This document provides an overview of derivatives and their evolution in both conventional and Islamic finance. It discusses some key points:
- Derivatives allow parties to manage risks like price fluctuations by creating claims based on underlying assets. Common forms include forwards, futures, options, and swaps.
- Islamic finance prohibits forms of derivatives that involve gambling (maysir), uncertainty (gharar), or usury (riba). Instruments must be based on real assets and trades.
- Some contracts used in Islamic finance to facilitate deferred sales resembling derivatives include salam (prepayment for future delivery), istisna (contracting future manufacturing), and parallel salam contracts.
- Newer hybrid contracts like
This document discusses the Islamic view of current derivative instruments from a scholarly perspective. It begins by introducing common derivative products like options, swaps, and futures and notes they involve debt transactions which are problematic under Islamic law.
The document then assesses arguments against derivatives. It addresses concerns about speculation due to large trading volumes, lack of delivery of underlying assets, and cash settlement instead of physical delivery. It provides counterpoints explaining how these aspects serve important risk management functions.
Specific derivative contracts are analyzed through an Islamic lens, including forwards which were the earliest derivative. While forwards provide commercial benefits, issues relate to a lack of physical delivery and price distortions. Salam contracts under Islamic law are compared to forwards but have different
1. The document discusses various Islamic banking concepts and instruments including modes of banking like mudarabah and murabaha, as well as derivatives like profit rate swaps, cross currency swaps, and options.
2. It explains how Islamic derivatives like profit rate swaps and cross currency swaps work using murabaha contracts to avoid issues like riba and gharar.
3. The document concludes that while derivatives could enable speculation, they can also facilitate important risk management, and greater convergence is needed between Islamic law sects on these issues.
Dr daud seminar on derivaties in islamic finance (bnm) 240605faisalasif
This document discusses Islamic derivatives solutions and structuring profit rate swaps in accordance with Sharia principles. It provides an overview of key Sharia issues related to derivatives like pricing standards, delivery/payment timing, and prohibition of riba (interest) and gharar (excessive uncertainty). The document proposes a structure for an Islamic profit rate swap using three agreements: 1) a master fixed rate transaction, 2) a master revolving floating rate transaction, and 3) a settlement agreement. It provides an example of a hypothetical profit rate swap between two banks (ABC and XYZ) where ABC receives fixed profit payments in the first stage and floating profit payments in the second stage, allowing it to match its floating funding rates with fixed investment
Islamic profit rate swap - exchange of the mark-up of a long dated fixed rate Murabahah contract with the LIBOR rate underlying a series of smaller Murabahahs corresponding to the date of installment payments on the fixed rate long dated contract.
This article will describe about an overview of derivatives in Islamic Finance. Derivative is a "claim on a claim" the value of the derivative will depend on the value of the asset (stocks, bonds, etc) on which it has a claim.
This document provides an overview of Islamic banking and finance practices in Malaysia, including the Islamic Inter-Bank Money Market (IIMM) and foreign exchange trading. The IIMM facilitates short-term liquidity management between Islamic banks using various Shariah-compliant instruments like Mudharabah Inter-Bank Investment and Wadiah Inter-Bank Acceptance. The document also outlines Government Investment Issues, Bank Negara Monetary Notes, and other instruments that Islamic banks can use for liquidity management. It describes the concepts of foreign exchange trading like Bai' al-Sarf that are applied in Malaysia in accordance with Shariah.
The document provides an overview of Islamic finance instruments, with a focus on Murabaha. It defines Murabaha as a sale transaction where the seller discloses the cost of goods to the buyer and adds a known profit margin. The key steps of a Murabaha transaction are that the bank appoints the client as an agent to purchase goods, then the bank sells those goods to the client on a deferred payment basis at a marked-up price including the disclosed profit. Several legal documents are required to structure a Sharia-compliant Murabaha deal.
The document discusses derivatives and their role in emerging markets. It then evaluates arguments that have been made against derivatives from an Islamic perspective. Specifically:
1) It addresses concerns about speculation in derivatives markets, explaining that large trading volumes are due to risk dissipation, not solely speculation.
2) It discusses arguments around non-delivery in derivatives contracts, noting that even hedgers may prefer cash settlement to physical delivery.
