Islamic Banking and Finance Fundamentals

Top 20 FREQUENT WORDS

islamic 1648 banks 955 banking 777 financial 554 finance 324 investment 295 deposits 291 contract 275 profit 258 conventional 249 assets 224 shari 222 risk 219 mudarabah 203 depositors 196 funds 179 options 177 legal 176 based 175 business 161

DOCUMENT KEY POINTS

while on the practical side the diversity of regulatory supervisory and legal environments faced by islamic financial institutions the issues of a proper accounting framework corporate governance and making available of a complete spectrum of islamic financial products have evolved as some of the new challenges
however the editors felt that the information content of the first category the orientation lectures will find its own currency and circulation because lectures by nature are repeated and their information content shared more widely

we also like to acknowledge with appreciation the academic committee of the conference comprising of irti and ubd staff who refereed the large number of papers submitted for the conference
we also acknowledge with thanks the tedious work of mister sajjad qurban mister amanul hoque mister mohammad asiri and many others at irti who helped us at different stages of typesetting and final production of this volume

islamic banking and finance in modern times grew out of the muslims desire to find out the ways and means to fulfil their financial requirements in view of prohibition of interest
these theoretical models perceived two tired mudarabah finance structure in which the islamic bank on one hand would receive deposits as agent mudarib of its customers and on the other hand provide finance to enterprise as principal sleeping partner rabb al mal

a combination of practical realities of the business and constraints of the regulatory environment forced the islamic banks to rely mostly on murabahah and leasing contracts for the financing activities instead of the originally conceived mudarabah contract in the second tier
however the accumulated theoretical knowledge prepared the ground and developed sufficient collective will for the emergence of first islamic banks one in private sector dubai islamic bank and another as a multilateral organization islamic development bank both of which came into being in the early s

chapra argues that inadequate market discipline is the main cause of financial crises but is it the ultimate one what causes the erosion of market discipline he points to the a absence of risk sharing as the root cause of all crises easy availability of credit and the resultant steep rise in debt particularly short term debt are the result of inadequate market discipline in the financial market as a result of the absence of risk sharing
salman syed ali ausaf ahmad umer chapra discusses the economic case against interest and asks why should we try to replace the interest based conventional system when it has been in existence for such a long time and has become highly sophisticated in its serving the society

for example combining a contract for search services ijarah to search and find a particular type of goods or a particular price for it with a supply or sale contract of that good a kind of put option is created in the sense that the service charge is definite to keep in lieu of the search services and it reduces the price risk for the goods sellera which is the ultimate economic purpose of any put option

an important finding is that the despite inherent stability features financial distress in islamic banks can stem from the current structure of these banks the regulatory environment that restricts them from owning or equity participation in businesses and trading and from the lack of support infrastructure institutions

the methodology builds upon the fact that being an index the djimi provides a unique opportunity to assess the impact of the constraints on performance free of other considerations such as investment style fund objects and timing that have clouded the analysis of the performance of ethical mutual funds
abul hassan and antonios antoniou in their paper equity fund s islamic screening effects on financial performance and its performance analysis chapter take us away from banking institutions and focus on financial markets

islamic banking and finance philosophical underpinnings mabid ali al jarhia introduction islamic banking and finance can be described as a system through which finance is provided in the form of money in return for either equity or rights to share in future business profits or in the form of goods and services delivered in return for a commitment to repay their value at a future date
it has taken a a this paper is derived from the keynote address delivered by doctor mabid ali al jarhi the then director of the islamic research and training institute at the conference on islamic banking and finance held at brunei darussalam brunei and jointly organized by irti and the university of brunei during january

shari ah islamic teachings in the fields of mu amalat or transactions prohibit selling a certain quantity of any present goods or service for a different presumably larger quantity of the same good or and service delivered in the future

mabid ali al jarhi islamic banks should therefore function as universal banks which are large scale banks that operate extensive networks of branches provide many different services hold several claims on firms including equity and debt and participate directly in the corporate governance of the firms that rely on the banks as sources of funding or as securities underwriters

it is therefore necessary to show that the interest free financial system is superior to the interest based system a doctor umer chapra is presently working as research adviser at the islamic research and training institute irti of the islamic development bank idb

however the persistence of the crises suggests that either the market discipline does not exist or it is ineffective in preventing the continued rise in macroeconomic imbalances in the public sector and living beyond means in the private sector such that it becomes possible to have excessive leverage and to blow the speculative bubble to the point of bursting
hence the proposals for the new architecture have been unable to step beyond the basic principles of conventional wisdom which emphasize sound macroeconomic policies along with sustainable exchange rates proper regulation and supervision and greater transparency for these principles see camdessus pp

then why one may ask has there been greater volatility in the last two decades compared with what prevailed before what has created the difference is the rise in the volume of funds as a result of rapid economic development after the second world war the revolution in information and communications technology and the liberalization of foreign exchange markets

in a financial system which assures in principle the repayment of deposits with interest and does not therefore permit the establishment of islamic banks because they provide such an assurance on income earning investment deposits it would be a breach of trust on the part of the governments to allow the violation of this principle
the first is to bail out the domestic banks at a great cost to the tax payer and the second is to allow the problem banks to fail

