Presented to: Dr. Abeer Zein Presented by: Ahmed El-‐Sayed ESLSCA 37B Mohamed Abdou Sameh Ali Mostafa Younis
Contents • Major Economic Systems. • Islamic Finance: Moral ProhibiFons. • Permissible ﬁnancing methods. • Permissible Investment Vehicles. • Permissible Insurance AlternaFves. • Shariah Governance Framework for Islamic Financial InsFtuFons. • Value of Money in Islamic ﬁnance • Islamic Finance: Challenges and opportuniFes
Economic Systems • Humans indeed made systems and who can change them for bePer • Systems do not need to be modiﬁed or altered unless it is not longer providing the desired results • Economic System is a set of principles on which an economy can run and make decisions about the central problems it faces in the form of scarcity of resources and unlimited wants.
Major Economic Systems • Capitalism • Socialism • Mixed Economy • Islamic Economic System
Capitalism • Economic system based on the private ownership of the means of producFon, distribuFon, and exchange, characterized by the freedom of capitalists to operate or manage their property for proﬁt in compeFFve condiFons. • It shiTs the break even line further away from the entrepreneur and crowds out entrepreneurs who cannot aﬀord to keep feeding capitalists.
Capitalism Fundamental • Right of Private Property • No Government IntervenFon • Freehand to Market Forces • Dependence on Invisible hand • Freedom of Choice in ProducFon • Freedom of Choice in ConsumpFon
Capitalism CriFcal Analysis • Issues of Equity – unscrupulous consumpFon and imposing externaliFes on society. – precedence of self interest over social prioriFes. – unequal distribuFon of income – Prices not reﬂect urgency – Social Darwinism • Need for Redeﬁning PrioriFes – Growth Vs Development – Proﬁt OpFmizaFon Vs Social OpFmizaFon – What goes around comes around! • Interest Dilemma – Interest is the price of risk – Share in the proﬁt of the borrower – Interest is a rent on money
Socialism • Socialism was to act as a pre-‐cursor to Communism. (Robert Owen, Charles Fourier, Pierre-‐Joseph Proudhon, Louis Blanc, Charles Hall and Saint-‐Simon) • socialism as a speciﬁc historical phase that will displace capitalism as a precursor to communism. (Karl Marx )
Socialism Fundamental • CollecFve property • Planned Economy • Decisions in CollecFve Interest • Reduced Income Inequality • RestricFon on Market forces • Centralized Economy • Non-‐existence of Private sector
Socialism CriFcal Analysis • government is only the big capitalist accredited with the responsibility to operate, manage and administer the overall economy without giving society and individuals any recourse to challenge the government. • The problem in distribuFon of income • Land has an intrinsic value and its owners receive rent on land. • Labor also earns wages even when the entrepreneur suﬀers loss. • Value of producFon i.e. prices of goods is not always suﬃcient to create surplus aTer paying wages, rent and interest.
Hybrid Economic System • Mixed economy is a compromise between capitalism and socialism. • A mixed economy takes the valuable features of both. • Most countries can be classiﬁed as mixed economies in the real world.
Hybrid System Fundamental • Coexistence of Public and Private Sector • Government RegulaFon and Prices • Government RegulaFon and Market ImperfecFon • Government IntervenFon and Income distribuFon • Public Sector and Social ObjecFves • PromoFon of Private Sector • DeregulaFon, LiberalizaFon and PrivaFzaFon
CriFcal Analysis • It sFll lacks an ethical foundaFon to foster social opFmizaFon and development at a grand scale to inﬂuence social and human development. • It has retained interest free ﬁnancial system which has created at least two havocs i.e. one in East Asia in 1990s and the Great Recession since 2007. Therefore, much of the criFcism that is made on Capitalism holds true for Mixed economy as well.
Islamic System • Islamic economic system in its true sense is not present in any country. • It is a blend of natural features present in Capitalism such as right to private property, private pursuit of economic interest, use of market forces etc. • Interest free economy, moral check on unbridled self-‐pursuit and provision of socio-‐economic jusFce to achieve the goals of Socialism as far as is naturally possible without denying individual freedom and incenFves.