3) It explains that cash settlement provides convenience and reduces costs for both parties, while also preventing market cornering attempts. The document concludes by examining salam and istisna contracts as potential Islamic alternatives to conventional forward contracts.
This document discusses the Islamic view of current derivative instruments from a scholarly perspective. It begins by introducing common derivative products like options, swaps, and futures and notes they involve debt transactions which are problematic under Islamic law.
The document then assesses arguments against derivatives. It addresses concerns about speculation due to large trading volumes, lack of delivery of underlying assets, and cash settlement instead of physical delivery. It provides counterpoints explaining how these aspects serve important risk management functions.
Specific derivative contracts are analyzed through an Islamic lens, including forwards which were the earliest derivative. While forwards provide commercial benefits, issues relate to a lack of physical delivery and price distortions. Salam contracts under Islamic law are compared to forwards but have different
1. The document discusses various Islamic banking concepts and instruments including modes of banking like mudarabah and murabaha, as well as derivatives like profit rate swaps, cross currency swaps, and options.
2. It explains how Islamic derivatives like profit rate swaps and cross currency swaps work using murabaha contracts to avoid issues like riba and gharar.
3. The document concludes that while derivatives could enable speculation, they can also facilitate important risk management, and greater convergence is needed between Islamic law sects on these issues.
Dr daud seminar on derivaties in islamic finance (bnm) 240605faisalasif
This document discusses Islamic derivatives solutions and structuring profit rate swaps in accordance with Sharia principles. It provides an overview of key Sharia issues related to derivatives like pricing standards, delivery/payment timing, and prohibition of riba (interest) and gharar (excessive uncertainty). The document proposes a structure for an Islamic profit rate swap using three agreements: 1) a master fixed rate transaction, 2) a master revolving floating rate transaction, and 3) a settlement agreement. It provides an example of a hypothetical profit rate swap between two banks (ABC and XYZ) where ABC receives fixed profit payments in the first stage and floating profit payments in the second stage, allowing it to match its floating funding rates with fixed investment
Islamic profit rate swap - exchange of the mark-up of a long dated fixed rate Murabahah contract with the LIBOR rate underlying a series of smaller Murabahahs corresponding to the date of installment payments on the fixed rate long dated contract.
This article will describe about an overview of derivatives in Islamic Finance. Derivative is a "claim on a claim" the value of the derivative will depend on the value of the asset (stocks, bonds, etc) on which it has a claim.
This document provides an overview of Islamic banking and finance practices in Malaysia, including the Islamic Inter-Bank Money Market (IIMM) and foreign exchange trading. The IIMM facilitates short-term liquidity management between Islamic banks using various Shariah-compliant instruments like Mudharabah Inter-Bank Investment and Wadiah Inter-Bank Acceptance. The document also outlines Government Investment Issues, Bank Negara Monetary Notes, and other instruments that Islamic banks can use for liquidity management. It describes the concepts of foreign exchange trading like Bai' al-Sarf that are applied in Malaysia in accordance with Shariah.
The document provides an overview of Islamic finance instruments, with a focus on Murabaha. It defines Murabaha as a sale transaction where the seller discloses the cost of goods to the buyer and adds a known profit margin. The key steps of a Murabaha transaction are that the bank appoints the client as an agent to purchase goods, then the bank sells those goods to the client on a deferred payment basis at a marked-up price including the disclosed profit. Several legal documents are required to structure a Sharia-compliant Murabaha deal.
The document discusses derivatives and their role in emerging markets. It then evaluates arguments that have been made against derivatives from an Islamic perspective. Specifically:
1) It addresses concerns about speculation in derivatives markets, explaining that large trading volumes are due to risk dissipation, not solely speculation.
2) It discusses arguments around non-delivery in derivatives contracts, noting that even hedgers may prefer cash settlement to physical delivery.
3) It explains that cash settlement provides convenience and reduces costs for both parties, while also preventing market cornering attempts. The document concludes by examining salam and istisna contracts as potential Islamic alternatives to conventional forward contracts.