a hedge fund is able to pursue its operations in secrecy because as explained by chairman of the board of governors of the federal reserve system alan greenspan it is structured to avoid regulation by limiting its clientele to a small number of highly sophisticated very wealthy individuals december p

this proposal needs to be reviewed against the ineffectiveness of the securities transaction tax which is levied on the sale of stocks bonds options and futures by a number of major industrial countries including the us the uk france germany and japan
regulations even though unavoidable cannot be relied upon totally because they may not be uniformly applied in all countries and to all institutional money managers because of the off balance sheet accounts bank secrecy standards and the difficulty faced by bank examiners in accurately evaluating the quality of banks assets

making the depositors as well as banks participate in the risk of business would motivate the depositors to take greater care in choosing their banks and the bank management to assess the risks more carefully and to monitor the use of funds by the borrowers more effectively
what is necessary is not just to make the shareholders suffer when a bank fails but also to strongly motivate even the depositors to be cautious in choosing their bank and the bank management to be more careful in making their loans and investments

the introduction of greater discipline in the financial system which the prohibition of interest ensures along with the more effective regulation and supervision and the other reforms mentioned above should go a long way in substantially reducing volatility in the financial markets and in promoting faster development
the firm would be insuring itself to some extent to use his precise words against a strain which in difficult conditions can be serious at the cost of an increased payment in conditions when it would be easy to meet it

it is now important to see whether the assumption about the superiority of the interest free system with respect to the contribution that it can make to the realization of the universally cherished goal of socio economic justice is realistic
however the rich borrow not only for productive investment but also for conspicuous consumption and speculation while the governments borrow not only for development and public well being but also for chauvinistic defence build up and white elephant projects

budgetary deficits in the fifties and sixties made possible by the interest based system led to an international financial crisis in the late s and the early s and the breakdown of the bretton woods system
the squeezing of resources for need fulfilment and productive investment resulting from conspicuous consumption and speculation has made it difficult for even rich countries like the united states to fulfil the essential needs of all their people in spite of their desire to do so and the abundant resources at their disposal

if however banks are required to share in the risks and rewards of financing and credit is made available primarily for the purchase of real goods and services which the islamic system tries to ensure the banks will be more careful in lending and credit expansion will be in step with the growth of the economy
but this may not be possible when the value system encourages both the public and the private sectors to live beyond their means and the interest based financial intermediation makes this possible by making credit easily available without due regard to its end use

most scholars however feel that even though the salesbased modes are different from interest based financing and are allowed by the shari ah the socio economic benefits of the prohibition of interest may not be realized fully until the share of pls modes rises substantially in total financing
this should motivate the depositors to monitor the affairs of their banks more carefully and to punish them by withdrawing their deposits if the banks performance is not up to their expectations

it has also attracted the attention of western central banks like the federal reserve board and the bank of england international financial institutions like the imf and the world bank and prestigious centres of learning like the harvard and rice universities in the united states and the london school of economics and loughborough and durban universities in the united kingdom

the rationale for allowing these risk management mechanism is to allow the contracting parties a time to think about the contract and to avoid harm that may overwhelm them when the contract continued
this is exemplified in the number of traditional shari ah options such as khiyar al majlis khiyar al shart khiyar al ayb khiyar al naqd to mention but few

the contract may or may not be concluded and the ownership to the subject matter and entitlement to the price are floating hanging till the conclusion of the contract
in this context islamic banks and financial institutions need these options to meet their desire to avoid risks and manage unpleasant situations of supply and demand

when one explores the fiqh literature in respect to options it becomes clear that a valid option need to meet certain parameters among others the following a the general view of the jurists is that an option should be a quality that exists simultaneously with the subject matter of the contract at the time of its stipulation
the risk management of shari ah options the above basic features of shari ah options suggest that these options if put together manage a wide range of risks including the following a a

a call option entitles the holder the right but not the obligation to buy an asset at a pre determined exercise price in the future prior to or on the maturity
basic features of financial options from the above concept one may summarize the basic features of option contracts as follows a the buyer of option pays as consideration a premium

the differences of shari ah and financial options the examination of shari ah options shows that they differ in substance and form from financial options from various perspectives although some of the differences may be eliminated
similarities of shari ah and financial options there are similarities between financial options and shari ah options

mohammed arbouna option forms an integral part of the contract and its inclusion in the contract follows the conclusion of the contract or during the conclusion of the contract
does this mean that there is no contract in islamic law which can be compared with contracting on options or does it mean that sale and purchase of options cannot be examined under the principles of islamic law firstly it is true that contracting on operations of options in modern stock markets is completely a new phenomenon

this is because the partiers to the contract do not know whether or not the event may happen in which case the contract is finalized or the event may not take place in which case the contract becomes not executable
financial options and floating contracts the notion of options is similar to the concept of shari ah floating contracts namely al aqd al mu allaq and al aqd al mud f

al darir commented that mudaf contract may lead to devouring of property of others because the contract would be concluded in the future in which case the contracting parties are not aware of the consequences of the subject matter at the time

