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Principles of Islamic Finance


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Principles of Islamic Finance

  1. 1. Principles of Islamic Finance Transactions Fundamentals & Evolution Institutions1 1/12/2012
  2. 2. Islamic Finance Defined A system of financial laws, markets, and institutions that has formed and developed in Islamic cultures around the world A form of economic organization built upon the behavioral rules, norms, and principles of Islamic society 2 1/12/2012
  3. 3. Central Theme:Prohibition of Charging Interest (Riba) No detailed definition exists in the Quran Arabic for “excess, addition, surplus” Money is a medium of exchange and not created to be sought for its own sake: gambling, loansharking Specific rules defined through jurisprudence in Islamic law Un-conventional from a Western lens as it prohibits debt financing vehicles 3 1/12/2012
  4. 4. Central Theme:Elimination of contract ambiguity (Gharar) Legal and religious theme Shariah: Man is faithful to his word Quran: Contracts should be in writing and have witness at final agreements Takes the form of risk management & due diligence 4 1/12/2012
  5. 5. Common Financial Instruments Transactional  Building blocks of Islamic Sale of Sale of Right Ownership Currency to Use finance Lease Property Spot (Ijarah)  Credit sales involve financier to take title of Price for Sale Barter inventorySpot Credit Future  “Mark up” rate depends on credit Cost Plus Bay’ al- worthiness, security and (Murabaha) Muajjil collateral Lump Sum  Cashflows replicate conventional debt Installment securities & Mirakhor, 2007) (Iqbal 5 1/12/2012
  6. 6. Islamic Bank Balance Sheet Assets Liabilities Trade Financing Demand Deposits Salam Murabahah Ijarah / Istisna Real Estate Lease/Manufacture Investment Accounts Mudarahbah P/L Sharing Investments Musharakah Special Investment Equity Partnerships Services Capital Reserves Jo’ala, Wikala, Kifala (Iqbal & Mirakhor, 2007)6 1/12/2012
  7. 7. Islamic Financial Markets:Top 10 Participant Countries $5,000,000 $500,000Annual Revenue (log scale) INDONESIA $50,000 $5,000 $500 BRITAIN UAE $50 PAKISTAN QATAR $5 JORDAN INDIA KUWAIT $1 BAHRAIN 0 2 4 6 8 10 12 14 16 # of Institutions = Relative Market Capitalization Source: Bloomberg LP 7 1/12/2012
  8. 8. Market dominated by conventional banks Insitutions (#) Market Capitlization ($B) $483 89 $59 22 Islamic Banks Conventional Banks Source: Bloomberg LP8 1/12/2012
  9. 9. UAE Financial Institutions Market Cap Annual RevenueName ($MM) ($MM)NATIONAL BANK OF ABU DHABI $8,200 $10,242MASHREQBANK $4,670 $6,581ABU DHABI COMMERCIAL BANK $4,240 $10,625ABU DHABI ISLAMIC BANK $1,980 $4,518DUBAI ISLAMIC BANK (*) $1,960 $5,003UNION NATIONAL BANK/ABU DHAB $1,940 $4,508DUBAI FINANCIAL MARKET (*) $1,680 $144COMMERCIAL BANK OF DUBAI $1,530 $2,353UNITED ARAB BANK $987 $628SHARJAH ISLAMIC BANK $542 $843TAMWEEL PJSC $155 $583DUBAI ISLAMIC INSURANCE CO $23 $38EMIRATES ISLAMIC BANK $0 $1,0139 1/12/2012
  10. 10. Evolution Industry has weathered financial crisis better than conventional banking Adapts well to micro-financing in many economies Promotes equity and risk sharing Growth is strong: $0.5B in revenue, growing 10-15% Need for innovation & efficiency 10 1/12/2012