Islamic Finance and Law


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What Is Islamic Finance? - dummies

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What will I gain from this programme? Programme structure. Duration: 1 year. Admission requirements. Want more information? Al Nasser complains that "Shariah authorities demonstrate excessive confidence in their subjects when it comes to dealing with parities in the industry", and Shariah audits are needed "to bring about transparency and ensure" that the institutions "deliver what they have committed to their customers". Furthermore, when external Shariah audits are carried out, "many of these auditors frequently complain about the amount of violations that they witness and cannot discuss" because the records they have examined "have been tampered with".

Although Islamic banking forbids interest, its "profit rates" often are benchmarked to interest rates.


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Islamic banker Harris Irfan states "there is no question" that benchmarks such as LIBOR "continue to be a necessary metric" for Islamic banks, and that the "overwhelming majority of scholars have come to accept this, however imperfect a solution this may seem", [] but Muhammad Akram Khan writes that following the conventional banking benchmark LIBOR "defeats the very purpose for which the Islamic financial products were designed and offered" in the first place, []. In addition skeptics have complained that the rates of return on accounts in Islamic banks are suspiciously close to those of conventional banks, when in theory their different mechanisms should lead to different numbers.

A study in Turkey found the long-term relationship between term-deposit rates at three of four " participation banks " i. Islamic Banks "significantly cointegrated" with those of the conventional banks. Islamic banking and finance has lacked a way to earn a return on funds "parked" for the short term, waiting to be invested, which puts those banks a disadvantage to conventional banks. Conventional banks are able to borrow and lend by using the interbank lending market — borrowing to meet liquidity requirements and investing for any duration including very short periods, and thereby optimize their earnings.

While Muslim countries such as Bahrain, Iran, Malaysia [] [] and Sudan have started to develop an Islamic money market, and have been "issuing securitized papers on the basis of musharaka , mudaraba and ijara ", at least as of , the "lack of an appropriate and efficient secondary market" has meant the relative volume of these securities is "much smaller" than on the conventional capital market. Regarding non-PLS, "debt-based contracts", one study found that "the business model of Islamic banking is changing over the time and moving in a direction where it is acquiring more liquidity risk.

To deal with the problem of earning no return on funds held for the sake of liquidity or because of a lack of investment opportunity, many Islamic financial institutions such as Islamic Development Bank and the Faisal Islamic Bank of Egypt [] have "been explicitly and openly earning interest on their excess funds, often invested in safer, debt-like or debt instruments overseas". Scholars in Islamic finance and banking have invoked necessity to permit exceptional relaxations of rules. They have issued fatwas opinions allowing Islamic banks to deposit funds in interest-bearing accounts.

The four schools Madhhab of Sunni fiqh Islamic jurisprudence apply "Islamic teachings to business and finance in different ways", and have not come closer to agreement. Furthermore, shari'a boards sometimes change their minds, reversing earlier decisions. Differences between boards as to what constitutes shariah compliance may raise "doubts in the minds of clients" over whether a given bank is truly shariah compliant, and should be given their business. Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory legal and religious device In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable.

Late fees in particular have been assimilated to riba. A number of suggestions have been made to deal with the problem.

Inflation is also a problem for financing where Islamic banks have not imitated conventional baking and are truly lending without interest or any other charges. Whether and how to compensate lenders for the erosion of the value of the funds from inflation, has also been called a problem "vexing" Islamic scholars, [] since finance for businesses will not be forthcoming if a lender loses money by lending. Suggestions include indexing loans opposed by many scholars as a type of riba and encouraging inflation , [] denominating loans "in terms of a commodity" such as gold, and further research to find an answer.

Islamic banking and finance customers, are almost all, if not entirely, Muslims. But the majority of financial institutions that offer Islamic banking services are Western financial institutions, not owned by Muslims. Supporters of Islamic banking have cited this interest of western banks in Islamic banking as evidence of the strong demand for Islamic banking and thus an "achievement of the movement".

However, critics complain these banks lack a deep faith-based commitment to Islamic banking which means. Sources differ over whether Islamic banking is more stable and less risky than conventional banking. Proponents such as Zeti Akhtar Aziz, the head of the central bank of Malaysia have argued that Islamic financial institutions are more stable than conventional banks because they forbid speculation [] and the two main types in theory of Islamic banking accounts — "current account" and mudarabah accounts — carry less risk to the bank.

This introduces a host of other well-documented risk factors for the institution On the other hand, Habib Ahmed —writing in shortly after the financial crisis — argues that the practices of Islamic finance have gradually moved closer to conventional finance exposing them to the same dangers of instability. When the practice of Islamic finance and the environment under which it operates are examined, one can identify trends that are similar to the ones that caused the current crisis In the recent past, the Gulf region has witnesses its own episodes of speculation in their stock and real estate markets.