by definition arbun sale refers to a sale contract in which the buyer reserves a commodity pays a small part of the price and agrees to forfeit the paid portion of the whole price when the buyer fails to turn up on a particular date for taking the goods and payment of the remaining price
the jurists differ on this concept from the perspective of the validity of arbun sale itself and on the definition of the period of arbun ie whether arbun may be an open contract or a period for exercising it should be defined

this is because there are very important differences between arbun sale and financial options including the following a the amount that is described as arbun form part and parcel of the price of the sold item whereas the premium of financial options is not considered part of the price but rather a consideration for granting an option to buy or sell
mohammed arbouna c the arbun sale entitles the buyer to gain a binding offer from the seller while the buyer is at discretion to accept or reject the offer within the period of offer in consideration for the arbun

the definition of the majority of jurists suggest that the term property is used to define anything that a has monetary value and usufruct in the eyes of society b is allowed by the shari ah and is not assigned value due to necessity and need
imam alshafi i said the terminology mal should not be construed except as to what has value with which it is exchangeable and the destructor of it would be made liable to pay compensation and what the people would not usually throw away or disown such as fils valueless currency and similar things that people would usually throw away

the interest of an individual that constitute a right may be divided from proprietary quality to two categories a the interest could be attached to a property by definition such as a right to drink haq shurb which is attached to land in which case there is no legal objection to sell it even according to the hanafis together with the land

b the interest could be in association to what cannot be defined as property such as the right to bring up a child and the right to build a higher building adjacent to a neighbour in a manner that would affect the flow of space air to the lower building
this is because these are non pure rights ie these rights are not created for management of harm per se against the beneficiary but rather they exist following certain events like murder and marriage

why rights are not tradable it noted that the jurists are against trading in rights that are created by law which were termed by one modern scholar as essential rights such as the right of pre emption
but this conclusion may be encountered by saying that these rights can only be dropped and cannot be exchanged for money because they enjoy no monetary value which is a necessary requirement for exchange contracts

if the commitment fee is more than the loss incurred by the bank the remaining balance after deduction of the value of the loss or damage must be returned to the customer
this service may be done on the basis of fees for management of the documents involved and finding such goods on the basis of ijarah without necessarily connecting the premium paid to finding such goods

in this case we may create a secondary market for options in the sense that the beneficiary of the services of the offering party may sell it to a third party because the subject matter of sale in this case is the liability to provide services
on the other hand the offer to provide services may be done through ijarah muwaziya or parallel ijarah contract which means the offering party may look for another person to provide him with shares or commodities in order to fulfil the obligation towards the first beneficiary

financial options and payment of price in shari ah options the hanbali jurists argued that it is permissible for the seller on the basis of khiyar al shart to require that the buyer pays the price during the period of option so far as this is not intended for riba
the same stand was adopted by the hanafis and shafi is except that the hanafis allow payment of the price of exchange contract if the buyer makes the payment voluntarily not dependent on condition

the return is predictable for the depositors in the case of ordinary investment deposits the nd case as well as other investment deposits offering stable income flows the th case
what are possible contractual arrangements to regulate the bank depositor relationship what are their implications for management of funds at the banks end answers to these questions are explored hereunder

a recourse to amanah a i i i i a or wadi ah a i i Oi a is inadvisable for the following reasons i in the case of amanah banks will not have the authorization to draw benefits from the funds while they are with them
ii the shari ah has provided the wadi ah for situations where usufruct of an asset is separable from the main body of an asset

this last point presumes that the share of each depositor in total profits would equal the fraction of his deposit in the total mudarabah funds multiplied by the overall profit sharing ratio in favour of the depositors
in order to avoid any accounting complications the mudarabah may be restricted only to those depositors who are ready to keep their funds with the bank for full months

according to this option ownership of funds always remains with the depositors and is at no stage shared with the banks as opposed to the case of mudarabah or musharakah or transferred to them as in the case of a loan
of course it would be essential that the growth fund in turn represents a shari ah permissible investment portfolio that is also relatively risk free

and the contract may have provisions for temporary loan from the bank to the depositor to cover any shortfall when the profits earned fall short of the prescribed amount
along with this arrangement banks may also offer composite accounts in which one of the two accounts is essentially an interest free account technically a loan to the bank that might be drawn upon to meet the depositors emergent cash needs

however it may not be too long before the depositors start to ask what is the material difference from the shari ah point of view between islamic banks and interest based banks this in turn requires that some steps be taken sooner than later so that depositors do not lose trust in islamic banking

in context of islamic banking the cost also is the reputation damage to the nascent industry a slowdown in new developments towards interest free alternatives for the people and consequently a drag on realization of potential benefits for the society from islamic finance
being a deposit taking institution the liabilities of a bank are fixed and a fixed interest is promised on them while its assets in the form of loans are subject a economist islamic research and training institute islamic development bank

because when the value of assets of the bank decline due to some shock the liability of the bank also decreases correspondingly due to profit sharing nature of the deposit contracts
why this has happened to what extent the causes of financial distress and failures identified for the conventional banks are relevant for islamic banks what factors are unique to islamic banks to our knowledge so far there has been no systematic study or analysis on islamic banks failure