This document provides an overview of Islamic modes of financing, including rental-based (ijara), participatory (mudarabah, musharakah), and trade-based (murabahah, musawamah, salam, istisna) modes. It discusses the definitions, key terms, and conditions for each type of financing arrangement. The document is presented to Dr. Saqib Sharif by Hira Ali, Durriya Hai, and Tehzeeb Tariq on the topic of Islamic modes of financing for managers.
Securitization involves pooling various financial assets and issuing securities backed by those assets. There are several types of Islamic securitization, including those based on musharakah, murabahah, and ijarah contracts. Musharakah certificates represent direct ownership in the securitized assets. Murabahah contracts cannot be securitized to create negotiable instruments since the amount must be transferred at par value. Ijarah certificates represent proportionate ownership of the leased asset.
1. Murabaha is an Islamic financing technique where a financier purchases an asset for a customer and sells it to them at an agreed upon higher price, incorporating a disclosed profit amount.
2. It involves the customer first requesting the purchase from the financier. The financier then appoints the customer as an agent to identify and procure the asset. Once purchased, ownership is transferred to the financier before being sold to the customer.
3. The transaction involves two separate contracts - one where the customer acts as the financier's agent in purchasing the asset, and another where the customer acts as buyer and the financier as seller, with ownership transferring upon sale. This ensures risks are properly assumed under
The document presents information on an easy home financing product based on the Islamic financing structure of diminishing musharakah. Key points include:
- Meezan Bank offers an easy home financing product that allows customers to purchase a home through monthly installments in a sharia-compliant manner without interest.
- The product is based on the concept of diminishing musharakah, where the bank and customer jointly own the property and the customer gradually purchases the bank's share over time.
- The document provides details on payment plans, profit calculations, examples of payment schedules, and frequently asked questions about the diminishing musharakah structure and easy home financing product.
ISLAMIC BANKING INSTRUMENTS IN APLLYING OF LETTER OF CREDIT (LC) Huzaimah Jaimin
This document discusses Islamic letters of credit (ILCs) and how they are applied using different Shariah contracts. It provides an overview of key Islamic trade finance products like Murabahah, Musharakah, and Wakalah that can be used as the basis for ILCs. It then examines the modus operandi and processes for Murabahah, Musharakah and Wakalah ILCs. The advantages of each model are also highlighted. The document aims to explain how ILCs can be structured in compliance with Islamic principles like the prohibition of Riba.
This document discusses futures markets and contracts. It describes forwards and futures contracts, how they are traded over-the-counter (OTC) or on organized exchanges, and the roles of clearinghouses. Clearinghouses introduce standardization, guarantee performance on contracts, and manage risks through daily mark-to-market pricing and margin requirements. Margin deposits are adjusted daily to reflect changes in contract values and maintain minimum balances.
Fundamental of Islamic Banking - Principles of Islamic BankingMahyuddin Khalid
This document provides an overview of Islamic banking and finance principles. It discusses permissible and prohibited activities for Islamic investment and financing. Key concepts covered include profit and loss sharing, trade-based financing vs interest-based loans, and the prohibition of riba (interest), gharar (uncertainty) and maisir (gambling). It also outlines the payment of zakat and some major Islamic legal maxims.
murabaha and bai bithaman ajil (kontrak jual beli)mandalina landy
The document discusses Murabaha, an Islamic financing structure where a bank purchases an asset from a supplier and sells it to a customer at a marked-up price, either for immediate or deferred payment. It defines Murabaha, explains how it works in practice including an example, compares it to Musawama, and outlines conditions to ensure it complies with Shariah such as disclosure of costs, fixed pricing, and separation of transactions.
This document discusses the concept of al-Tawarruq, an Islamic financing structure. It begins with an overview of Bank Islam Malaysia and its Shariah governance bodies. It then defines al-Tawarruq as the buying of a commodity on deferred payment and selling it for cash to a third party. The document outlines arguments for both prohibiting and permitting al-Tawarruq, and discusses issues around its operationalization. It concludes with trends showing growing use of al-Tawarruq products in Malaysian Islamic banks.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
This document provides information about riba (usury or interest) in Islam. It begins by defining riba in Arabic and in fiqh (Islamic jurisprudence) terminology. It then quotes a relevant verse from the Quran that forbids riba. Next, it shares a hadith from the Prophet Muhammad (peace be upon him) regarding the prohibition of increasing amounts in exchanges of gold and silver. The document goes on to explain the two types of riba: riba al-nasi'ah, which relates to loans, and riba al-fadl, which relates to trade. It concludes by stating that both types of riba are forbidden in the Quran and traders are allowed as
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Foreign exchange transactions involve the exchange of one currency for another at an agreed upon exchange rate. Such transactions help businesses manage currency risk exposure and protect against unfavorable currency movements. There is debate around whether certain FX practices like futures contracts comply with Islamic principles due to elements of gharar and speculation. Islamic scholars have proposed alternatives like currency swaps and options that aim to achieve hedging objectives while avoiding risks prohibited under Sharia.