Islamic System Fundamental • Equitable distribuFon of Income • ProhibiFon of Interest • Spending in the way of Allah • ProtecFon of Rights • Provision of JusFce • Equality of OpportuniFes • No Gender and Ethnic DiscriminaFon
Dealing with Scarcity of Capital in an Islamic Economy • Business Cycles will conFnue to exist as they are natural, but the loss/proﬁt would be shared. • An imposiFon of wealth tax (Zakah) would ensure that loanable funds increase even when there is no interest. • Tax exempFon would also ensure the availability and supply of loanable funds. • ExempFon of investment in income bonds would also ensure the availability and supply of loanable funds in income bonds market. • corporaFons will no longer be able to generate ﬁnance through interest based debt. Therefore, increase in listed companies will expand the market and diversify trading opportuniFes for investors.
Islamic System CriFcal Analysis • Comparing Islamic ideals with pracFced capitalism: Making that systems cannot be analyzed judicially with taking ideals of one and the pracFce of the other.
ISLAMIC FINANCE MORAL PROHIBITIONS • Shariah’ah; comprises two sources; – Quran – Sunna • Fiqh; body of laws deducted from Shariah’ah • SePled 2 Major principles; – Halal; permiPed acFviFes – Maslaha; public goods
ISLAMIC FINANCE MORAL PROHIBITIONS (cont,) – riba: interest earnings or usury and money lending – Haram: such as direct or indirect associaFon with lines of business involving alcohol, pork products, ﬁrearms, tobacco, and adult entertainment – Maisir: speculaFon, bekng, and gambling, including the speculaFve trade or exchange of money for debt without an underlying asset transfer – bay’ al inah: the trading of the same object between buyer and seller – gharar: preventable uncertainty; such as all ﬁnancial derivaFve instruments, forwarding contracts, and future agreements
Permissible ﬁnancing methods SUKUK • In the modern Islamic perspecFve, sukuk lies in the concept of asset moneFzaFon , or also called securiFzaFon • to enable organizaFons (1) to raise capital in a Shariah-‐compliant fashion, (2) expanding the investor base (3) oﬀering investment opportuniFes to new groups. • While a convenFonal bond is a promise to repay a loan, sukuk consFtutes parFal ownership in a debt (Sukuk Murabaha), asset (Sukuk Al Ijara), project (Sukuk Al IsJsna), business (Sukuk Al Musharaka), or investment (Sukuk Al IsJthmar).
Sukuk – Guiding principles • Islamic cerFﬁcates of investment referred to as Sukuk involve structuring of pools of Shariah compliant assets • Investors have an undivided interest in the underlying assets and are therefore enFtled to share jointly the related returns • Could take place through applicaFon of various Shariah principles such as Ijarah, Salam, Musharakah, Mudaraba and mixed pools. • From credit perspecFve, investors expect the Sukuk issue to represent the same credit risk as that of the ulFmate issuer/guarantor.