future evolution and stability of islamic banks and financial institutions will be influenced by the trend of financial liberalization development of other non bank financial institutions financial innovations development in ebanking that has the potential to integrate the geographically dispersed a a
while an ideal islamic bank operating on profit and loss sharing basis both on its asset and liability sides may be more stable than a conventional bank a crisis that may develop in the conventional banking sector can potentially affect islamic banks through contagion effect as well as through a general loss of confidence in the banking sector

in context of a banking crisis it means that irrespective of solvent position of a bank or of the banking sector as a whole if a random event can adversely change the collective expectations of the depositors ie its creditors then it can precipitate a run on the bank and on the banking system

causes of financial distressa policy oriented classification in this paper we want to approach the subject with policy perspective in identifying the causes of financial distress and banking crisis and highlight the differences and similarities in importance of these causes for islamic banks

this can further be divided between what is internal to the bank ie bank s control and what is external to the bank

if most of the liabilities of the banking sector are in foreign exchange or if the banks cannot adjust their liabilitya asset structure as fast as the home currency is depreciating then the costs of carrying such portfolio increases eventually putting the banks in financial distress and can possibly trigger a financial crisis
however being large in number their decisions are not coordinated except in situations of panics and mania when actions get coordinated in the form of a herd behaviour therefore for the time being we can abstract away from the role of bank customers as cause of banking crisis

inadequate accounting and legal protection of contracts shortcomings in accounting methods and auditing procedures at the banks level can hide and delay the realization of developing problems of illiquidity and insolvency by supervisors and depositors

if the banks are not careful in pricing the risk they may be tempted towards those clients who are willing to pay higher interest but are more risky and deny the credit to prudent ones who are willing to pay a lower interest
if they are not careful in risk assessment of their clients they may be tempted more to those who are willing to pay higher mark up rates than those who may be more prudent in risk taking and therefore willing to commit only a lower rate of mark up

in brief there are different factors which are important in affecting profit maximization of islamic banks such as boosting of all forms of deposits improvement in the quality of customer services expansion in the base of banking services protection of capital provision of humanitarian and social services etc

monzer kahf while it is neither morally wrong nor against the principle of profit maximization that a bank should offer its big clients special services that correspond to the level of profit it makes from dealing with them and their financial transactions experiences have shown that banks that are able to improve the services they offer to medium depositors and small traders can still make huge profits through economies of scale

success factors of islamic banks an empirical study based on keeping and maintaining a continuous relation with them which is to some experts the most important managerial rule success in banking services means the ability to interact with and relate to the client s desires anticipate their wishes and to offer such services that are specific to these desires and wishes

experience of some islamic banks in meeting their objectives this section shall make an attempt to study the experiences of some islamic banks in meeting their objectives as well as to measure the extent of their success through a study of their final accounts for the period from a

in bank f where average deposits profit surpassed average equity profit there are a few factors that are responsible including pricing policy and the bank s inability to develop its revenues as well as the weakness of its old inherent returns on the bank s assets investment
success factors of islamic banks an empirical study if equity increase comes about from retained profits under various names and from the increase in paid up capital we shall find the effect on banks profit if we examine retained earnings

while efficiency in conventional banks is defined as the gap between the average profit of a given bank and the highest profit average in other banks adding the element of depositors share of profit to this definition is necessary for islamic banks
this section is divided into six sub sections banking efficiency increasing confidence in a bank efficiency in investment management financial engineering and marketing preservation of shareholders and depositors equity provision of humanitarian and social services and other factors

if we want to measure the distance between the profit of any bank and the best profit realized by a bank that distributed the highest share to depositors then column shows that if all the banks distributed the depositors shares equal to the best share actually distributed by any bank ie
the importance of a study of bank efficiency in islamic banks lies in that it allows the measurement of aggregate achievement of management whether in terms of the profit it offers to shareholders or in terms of the shares of profit distributed to depositors

as for delegation of authority several surveys carried out in the us banks showed that banks that separate between the positions of general manager and the chairman of board of directors usually record higher profitability than those that merge the two positions in one person
the idea of restricted investments managed on the ancient principle of agency is well entrenched in islamic banks although some alrajhi banking and investment corporation do not depend on it to such as an extent as to make it a strategic part of profitability management rather it only uses them to attract big deposits

the most import aspect in functioning of this department is a strict commitment to sound banking practices adherence to self established red lines that apply to both the departments and the top management diversification of invested assets choice of investment opportunities maintenance of appropriate equities assets ratio and creation of necessary reserves to stabilize the distribution rates to the mudarabah account holders and to shareholders

first there is a potential conflict of interest between shareholders who are represented by the management and depositors who are represented by no body for instance most islamic banks leave it to the management to decide on the per cent of mudarabah deposits that is kept liquid un invested the share of the bank as a mudarib agenta even in the absence of any competitive conditions in that market and the ratio of profit distribution between the different types of investment deposits
hence the profit of investing funds accumulated in the reserve fund for investment risk and in the mutual debt insurance fund both are furnished with deductions from customers accounts is assigned to shareholders in in bank a the total amount accumulated in these two accounts was equal to per cent of net equity

