-ijrarh because each security bond is pro-rata ownership of physical assets and trading sukukal-ijrarh in secondary market is permitted[ 29 ].
The key idea in sukukal-ijrarh referrers to securitization; although the concept of securitization is derived from conventional bond application, Islamic securitization has distinctive features that distinguish it from asset securitization. According to the sharia law Islamic securitization must be free from riba , gharar and maysir and Islamic securitization must involve the funding or the production of real assets[ 30 ].
The procedures of issuing sukukal-ijrarh by BMA is related to the International Bahrain Airport and was done by the following steps[ 33 ]:. In practice, sukuk al-ijrarh is similar to conventional bonds except in ownership of the assets. Some writings criticize sukukal-ijrarh issued by BMA claiming that such sukuk are not different from the conventional bonds and the only difference is the naming and that the issuing process was non-compliant with the sharia law because[ 34 ]:.
However, the Sharia Committee in Bahrain issued a Fatwa to legalize the sukuk process and presented arguments to show that the process is totally compliant with the sharia law[ 35 ]. There is a controversy between Muslim scholars surrounding the question: what is considered compliant with sharia law and what is non-complaint with sharia law.
The controversy is not only in sukuk , but in every single Islamic transaction. According to sharia law the debt cards are permitted since there is no grace period and no interest riba , but the problem with this type of credit cards is that it lends clients an amount of money and the client is committed to repay the amount with interest.
Some Islamic financial organizations developed liberal rulings to adopt Islamic credit cards for longer periods than the usual one-month grace period. With these cards purchases are automatically financed over a fixed period, usually 12 months[ 36 ].
The OIC issued a fatwa legalizing credit cards if they are compliant with sharia law's principles. The fatwa draw up the conditions of credit cards from Islamic perspective and these conditions are[ 38 ]:. However, in practice there are several forms of applying the Islamic rules on credit cards.
For example, some Islamic cards involve a transaction that consists of two agreements. In the first agreement the customer buys merchandise from the bank at a stipulated price, the bank buys back the merchandise from the client at a lower price.
The profit rate levied by Islamic banks is known in advance[ 39 ]. There is another form of using Islamic credit cards, in the Kuwait Finance House issued credit cards to be used specifically to buy consumer durables from selected shops, these cards were based on ijarah [ 40 ]. Some writings criticized the manner of using credit cards and claimed that the only Islamic way to use credit cards is by giving a loan without interests qard hasan and the only permitted fees are the fees of providing the service and any charge of profit is considered as riba [ 41 ].
Regulation and Supervision Structures of Islamic Banks. As a practical matter, Islamic banks are currently governed by the same regulations that govern conventional banks; such regulations generally follow the guidelines of the Basle Committee on Banking Supervision.
But Basel instructions do not consider the nature of Islamic banking transactions[ 42 ]. Conventional banks generally follow the Basel Committee[ 43 ] rules. The Committee in issued Basel II which is a set of recommendations on banking laws and regulations. The purpose of Basel II is the creation of international standards for banking regulators to be used for the creation of regulations respecting the amount or ratio of capital that banks should put aside or reserve as a cushion against the types of financial and operational risks which banks confront.
These international standards act as a measure of protection for the international financial system against the possibility of a major bank.
To achieve this goal, Basel II sets up rigorous risk and capital management requirements designed to ensure that the banks hold capital reserves appropriate to the risk exposure of the particular bank inherent in its lending and investment practices.
Accordingly, under these rules the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold in reserve to safeguard its solvency and overall economic stability[ 44 ]. After the worldwide financial crisis, Basel III was issued to provide a new global regulatory standard on bank capital adequacy and liquidity. The Basel Committee does not take in its account Islamic banking transactions.
However, some Islamic banks have attempted to follow Basel II.
Islamic financial system : principles & operations.
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The Qur'an prohibits riba , which literally means "increase". Technically riba is the increase when liquid or fungible assets cash, debt, grains, etc. In the late 20th century, as part of the revival of Islamic identity,  [Note 1] a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community. The industry has been lauded for returning to the path of "divine guidance" in rejecting the "political and economic dominance" of the West,  and noted as the "most visible mark" of Islamic revivalism,  its most enthusiastic advocates promise "no inflation, no unemployment, no exploitation and no poverty" once it is fully implemented. Although Islamic finance contains many prohibitions—such as on consumption of alcohol, gambling, uncertainty, etc. According to Islamic economists Choudhury and Malik, the elimination of interest followed a "gradual process" in early Islam, "culminating" with a "fully fledged Islamic economic system" under Caliph Umar CE. In the late 19th century Islamic Modernists reacted to the rise of European power and influence and its colonization of Muslim countries by reconsidering the prohibition on interest and whether interest rates and insurance were not among the "preconditions for productive investment" in a functioning modern economy.
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Islamic banking and finance
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This paper is an introduction to the practices and institutions of Islamic finance. It is very important to establish which Islamic countries have introduced an economic system based on Islamic law and which have introduced a dual system. It is also important to know where the first Islamic bank was born to understand the evolution of the spread of the Islamic banking system. To understand how an Islamic bank works it is important to understand what are the tools that it uses, and especially the international rules which must be respected in order to diffuse the Islamic system.
Islamic finance often faces numerous challenges in a dynamic marketplace. Furthermore, corporate social responsibility CSR , Islamic accounting, risk management, Basel Accord, and Shari'ah governance systems are discussed in the book. Despite the relevance of these issues in Islamic finance, only a few reference sources exist.
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Islamic Banking and Finance: New Perspectives on Profit Sharing and Risk
Banking or banking activity that complies with sharia Islamic law —known as Islamic banking and finance , or shariah  -compliant finance  —has its own products, services and contracts that differ from conventional banking. Some of these include Mudharabah profit sharing , Wadiah safekeeping , Musharakah joint venture , Murabahah cost plus finance , Ijar leasing , Hawala an international fund transfer system , Takaful Islamic insurance , and Sukuk Islamic bonds. Sharia prohibits riba , or usury , defined as interest paid on all loans of money although some Muslims dispute whether there is a consensus that interest is equivalent to riba. To be consistent with the principles of Islamic law Shariah and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities:. Money earned from the most common type of Islamic financing—debt-based contracts—"must" come "from a tangible asset that one owns and thus has the right to sell—and in financial transactions it demands that risk be shared.
ГЛАВА 111 В комнате оперативного управления раздался страшный крик Соши: - Акулы. Джабба стремительно повернулся к ВР.