Derivatives have played a role in several major corporate collapses and financial crises. While derivatives can be used to hedge risks, they must be properly regulated to prevent excessive risk taking. This document provides an overview of derivatives, including the main types of derivative contracts, the underlying assets they are based on, and the exchange-traded and over-the-counter markets in which they are traded. It also discusses some recent credit events where counterparty risk from derivatives contributed to the problems.
A future market or future exchange is a central financial exchange where people can trade. In which Futures contracts are an agreement between a buyer and a seller to buy or sell the underlying asset at a specified price and date in the future.
Conventional & Islamic Negotiable Instrument ASMAH CHE WAN
The document discusses the differences between conventional and Islamic negotiable instruments. For conventional instruments, negotiable instruments are governed by the Bills of Exchange Act 1949 and Cheques Act 1957, while Islamic instruments are governed by the Islamic Financial Services Act 2013. Some key types of conventional instruments include bills of exchange, cheques, promissory notes, and bankers' drafts. Islamic negotiable instruments include the Islamic Negotiable Instrument of Deposit (INID), which is based on the al-mudharabah concept, and the Negotiable Islamic Debt Certificate (NIDC).
Mudarabah is an Islamic equity-based contract where the rabbul-maal provides capital to the mudarib for a business venture. Profits are shared according to a predetermined ratio, while losses are borne by the rabbul-maal. There are issues with using mudarabah as the basis for deposit instruments or financing facilities, as some structures violate risk-sharing principles. Bay' Bithaman Ajil (BBA) is an Islamic contract where payment for an asset is deferred through installments. It is commonly used for home financing in Malaysia, though some consider it controversial as the profit rate tracks market interest rates. Legal documentation for BBA financing includes sale and purchase agreements and security documents like charges over
Musharakah is an Islamic business partnership where profits are shared by ratio but losses are shared by capital contribution. There are two types of Musharakah - one based on joint ownership of an asset and one based on partnership via contract. The contract-based type can involve capital partnership, service partnership, or goodwill partnership. Basic rules require the capital contribution to be quantified and specified, management is decided by partners, profits are shared by agreed ratio and losses by capital ratio. The partnership can be terminated when the purpose is achieved or any partner gives notice.
This document defines and discusses the concept of bay' al-tawarruq, an Islamic financing structure. It provides the definition, evidence from Islamic legal sources, key pillars and participants, types, conditions and a modern application of bay' al-tawarruq. Bay' al-tawarruq involves the purchase of a commodity on credit followed by the immediate resale of that commodity to a third party for a lower price in cash. The document outlines the different types and conditions that must be met for bay' al-tawarruq to be valid according to Islamic law.
This document discusses effective management and organizational structure from an Islamic perspective. It defines management as the process of completing activities efficiently through planning, organizing, staffing, directing, coordinating, reporting and budgeting. Islamic principles of management include division of work, authority, discipline, unity of command and direction, and subordination of individual interests to the group. The levels of management are top/high level, middle, and supervisory. Organizational structures can be centralized, decentralized, or use a matrix. Departmentalization options include function, product, location, and customer.
Principle Management Chapter 9 Management Information SystemsDr. John V. Padua
This document discusses information systems and their components. It defines key terms like data, information, and systems. It explains that computer-based information systems take in data as input, process it, and produce information as output. A system is defined as a set of components working together to achieve a common goal, and can include subsystems and be either closed or open. The four stages of data processing are described as input, processing, output, and storage. Reasons for studying information systems include careers in the field and because computer literacy is becoming essential in modern society. Some ethical issues with information systems are also outlined, such as privacy concerns and social inequality.