the attitude of bank customers and professional bankers towards islamic and conventional banks in bangladesh mahmood ahmada introduction an islamic bank is a financial institution that operates with the objective to implement and materialize the economic and financial principles of islam in the banking arena
it follows therefore that what makes islamic banking different from traditional western banking is that there can be no interest riba paid or charged for any transaction or service to ensure justice welfare and nonexploitation

this is done at the theoretical plane as well as by opinion survey of the users ie bankers and customers of the two syste miss the paper seeks to identify and clarify the controversial issues between islamic and conventional banks in order to help remove the misconceptions about islamic banking
analysis of the deposit and investment mechanisms and the opinions of the bankers and customers of both islamic and conventional banks would be useful to understand and identify islamic banking with its separate unique features and its impact on economy and society

in other words real economic progress and development consist in expansion of physical and human aggregates of the economy via creation of assets products and services not merely in the form of fiduciary financial expansion

the depositor is not guaranteed any pre determined return on the nominal value of his deposit like interestbearing banks but is treated as a shareholder of the bank and as such is entitled to a share of the profits made by the bank
islamic interpretation of similarities and differences of deposit services provided by islamic and conventional banks various types of deposit services provided by islamic and conventional banks have been given in table

in case of genuine default the islamic bank recovers only the contracted amount in case of murabahah or remainder of the principal amount in case of mudarabah and shirakah without any compensation for bearing risk
the business relationship between the bank and client on an actual basis considers every aspect of assurance of profitability such as credit risk liquidity risk maturity risk and inflation risk

regarding the essence of the profit and loss sharing system of islamic finance table shows that the bankers are more aware than the customers
although in face value a number of islamic financing modes look similar to those of interest based banking we find that these are very different from each other in terms of justice efficiency stability and economic growth

the next question is what is the basis of the development of islamic banking system in bangladesh of bankers and of customers table think that this is due to a mere faith in islam of the overwhelming muslims of the country
again of respondents view the concept of halal and haram is introduced in the case of investment buying and selling while least of them mention that mobilization of financial resources to the real sector of the economy is well introduced

with this view in mind the respondents were asked do they believe that the condition of deposit loss is not harmful for deposit mobilization we received the response that possibility of loss is not detrimental to deposit mobilization
further the respondents confirm that many customers are not interested in dealing with islamic banks because they feel that only the title name of the banks has been changed and interest in a real sense has not been eliminated

this debate raises a natural question that if islamic banks are no different from conventional banks why they are growing so fast a survey analysis of the deposit and investment mechanisms and the opinions of the bankers and the customers of both islamic and conventional banks help our understanding and identification of this debate

the misleading similarities between islamic and conventional banking products are the result of the following observations first fixed charges in percentage which increases with time as compensation for violation of an agreement for repayment schedule of investment taken by the entrepreneur from the bank
islamic banking maintains al wadi ah current mudarabah savings and term deposit accounts and conventional banks maintain current deposit savings deposit and term deposit accounts

attitude of customers and bankers towards islamic banking in bangladesh appendix table a comparison of deposit mechanism between islamic and conventional banks deposit mechanism of deposit mechanism of islamic banks conventional banks islamic banks accept al wadi ah trust current conventional banks accept mudarabah savings and term deposits

table a comparison of investment mechanism between islamic and conventional banks investment mechanism of investment mechanism of islamic banks conventional banks there are seven islamic financing modes practiced by conventional banks provide the most of the islamic banks of the world finance by using the following techniques a c bay murabahah the client approaches the islamic bank with the a c loans request to finance his specific requirement like a loan is an advance purchase of capital goods raw materials sanctioned in lump sum

the agreed price includes the cost of goods to the interest is charged on the bank plus the bank s margin of profit with other daily balance of the incidental costs
a c bay mu ajjal a c cash credits it is a sale contract in which provision is made for it is made through a an immediate delivery of goods while the separate cash credit payment of the price is postponed to a later date

attitude of customers and bankers towards islamic banking in bangladesh table distribution of the questionnaire in the final survey no

elgari mohamed ali a short term financial instrument based on the salam contract paper presented at the international seminar on mechanism and development of islamic financial instruments for resource mobilization in dhaka bangladesh

of particular note was the establishment in of the dow jones islamic market index hereafter the djim and later in the year the ftse global islamic the paper was written while abul hassan was a phd candidate department of economics finance university of durham uk
often hailed by conventional financial observers as the pre eminent international emerging market islamic investing has grown from a regional small market to an industry encompassing mutual fund complexes investment banks and retail brokerage etc

by way of guidance stocks whose core activities come under or are related to the following headings are excluded a banking or any other interest related activity b alcohol c tobacco d gaming e insurance f pork production packaging and processing or any other activity related to pork g activities deemed offensive to the principles of islam h sectors companies significantly affected by the above
equity fund s islamic screening effects the dow jones islamic market uk index the dow jones islamic market europe index and the dow jones islamic market asia pacific index