Key features

Finally, the Islamic financial industry has witnessed rapid growth with innovations of complex Shari'ah compliant financial products. Risks in these new Islamic financial products are complex, as the instruments have multiple types of risks In any event, a few Islamic banks have failed over the decades. In the Islamic investment house, Ar-Ryan collapsed causing thousands of small investors to lose their savings they were later reimbursed for their losses by an anonymous Gulf state donor [] and dealing a blow to Islamic finance at the time.

In the management of Bank al Taqwa's failed. It was later revealed that management had violated banking rules "invested in one single project more than 60 per cent bank's assets. The Ihlas Finance House in Turkey closed in due to "liquidity problems and financial distress". During the global financial crisis Islamic banks "on average, showed stronger resilience" than conventional banks, but "faced larger losses" when the crisis hit "the real economy," according to a IMF survey. At the beginning of the "Great Recession" of , Islamic banks were "unscathed", leading to one Islamic banking supporter to write that the collapse of leading Wall Street institutions, particularly Lehman Brothers, "should encourage economists world-wide to focus on Islamic banking and finance as an alternative model.

Concentrated ownership is another danger to the stability of Islamic banking and finance.

Munawar Iqbal and Philip Molyneux write that only. This concentration of ownership could result in substantial financial instability and possible collapse of the industry if anything happens to those families, or the next generation of these families change their priorities. Similarly, the experience of country-wide experiments has also been mostly on the initiatives of rulers not elected through popular votes.

Harris Irafan warns that the "macroeconomic exposures" of Islamic banks constitute a "ticking time bomb" of a "billions of dollars" in "unhedged currencies and rates".

The difficulty, complexity and expense of hedging these in the correct Islamic manner is such that as of , the Islamic Development Bank "was hemorrhaging cash as if it were funding a war. It simply couldn't swap dollars for euros or vice versa on an ongoing basis without resorting to the conventional markets.

What Is Islamic Finance And How Does It Work?

The majority of Islamic banking clients are found in the Gulf states and in developed countries. A study of Islamic banking customers in Bangladesh found "most customers" between 25—35 years, "highly educated" and having a "durable relationship" with the bank, more knowledgeable about account than financing products. In series of interviews conducted in and with Pakistani banking professionals conventional and Islamic bankers, Shariah banking advisors, finance-using businessmen, and management consultants , economist Feisal Khan noted many Islamic bankers expressed "cynicism" over the difference or lack thereof between conventional and Islamic bank products, [] the lack of requirements for external Shariah-compliance audits of Islamic banks in Pakistan, [] shariah boards lack of awareness of their banks' failure to follow shariah compliant practices in or their power to stop these practices.

What I could do, I've done. Borrowers were "less likely to default during Ramadan and in big cities if the share of votes to religious-political parties increases, suggesting that religion — either through individual piousness or network effects — may play a role in determining loan default. Muhammad El-Gamal argues that because Islamic financial products imitate conventional financial products but operate in accordance with the rules of shariah, different products will require additional jurist and lawyer fees, "multiple sales, special-purpose vehicles , and documentations of title ".

In addition there will be costs associated with "the peculiar structure that Islamic banks use for late payment penalties". These contracts follow classical texts and were created in a time when financial markets were very limited. They are not equipped to "disentangle various risks" that "modern" financial markets and institutions such as " money markets , capital markets , options markets , etc. In one important part of the finance market — home buying — Islamic finance has not been able to compete with conventional finance in at least some countries the UK as of , and the US and Canada as of Visser credits the higher cost of Islamic ijara financing to its higher risk weighting compared to conventional mortgages under Basel I and Basel II international standard of minimum capital requirements for banks.

According to M. Farooq, "common explanations offered by" the Islamic finance movement for the Islamic banking industry shortcomings are that. While the veracity of the second explanation can not be verified before a complete Islamic society is established, Feisal Khan points in regard to the first defense that it has been over twenty years since one critic Timur Kuran [] first highlighted the industry problems the basic similarity of Islamic banking in practice to the conventional, the marginalizing of the equity-based, risk-sharing modes and embrace of short-term products and debt-like instruments , and since a supporter Ausaf Ahmad defended the industry as early in its transition from conventional banking.


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Seventeen years later, Ibrahim Warde, an Islamic finance proponent, lamented that "rather than disappearing, murabaha and comparable sale-based products grew significantly and today they constitute the bulk of the activity of most Islamic Banks Most critics of the Islamic banking industry call for further orthodoxy and a redoubling of effort and stricter enforcement of sharia. Farooq and M. Khan , have blamed the industry problems on its condemnation of any and all interest on loans as forbidden riba , and the impracticality of attempting to enforce this prohibition.

From Wikipedia, the free encyclopedia. Part of a series on financial services Banking Types of banks.

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