Islam has 3 important principles: PROHIBITION: Riba: Earning Interest Gharar: Situation where rights and obligation of contracting

parties are not clear in the contract. (e.g.: If u buy a accident policy but none of the party knows when the policy will be exercised. There is no clarity on if the accident will ever happen.) Mysir: Gambling ENCOURAGEMENT: • • • Profit and loss sharing Charity and debt (Prophet says, “debt has got rewards 18 times more than charity”. Public welfare

DISCOURAGE • • • Wasteful consumption (don’t waste assets like water) Conspicious consumption Over consumption

Shariah is an abstract form of law capable of adaption, development and interpretation. HALAL: PERMISSIBLE HARAM: NON PERMISSIBLE 3 important aspects to be considered • • • Extent of repugnant debt and investment Extent of impermissible or suspect earning of the company (e.g. Hawala transaction) Extent of cash and receivable with the company

2 Types of Screening • BUSINESS SCREENING

If core or main business is Shariah repugnant, then exclude from portfolio. E.g. even hotel industry is avoided as u cannot determine how much revenue comes from food and how much from alcohol. • FINANCIAL SCREENING

The purpose is to ensure that there are no investments into prohibited areas. E.g. Investments in derivatives, advertising & tobacco companies.

Taking into account the above Shariah principles, the following market structures can be incorporated to ensure wide scale participation by the Muslim community in the financial markets.

We look into 4 different markets in detail viz. o o o o Banking Structure Insurance Treasury Management Bond Market.

Bank structure Sources of funds Share capital Deposits • Demand deposits wadia :- unlike amanah if banks

Want to use money it uses This alternative Amanah • Time deposits Investment accocerts Musharka Mudarba restricted unrestricted

Restricted Rabul maal will decide that on which project the capital should be put in. Insurance Premium Pool of money to honor claims. Investments Issues crop here Money will go to places Where intreast would be earned

and other issue we saw was `gharar`. None of the parties when would it eventually occour. There is also a element of gambling involved, not in true sense through because its like a gambling that if u die u get money else not. TAKAFUL Claims. 10% Investment 90%

Whatever amount you get you out of investments is distributed among policy holders (Rabbul Maal) and Takaful(Mudarib) on pre-divided basis and remaining amount distributed on prorate basis among Rabbul Maal.

Treasury management Bank to running short by $20m.


Different Murabaha sold @ $20.2m Given on credit Spot cash $20m Cash $20m



Sell commodity(s pot) @ $20m

Commodity trader A

Commodity trader B

$0.2 is the interest (profit earned on trading of commodities) that bank 1 changes to bank 2 CIBOR and depends on time period as well. Commodity traders a and b cannot be the sane. V.V. same important It would be borrowing from a, giving to bank 2 and giving it back to the trader a. so its borrowing-lending relationship at interest which is not permitted. Above transaction was between 2 banks same thing can be done between a bank and a costumer as well and HSBC has come up with a product to tap this. But this whole product is facing huge criticism from Shariah Scholars. But there is a general feeling that till the time Islamic finance has decent liquidity, this option should be allowed. But if this product is accepted it would take away all the hassles and make Islamic banking easier. But then ultimately the above concept is like borrowing-lending at interest, which is unacceptable.

Bond market Take for instance the following structure.

Mudaraba Sukuk Expertise



Financers Bond holders

Issues bonds to raise money

Say HCC needs to raise money here in finances become Rabbul Maal whereas HCC becomes Mudarib Now like we saw is Mudarib transits, loses will bounce by bond holders completely and projects will be share is 10:90(say) HCC doesn’t loose. Mudarib doesn’t take loss. It’s just a manager.

Shariah- Islamic word means `path` of Islamic laws.

This religion

Quran protections Ijmah Sunnah Public welfare

Qujas Shariah Ibadaat Mumlaat

Prophet Abraham, Muslims

Jesus – messengers of God Christians

Quran- holy book of Muslims Sunnah- teachings of Prophet Abraham Quran Sunnah Primary sources of knowledge laws for Islam If new laws need to be designed then based on the principles of Quran Sunnah new laws can be enacted is Qujas Ijmah- consequences of the scholars Ibadaat- worship The `principle` is everything except what is prescribed is `prohibited`. It means everything is prohibited except what is given. i.e. when it comes to a mans relation with God everything is prohibited except what is given i.e. you cannot make any addictions, deletions on what you are provided example is Ramzaan says you have to fast for 30days you cannot fast for 31 days thinking that Allah would be impressed Muamalaat When it comes to human relationship, everything is permitted Financial Teachings that derive If our body is nourished out of impure income then our Ibadaat wont be accepted

On the judgment day(the day when world dies) every person has to reveal sources of income and how one spent it On the judgment day our deeds determine whether you will go to heaven or hell Islamic Finance (distinguishing features) -looks at moral consequences of financial transactions -ensures that contracts are just and equitable for all parties involvement -reward should be related to effort, responsibilities and risk sharing Islamic Finance -75 countries -2020 major part of Middle Eastern economy to become shariah complaint (currently 30%) -conventional banks have either started a subsidiary or converted themselves to shariah-complaint mode -even foreign institutions following suit -UK, US, Switzerland, France and Germany We cant implement in india banking as it does not comply with RBI rules…. International Islamic Financial Market (IIFM) primary focus lies in the standardization of certain Islamic products, documentation and related processes. IIFM was founded with the collective efforts of its permanent members which include central banks and government agencies of Bahrain, Brunei Darussalam, Indonesia, Malaysia, Sudan, Pakistan, United Arab Emirates and the Islamic Development Bank based in Saudi Arabia, as an infrastructure institution with the mandate to take part in the establishment, development and promotion of Islamic Capital and Money Market Islamic market Islamic finance has entered a bright new stage of development, emerging after the global financial crisis as a more equitable and efficient alternative to the Western approach. Let's see how. Interest in Islamic finance (IF) began in the 1970s, mainly due to the accumulated petrodollars in Arab countries. In a rather pragmatic approach, it was thought in the West that respecting Islamic principles regarding finance would attract wealthy Arab investors. The second major turning point in IF took place after the Sept. 11 attack on the US. It was declared at that time that Muslims were guilty unless they proved themselves innocent, and as a reaction to this uncertainty and discrimination, IF escaped from the West. The amount of capital which fled the West was over $200 billion. We can implement all this learning to the Islamic countries to development of markets to ensure maximum participation and ensure social inclusion.

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