This document provides an overview of Islamic modes of financing, including rental-based (ijara), participatory (mudarabah, musharakah), and trade-based (murabahah, musawamah, salam, istisna) modes. It discusses the definitions, key terms, and conditions for each type of financing arrangement. The document is presented to Dr. Saqib Sharif by Hira Ali, Durriya Hai, and Tehzeeb Tariq on the topic of Islamic modes of financing for managers.
Securitization involves pooling various financial assets and issuing securities backed by those assets. There are several types of Islamic securitization, including those based on musharakah, murabahah, and ijarah contracts. Musharakah certificates represent direct ownership in the securitized assets. Murabahah contracts cannot be securitized to create negotiable instruments since the amount must be transferred at par value. Ijarah certificates represent proportionate ownership of the leased asset.
1. Murabaha is an Islamic financing technique where a financier purchases an asset for a customer and sells it to them at an agreed upon higher price, incorporating a disclosed profit amount.
2. It involves the customer first requesting the purchase from the financier. The financier then appoints the customer as an agent to identify and procure the asset. Once purchased, ownership is transferred to the financier before being sold to the customer.
3. The transaction involves two separate contracts - one where the customer acts as the financier's agent in purchasing the asset, and another where the customer acts as buyer and the financier as seller, with ownership transferring upon sale. This ensures risks are properly assumed under
The document presents information on an easy home financing product based on the Islamic financing structure of diminishing musharakah. Key points include:
- Meezan Bank offers an easy home financing product that allows customers to purchase a home through monthly installments in a sharia-compliant manner without interest.
- The product is based on the concept of diminishing musharakah, where the bank and customer jointly own the property and the customer gradually purchases the bank's share over time.
- The document provides details on payment plans, profit calculations, examples of payment schedules, and frequently asked questions about the diminishing musharakah structure and easy home financing product.
ISLAMIC BANKING INSTRUMENTS IN APLLYING OF LETTER OF CREDIT (LC) Huzaimah Jaimin
This document discusses Islamic letters of credit (ILCs) and how they are applied using different Shariah contracts. It provides an overview of key Islamic trade finance products like Murabahah, Musharakah, and Wakalah that can be used as the basis for ILCs. It then examines the modus operandi and processes for Murabahah, Musharakah and Wakalah ILCs. The advantages of each model are also highlighted. The document aims to explain how ILCs can be structured in compliance with Islamic principles like the prohibition of Riba.
This document discusses futures markets and contracts. It describes forwards and futures contracts, how they are traded over-the-counter (OTC) or on organized exchanges, and the roles of clearinghouses. Clearinghouses introduce standardization, guarantee performance on contracts, and manage risks through daily mark-to-market pricing and margin requirements. Margin deposits are adjusted daily to reflect changes in contract values and maintain minimum balances.
Fundamental of Islamic Banking - Principles of Islamic BankingMahyuddin Khalid
This document provides an overview of Islamic banking and finance principles. It discusses permissible and prohibited activities for Islamic investment and financing. Key concepts covered include profit and loss sharing, trade-based financing vs interest-based loans, and the prohibition of riba (interest), gharar (uncertainty) and maisir (gambling). It also outlines the payment of zakat and some major Islamic legal maxims.
murabaha and bai bithaman ajil (kontrak jual beli)mandalina landy
The document discusses Murabaha, an Islamic financing structure where a bank purchases an asset from a supplier and sells it to a customer at a marked-up price, either for immediate or deferred payment. It defines Murabaha, explains how it works in practice including an example, compares it to Musawama, and outlines conditions to ensure it complies with Shariah such as disclosure of costs, fixed pricing, and separation of transactions.
