Islamic Finance: Concepts,

Products, Issues
 Old Ideas, Young Industry

50s & 60s: initial theoretical work, some

experimentation

70s: DIB, IDB, petrodollars

80s: OIC’s IFA, initiatives in Malaysia,

Bahrain, Pakistan, Sudan

90s: AAOIFI, Dow Jones & FTSE indexes,

growth in number & type of funds

00s: IFSB, IIRA, more innovation, credit cards

to hedge funds, more petrodollars

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 Industry Statistics

•Size estimates go up to US $1 trillion (small)

•2007 asset mix, as per IFSL 2009 Report:

Commercial banks (74%) Investment banks (12%) Sukuk
(11%) Funds (2%), Takaful (1%)

•Major countries, as per The Banker: Iran, Saudi

Arabia, Malaysia, Kuwait, UAE, Bahrain, Pakistan,
Qatar, UK

•Estimated 300 IFI, 50+ countries

•Industry reports available on the net for free

•Growth story, favorable outlook

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 Common Misconceptions

 Practice exclusive to Muslims, modes

exclusive to Islam

 No time value of money in pricing

 Dominant form of finance in Muslim

countries

 No gap between Islamic finance

theory & practice

 All Muslims highly sensitive to Shari’a

compliance in finance
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 Islamic finance

• Finance that complies with

Shari’a

• Primary Sources
Qura’n (the Holy Book)
Sunnah (or tradition of Prophet
Mohammad)

“The obligation of the Shari’a is to

provide the wellbeing of all
humankind, which lies in
safeguarding their faith, their
human self (nafs), their intellect
(’aql), their progeny (nasl) and
their wealth (mal)”
Al-Ghazali
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 Religion & Economics

•Religion seeks to influence human behaviour

– Accountability to God should be a

permanent concern

– Earning an honest living an act of worship

– Moral economy of Islam (a theoretical ideal)

neither communism, nor capitalism

•Depends on belief in Allah (which is up to the

individual)
 Islamic finance Concepts

•Islamic commercial jurisprudence:

human dealings, default ruling is permissibility

Test of impermissibility:
_Purpose involves prohibited activities
(socially responsible, ethical)
_Structure involves Riba or Gharar or both

•On riba & gharar: “…the talented jurist Ibn

Taymiyya …famously stated that two
prohibitions can explain all distinctions
between contracts that are deemed valid or
invalid: those of riba and gharar.” Page 8, “Islamic
Finance: Law Economics, and Practice” (2006) by Mahmoud A. El - Gamal
 Application

Riba Gharar

Capital _Equity funds: business, Derivatives (or at

Market debt & income screening least their trading)
_Sukuk: ownership of largely avoided
assets
_Debt trading constrained

Banking _Trade, lease, share Sales/leases of assets

_No money after purchases
borrowing/lending

Insurance Avoid interest bearing Mutuality (risk-

/ Takaful investments sharing, solidarity
group)

Note: Sin industries to be avoided in all cases

 Opportunities

• Inclusive, simple, tied to real economy

• Small size means growth potential;

petrodollars to invested

• Responsible investments also growing

• More countries promoting Islamic

finance

• Industry reports & surveys still

suggesting double digit growth
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 Challenges

• Covering gap of centuries in decades

• Global economy - lending money, trading risk

• Legal, regulatory, tax issues

• Lack of global Shari’a standards

• Industry requires multidisciplinary expertise

• And the form versus substance debate…

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 Financial Crisis & Islamic Finance

• We did better (Proponents)

• You got hit by real estate (Critics)

• Much noise, but not a sound debate:

What were the reasons toxic products were avoided
by IFI?
Real estate investments business or Shari’a issue?
Can a small segment in the same market be
unaffected in a market wide turmoil?

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