Cost-‐plus sales (Murabaha) • In this sale, the buyer knows the price at which the seller obtained the object to be ﬁnanced, and agrees to pay a premium over that iniFal price Ex. purchase this item on my behalf at this price, and I shall give you a proﬁt margin
Credit sales (bay bi-‐thaman ajil) • When a customer approaches an Islamic bank to ﬁnance a purchase through mur￣abaha the payment of the price is usually deferred, and most commonly paid in installments. • rate of return is thus guaranteed (up to the risk of default on payments by the buyer) over a ﬁxed period of Fme
Leasing (ijarah) • the lease contract is not a sale of the object, but rather a sale of the usufruct (the right to use the object) for a speciﬁed period of Fme. • The most important ﬁnancial diﬀerence between Islamically permiPed leasing and convenFonal ﬁnancial leasing is that the leasing agency must own the leased object for the duraFon of the lease
Salam & IsFsna´a • Bai As-‐salam or Salam means a contract in which advance cash payment is made for goods to be delivered later on. • The seller undertakes to supply some speciﬁc goods to the buyer at a future date in exchange of an advance price fully paid at the Fme of contract. • Salam-‐ also know as sales by order. • IsFsna is almost the same , it can be used for ﬁnancing the manufacture or construcFon of houses, plants, projects, bridges, roads and highways. By way of parallel IsFsna contract with subcontractors,. •
Partnerships (musharaka and mudaraba) • where the ﬁnancing agency and the customer share the ownership of real estate. • Mudarabah cerFﬁcates or Sukuk represent projects or acFviFes managed on Mudarabah principle by appoinFng any of the partners or any other person as Mudarib
Permissible Investment Vehicles • InvesFng in equiFes – Common stocks are Islamically permiPed. – Possible to create mutual funds in such stocks invesFng in a porqolio of permiPed stocks • some Islamic countries, some “Islamic mutual • funds” also calculate and pay the appropriate Zak¯ˉah on shares on behalf of • their investors. • companies which neither pay nor receive interest (diﬃcult to control )
Secondary Market of Sukuk • Shirkah based and Ijarah Sukuk; MarkeFng based on the market signals and forces. • Murabaha, Salam and IsFsna´a Sukuk only at face value (Hawalah rules)
The Dow Jones Sukuk Index hPp://www.djindexes.com/sukuk/ • Different criteria to satisfy: – Comply with both Sharia Law and the standards of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) for tradable sukuk. – Must have a minimum maturity of one year – Minimum issue size of US$200 million – Minimum rating of at least BBB-/Baa3 by leading rating agencies.
Permissible Investment Vehicles • “Fixed income” funds – Majority of convenFonal ﬁxed income investments (e.g. CDs, government bonds, money market accounts, etc.) include forbidden Rib¯ˉa – Do we have islamic ﬁxed income funds ? • Consider Real estate Ijarah in a porqolio
Permissible Insurance AlternaFves • Thinking about reducing certain types of risk • The majority of Islamic jurists have concluded that regular insurance contract is invalid based on the prohibiFon of Gh¯ˉarar. • insurance companies’ investments in interest-‐ bearing bonds render such contracts invalid based on the prohibiFon of Rib¯ˉa • Why is convenFonal insurance not permissible in Islam? • Uncertainty (Gharar) • Gambling (Maisir) • Interest (Riba)
Permissible Insurance AlternaFves • CooperaFve insurance – group of subscribers contribute to a pool of funds. Whenever one of the members makes a legiFmate claim ), they draw money out of the pool – funds in the pool are invested in an Islamic manner without exposing the policy holders to any extra signiﬁcant risk
Shariah Governance Framework for Islamic Financial InsJtuJons ObjecJves: • Set out the expectaFons of the IFI. • Provide a comprehensive guidance to the key organs. • Outline the funcFons relaFng to Shariah review, Shariah audit, Shariah risk management and Shariah research.
Approach: • General requirements of the Shariah governance framework. • Oversight, accountability & responsibility. • Independence. • Competency. • ConﬁdenFality & consistency. • Shariah compliance & research funcFons.
key organs in the IFI’s Shariah governance framework
The people not conversant with the principles of Shari‘ah and its economic philosophy someFmes believe that abolishing interest from the banks and ﬁnancial insFtuFons would make them charitable, rather than commercial, concerns which oﬀer ﬁnancial services without a return.
The Islamic Shari‘ah has a differentset-up for the purpose of profit, Theprinciple is that the person extendingmoney to another person must decidewhether he wishes to help theopposite party or he wants to share hisprofits. If he wants to help theborrower, he must rescind from anyclaim to any additional amount. Hisprincipal will be secured andguaranteed, but no return over andabove the principal amount islegitimate. But if he is advancingmoney to share the profits earned bythe other party, he can claim astipulated proportion of profit actuallyearned by him, and must share his lossalso, if he suffers a loss.
It is thus obvious that exclusionof interest from financial activitiesdoes not necessarily mean thatthe financier cannot earn a profit.If financing is meant for acommercial purpose, it can bebased on the concept of profitand loss sharing, for whichmusharakah and mudarabah havebeen designed since the veryinception of the Islamiccommercial law.