This document discusses the concept of al-Tawarruq, an Islamic financing structure. It begins with an overview of Bank Islam Malaysia and its Shariah governance bodies. It then defines al-Tawarruq as the buying of a commodity on deferred payment and selling it for cash to a third party. The document outlines arguments for both prohibiting and permitting al-Tawarruq, and discusses issues around its operationalization. It concludes with trends showing growing use of al-Tawarruq products in Malaysian Islamic banks.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
This document provides information about riba (usury or interest) in Islam. It begins by defining riba in Arabic and in fiqh (Islamic jurisprudence) terminology. It then quotes a relevant verse from the Quran that forbids riba. Next, it shares a hadith from the Prophet Muhammad (peace be upon him) regarding the prohibition of increasing amounts in exchanges of gold and silver. The document goes on to explain the two types of riba: riba al-nasi'ah, which relates to loans, and riba al-fadl, which relates to trade. It concludes by stating that both types of riba are forbidden in the Quran and traders are allowed as
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Foreign exchange transactions involve the exchange of one currency for another at an agreed upon exchange rate. Such transactions help businesses manage currency risk exposure and protect against unfavorable currency movements. There is debate around whether certain FX practices like futures contracts comply with Islamic principles due to elements of gharar and speculation. Islamic scholars have proposed alternatives like currency swaps and options that aim to achieve hedging objectives while avoiding risks prohibited under Sharia.
Derivatives have played a role in several major corporate collapses and financial crises. While derivatives can be used to hedge risks, they must be properly regulated to prevent excessive risk taking. This document provides an overview of derivatives, including the main types of derivative contracts, the underlying assets they are based on, and the exchange-traded and over-the-counter markets in which they are traded. It also discusses some recent credit events where counterparty risk from derivatives contributed to the problems.
A future market or future exchange is a central financial exchange where people can trade. In which Futures contracts are an agreement between a buyer and a seller to buy or sell the underlying asset at a specified price and date in the future.
Conventional & Islamic Negotiable Instrument ASMAH CHE WAN
The document discusses the differences between conventional and Islamic negotiable instruments. For conventional instruments, negotiable instruments are governed by the Bills of Exchange Act 1949 and Cheques Act 1957, while Islamic instruments are governed by the Islamic Financial Services Act 2013. Some key types of conventional instruments include bills of exchange, cheques, promissory notes, and bankers' drafts. Islamic negotiable instruments include the Islamic Negotiable Instrument of Deposit (INID), which is based on the al-mudharabah concept, and the Negotiable Islamic Debt Certificate (NIDC).
Mudarabah is an Islamic equity-based contract where the rabbul-maal provides capital to the mudarib for a business venture. Profits are shared according to a predetermined ratio, while losses are borne by the rabbul-maal. There are issues with using mudarabah as the basis for deposit instruments or financing facilities, as some structures violate risk-sharing principles. Bay' Bithaman Ajil (BBA) is an Islamic contract where payment for an asset is deferred through installments. It is commonly used for home financing in Malaysia, though some consider it controversial as the profit rate tracks market interest rates. Legal documentation for BBA financing includes sale and purchase agreements and security documents like charges over
Musharakah is an Islamic business partnership where profits are shared by ratio but losses are shared by capital contribution. There are two types of Musharakah - one based on joint ownership of an asset and one based on partnership via contract. The contract-based type can involve capital partnership, service partnership, or goodwill partnership. Basic rules require the capital contribution to be quantified and specified, management is decided by partners, profits are shared by agreed ratio and losses by capital ratio. The partnership can be terminated when the purpose is achieved or any partner gives notice.
This document defines and discusses the concept of bay' al-tawarruq, an Islamic financing structure. It provides the definition, evidence from Islamic legal sources, key pillars and participants, types, conditions and a modern application of bay' al-tawarruq. Bay' al-tawarruq involves the purchase of a commodity on credit followed by the immediate resale of that commodity to a third party for a lower price in cash. The document outlines the different types and conditions that must be met for bay' al-tawarruq to be valid according to Islamic law.
This document discusses effective management and organizational structure from an Islamic perspective. It defines management as the process of completing activities efficiently through planning, organizing, staffing, directing, coordinating, reporting and budgeting. Islamic principles of management include division of work, authority, discipline, unity of command and direction, and subordination of individual interests to the group. The levels of management are top/high level, middle, and supervisory. Organizational structures can be centralized, decentralized, or use a matrix. Departmentalization options include function, product, location, and customer.
Principle Management Chapter 9 Management Information SystemsDr. John V. Padua
This document discusses information systems and their components. It defines key terms like data, information, and systems. It explains that computer-based information systems take in data as input, process it, and produce information as output. A system is defined as a set of components working together to achieve a common goal, and can include subsystems and be either closed or open. The four stages of data processing are described as input, processing, output, and storage. Reasons for studying information systems include careers in the field and because computer literacy is becoming essential in modern society. Some ethical issues with information systems are also outlined, such as privacy concerns and social inequality.