therefore this research sought to address the following objectives a to examine the potential impact of islamic screening restrictions on investment performance by comparing the performance characteristics of a diversified portfolio of islamic screened stock indexes djim with conventional benchmark dgi
review of the empirical evidence islamic investing has much in common with modern forms of investing known as a ethical investing a socially responsible investing a faith investing and a green investing

studies done by sauer and then statman compared the returns of ethical and nonethical usa mutual funds to each other and to both the s p and the dominic social index dsi
equity fund s islamic screening effects performance of managed funds or mutual funds have found that they do not outperform the market and in some cases significantly under perform the market

abul hassan antonios antoniou in the above models the beta measures the elasticity of the dow jones islamic market index djim with respect to the djim technology index and the djim united kingdom stock index ie the percentage change in djim for a percentage change in the djim tech and the djim uk

the use of monthly data though common in empirical stock market studies jensen fama macbeth guy since our present study uses the short sample period which would reduce the number of observations to a level where the robustness of the results would be compromised we therefore use the weekly data interval

they were established by virtue of an act of parliament the islamic banking act iba which is considered as the beginning of the effort to assimilate islam into the malaysian economic system
in malaysia currently there are two islamic banks bank islam malaysia berhad bimb which commenced operation in july and bank muamalat malaysia berhad bmmb in a relatively new bank as the result of a merger and takeover exercise

on the negative side in the absence of a statutory definition of a banking business in the act it is the practice and the law by virtue of sections and of the civil law act to have regard to the english law to determine its meaning
universal banking can be defined as the conduct of a range of financial instrument services comprising deposit taking and lending trading of financial instruments and foreign exchange underwriting of new debt and equity issues brokerage investment management and insurance

section of the iba reads an islamic bank which is incorporated under the companies act shall be subject to the provisions of the act as well as the provisions of this act save where there is any conflict or inconsistency between the provisions of that act and the provisions of this act the provisions of this act shall prevail
as one expert observed the establishment of bank muamalat malaysia sic as the country s second islamic bank caught many by surprise since bank kerjasama rakyat malaysia had been tipped to be the second of such banks after bank islam malaysia bhd

section b provides that there is in the articles of association of the bank concerned provision for the establishment of a syariah advisory body to advise the bank on the operations of its banking business in order to ensure that they do not involve any element which is not approved by the religion of islam
it incorporates a new section a on the advice of shar i ah advisory council which provides an islamic bank may seek the advice of the syariah advisory council on syariah matters relating to its banking business and the islamic bank shall comply with the advice of the syariah advisory council

on the other hand it could also be submitted that if the decision or the opinion of sab is ignored by the bank management it will run the risk of its product or service be challenged in the court as to its shar i ah validity are their decisions subject to judicial review can the court quash or review their decisions on islamic banking matters
they are as below with commentary connected therewith spi banks are allowed to carry on islamic banking business ibb or islamic financial business ifb in addition to their existing traditional banking business provided that they consult the central bank cbm spi banks in carrying out ibb or ifb are subject to other provisions of bafia

likewise the restriction on investment is mitigated by virtue of the bafia acquisition and holding of shares and interests in shares licensed banks licensed finance companies and licensed merchant banks regulations which came into force on october in carrying out ibb or ifb the spi may seek the advice of the sac established under subsection of bafia on the operations of the business to ensure that it does not involve any element which is not approved by the religion of islam a a
yasin the one hand section of bafia allows spi banks to carry on islamic banking business and islamic financial business in addition to their existing business but on the other hand section prohibits licensed institutions from carrying on trade either retail or wholesale including import and export except in connection with the realisation of a security given to or held by it for the purpose of carrying on its licensed business

as such in malaysia there exists two groups of shar i ah advisors a in house advisors belonging an islamic bank by virtue of the iba called a shar i ah advisory body sab and b the national sac attached to the cbm acting as the central body to advise the cbm on all islamic matters relating to banking and finance ibb and ifb by virtue of bafia
but subsection uses the word shall which means that if an spi bank refers the shar i ah issue to bnm s sac for a ruling thereby the written directives issued by the cbm in consultation with the sac has to be complied with an spi bank is still legally regarded as a conventional bank and shall be deemed to be not an islamic bank

for this the court in deciding the case will have to refer to the shari ah supervisory council at cbm and their opinion will have to be taken into consideration as the court is not competent to decide the case by itself
list in the state list provides for the constitution organisation and procedure of shari ah courts which shall have jurisdiction only over persons professing the religion of islam and in respect only of any of the matters included which exclude banking

yasin where in any proceedings relating to islamic banking businessa or any business which is based on shari ah principles and is supervised by the bank central bank of malaysia before any court or arbitrator any question arises concerning a syariah matter the court or the arbitrator as the case may be maya take into consideration any written directives issued by the bank pursuant to subsection or b refer such question to the syariah advisory council for its ruling

section of bafia states that except as otherwise provided in this act or in pursuance of any provision of this act no contract agreement or arrangement entered into in contravention of any provision of this act shall be void solely by reason of such contravention therefore contravention of the provisions of bafia does not render the contract agreement or arrangement null and void and it is argued that the same is not applicable to iba
applicable law as far as islamic banking transactions and legal documentation is concerned it is submitted that the following laws are relevant and applicable i valid according to islamic law ii compliance with civil federal laws as well as procedural laws iii state law and iv english common law

legal aspects of islamic banking malaysian experience the potential legal risk is that what if the civil law and procedure such as the rules of high court rhc is in conflict with shari ah and its principles in other words what if compliance to the law and rules of procedure are impossible as they do not facilitate the operation and practice of islamic banking if this happens the risk is that the case will be discharged or the decision made against islamic transactions as a prima facie case has already been established by the other party who opposes it

the learned judicial commissioner jc supported this argument and was of the view that the words except where the court in any case or class otherwise directs in the preamble to rule indicated that the court was able to exercise a discretion to allow a certain flexibility in the requirements of that provision in particular cases
the land was held under kmre and section i expressly states that no right or interest of any malay in reservation land and no right or interest in such land acquired by virtue of section a by any person not being a malay shall be transferred to or transmitted to or vest in any person not being a malay provided that leases of a a

it so happened that the execution of the property purchase agreement and the property sale agreement constituted part of the process required by the islamic banking procedure before a party can avail itself of the financial provided by the defendant accordingly it is my judgment that the execution of property purchase agreement had not transgressed the provisions of ss and of the malay reservation enactment since there was no dealing or attempt to deal in the said lands contrary to the provisions thereof

it is without doubt that the creation of conducive environment for islamic banking necessitates the development of such vehicles especially the legal aspects of them as sufficient and sound legal system pertaining to islamic project finance and asset securitization will certainly strengthen the operation of islamic banking
the combination of project finance and assets securitization will serve as a powerful tool for islamic banking to mobilize funds from the market and to extend financing which is based on the principles of risk mitigation and allocation where return is justified by risk taking

based on this tenet the islamic banking can be elaborated as a system of banking which provides just financing is free from factors unlawful to islam and offers benefits not only to the shareholder of the bank but also to the stakeholder of the bank
the paper will also assess the ramification of the existing unresolved fiqh issues related to leasing and asset securitization and describe how the islamic project finance and assets securitization will form a bridge between the traditional banking and islamic banking

however the heavy reliance on the nonpls mode often attracts sarcastic criticisms that most islamic finance techniques used at present bear no difference in substance to the conventional finance and that the superficial distinction of the islamic and conventional finance is mainly centred in the use of arabic names and in the disguised trade transactions for conventional transaction which are substantially similar to those of conventional finance
even though this notion can be refuted by the development of myriad shari ah justifications for a restricted scope of application of some conventional techniques it is sufficient to say that efforts should be directed toward the revival of the early concept of double tier mudarabah in islamic banking in order to minimize the effects of the above mentioned sarcastic criticis miss in this context the project finance and assets securitization become very important

soon after the promulgation of the law no year which gives bank indonesia the power to supervise and regulate the banking sector in indonesia it promulgated several bank indonesia regulations peraturan bank indonesia which were intended to regulate the islamic banking
legal aspects of islamic project finance in indonesia the structure is based on two tier mudarabah model where the depositors will place their fund as a mudarabah deposit in the bank which in turn invest the fund through mudarabah in several project

it is mentioned that the source of indonesian law is the state ideology pancasila and that the legislative order which shall be the followings i the constitution ii decrees of the people s consultative assembly of the republic of indonesia iii statutes laws iv government regulations in lieu of statutes v government regulations vi presidential decrees vii regional regulation
the inadequacies related to basic norms of the legal sources and legislative order under indonesian laws as a country following civil law system indonesia put a heavy emphasis on the codification of laws and requires that all laws be transformed into written laws

the need for specialized legal and regulatory regimes for islamic banking due to the uniqueness of islamic banking it is necessary to develop a specialized law lex specialis which lays down a sound foundation for the operation of islamic banking to complement existing legal and regulatory infrastructure

a note for further development it is sufficient to say that for emerging volatile economy such as that of indonesia the islamic banking system should be the fundamental basis for its economic development or at least effort should be directed toward the creation of conducive environment to islamic banking which might enable the transformation of conventional banking to islamic banking

the framework will ensure the certainty of the law as it will fill the gaps which are the result of the inexistence of law pertaining to islamic banking institutions
applicability of the framework in indonesia although not widely practiced and representing only a tiny portion of indonesian financial market share islamic banking activities have been carried out in practice without any significant legal problem

until the day of issuance the discussion of islamic finance goes on within the boundaries of islamic banking since most islamic finance products are practiced by islamic banks and in more limited portion by insurances
few are informed that indosat is the third company which offered to issue islamic bond after two other organizations who were interested but abandoned their plans in the last minute

mudarabah bond an effort of redefinition the launching of indosat islamic bond the formal title being obligasi syariah mudarabah indosat is followed by launching of similar islamic bond in may by berlian laju tanker a shipping company bank muamalat and bank syariah mandiri two islamic full fledged banks bank bukopin a conventional bank that has islamic business unit in july and recently august by ciliandra perkasa a holding company for several palm coconut farming companies
apart from its successful attempt in providing money market instrument for islamic banks in malaysia many see this bond as not purely islamic since it invests the fund into the sale of debt with discount which becomes source of intense and continuing debate among the islamic bankers and scholars as well

in the case of palm oil company fund is mobilized partly for the purpose of increasing ownership of parent company in its subsidiary and building palm to oil processing factory while profit is paid with reference to the revenue from palm fruit and or oil sale contract of the subsidiary company to the parent company or to other parties during a year period ahead

if a bond interest is paid annually along with its principal that has a certain year maturity then the future value of the bond will be calculated using the formula fv a n where fv is future value of a bond a is principal repayment is rate of interest and n is time period

given the condition that a quarterly report can only be published at the end of january or in this case in the second quarter then the first quarter profit will only be paid at the end of second quarter or at the end of march

cecep maskanul hakim i musharakah bond the idea of musharakah bond is similar to what is applied in mudarabah bond except that the issuer participates in providing fund for investment
however it should be explored more in details since there are certain regulations that might hinder an issuer to buy back the bond or to combine his own capital with the one mobilized through public offering

introduction a we have now come to the moment we have been waiting for after such a long wait for that which we have been wanting to achieve or possess as conscious muslims these words form part of a royal address of his majesty the sultan and yang di pertuan of brunei darussalam during the launching ceremony of the islamic bank of brunei berhad in

islamic banking in brunei and the future role of cibfm given the natural setting of brunei a malay muslim monarchy the introduction of islamic banking is in fact a preferred method of operating banking transactions
the public has a variety of options to choose from when opening a savings account ranging from accounts such as a akaun simanja for children below to a akaun belia for youths and accounts for adults

alhamduillah this dream has now come true from the blessing of our good intentions to comply with the demands of the shara which are very challenginga personal muslim customers will surely be more confident and relieved with the presence of this system of islamic banking as a way out of transgressions due to riba apart from hoping for lawful benefits and profits from it all which are more barakah blessed
the islamic bank of brunei berhad ibb two years after establishing the trust fund brunei officially opened its first fully fledged islamic commercial bank called a the islamic bank of brunei berhad ibb

this strong network across the country enables the bank to reach the public at large from the prominent businessmen in the main business centres to the farmers in the remotest places such as the temburong district
to achieve this objective ibb has participated in many community services where finance is needed it also extends a qard hasan facilities where loans are extended to those who are in grave need of funds without any charges whatsoever and period of repayment is very generous

as described above there is no central bank in brunei and the ministry of finance holds jurisdiction over financial activities of the country and regulates the banks operating within the country through the various banking and finance acts
under this department various international legislations have been introduced in recent years such as the international banking order international business companies order securities order and international insurance and takaful order and others

the records for these diagrams are sourced from the respective islamic banks annual reports brunei darussalam statistical yearbook and reports from the financial institution division in the ministry of finance
there is a sharp increase in deposits in year which is not only contributed by idbb conversion but in fact largely due to a sharp increase in ibb s deposits by per cent of its previous year deposit

ibb s equity issued capital of bnd million was increased in by way of bonus share issued by capitalising its unappropriated share by bnd million and by issuing million ordinary shares for cash at a premium of bnd

islamic banks have to be active in lending to these sectors which will assist the brunei government in its effort to diversify brunei economy and facilitate local businessmen to venture into these sectors
total assets total assets comprise of cash placements and balance with banks in and outside of brunei loans and advances investments and other miscellaneous assets

other departments and faculties within the university are also offering islamic knowledge and the centre will pull together the teachings relating to business management and banking under the roof of the centre to gain from the synergy of combined knowledge
however to set the learning in progress a minor in islamic banking and finance has been introduced two years ago offering the students at undergraduate and post graduate levels the opportunity to learn islamic business knowledge such as islamic accounting islamic management ethics islamic business and finance islamic jurisprudence islamic transactions and many others

the gatherings of eminent scholars and practitioners such as this is very rare and its value is immeasurable a it is a meeting of minds and insha allah the experienced and the new comers of this discipline will intermingle and learn and nourish one another

in this respect the centre will contribute and play an important role of ensuring that skills and knowledge are acquired by the people of brunei darussalam to support the government s national development plan of making the country an islamic financial hub
one of the prerequisites needed to carry out such a noble plan is to ensure that the country develops its capacity building requirement so as to put in place the skills and knowledge needed for creating and implementing a more sophisticated financial environment

bay al inah selling of something to someone at a given price usually on credit and then buying it back from him at the same time at a different price usually lower but cash

part two addresses to the empirical issues of performance evaluation of islamic banks of equity funds and the attitude of bank customers
while much of the research in the industry is focused on the immediate concerns longterm direction setting basic research is getting less attention

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AlHuda Material\islamic banking

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islamic banks banking financial finance investment conventional institutions funds risk financing deposits assets services management international countries equity profit products

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2007-04-13 21:19:24

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Islamic Banking and Finance Fundamentals

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