The document discusses the principles and philosophy of Islamic management. It outlines the key functions of management in Islam which include planning, organizing, leading, and controlling. Planning involves setting both short-term and long-term goals to be productive servants of Allah. Organizing establishes project and role structures. Leading guides people in their long-term interests. Controlling ensures plans are properly executed. Other principles discussed are Tawhid, Khalifah, Al-Adl, Syura, Ikhlas, freedom, Amanah, reward, Amar Makruf Nahi Munkar, and brotherhood.
WHAT IS THE ROLE AND ACTIVITIES ASSOCIATED WITH EACH FUNCTIONAL AREA?... various functions of a business. Human resources management. HRM. Marketing management,. Operation management. Financial management. Office management.
1) The Islamic economic system is based on several key principles: Allah owns all things and humans are merely trustees; everything was created for humans' service and use; the concepts of halal (lawful) and haram (unlawful) govern production and consumption; and a system of zakat and sadaqat ensures equitable distribution of wealth.
2) Some other features include: Allah provides sustenance to all and expands or restricts livelihood; humans have limited ownership rights as trustees of wealth bestowed by Allah; interest, hoarding of wealth, and monopolies are prohibited.
3) The system aims for justice, welfare, and moderation by ensuring the basic needs of the
This document discusses Islamic business management. It outlines the key principles, philosophy, and objectives of Islamic management, which include establishing clear values and ethics based on Islamic principles. Management aims to develop high moral character among employees and use systems and practices that are fair and aligned with Islamic law. The document also compares Islamic management to traditional Western management, noting Islamic management aims to achieve organizational goals while also considering spiritual well-being and broader societal benefits.
The document discusses the principles of Islamic financial systems. It covers topics such as the fundamental principles of Islam like tawhid (unity of God), khilafah (vicegerency), and adalah (justice). It also discusses maqasid al-shariah (objectives of shariah), the strategy of Islamic economics, differences between conventional and Islamic financial systems, principles of Islamic banking like prohibition of interest and risk sharing, and objectives of seeking human welfare through allocating resources in accordance with Islamic teachings.
This document discusses Islamic financial instruments. It begins by outlining the principles of Islamic banks, including prohibitions on interest and investing in ethical businesses. It then describes the objectives of Islamic banks as promoting financial transactions and investments according to Islamic principles. The document goes on to summarize various types of Islamic financial instruments for mobilizing funds, such as savings accounts, investment accounts, and sukuk bonds. It also describes instruments for utilizing funds, including mudaraba (partnership), musharaka (equity participation), murabaha (cost-plus financing), and ijara (leasing).
The document outlines an Islamic finance workshop held in Dakar, Senegal in November 2013. It discusses the origin and principles of Islamic finance, which are based on ethical values of preserving faith, life, intellect, wealth and posterity for all. Islamic finance prohibits interest (riba) and involves profit/loss sharing and mark-up for trade financing. The outline discusses the growth of the global Islamic finance industry, including segments like Islamic banking, sukuk bonds, funds and microfinance. It notes the industry has grown to over $1 trillion in assets, with the majority in banking and located in the Middle East and Southeast Asia, though Africa is an emerging market.
The document criticizes capitalism and highlights its negative impacts based on statistics. It notes that in the US, 37 million people live in poverty, over 2 million experience homelessness annually, and the richest person has more wealth than the bottom 45% combined. It argues capitalism leads to polarization of wealth, with the rich accumulating more over time compared to the poor. Various data is presented showing concentration of wealth among the top 10% in Western countries. The system is said to fail in fulfilling basic human needs for all.
This document provides an overview of different economic systems including conventional, capitalist, communist/socialist, mixed, and Islamic systems. It discusses key principles such as private property and profit motive in capitalism, nationalization and equality in communism/socialism, and a mixture of public and private ownership in mixed economies. The Islamic economic system is defined as studying human behavior in using resources for individual and community benefit according to Sharia principles like tauhid and khalifah. It aims to fulfill the maqasid or purposes of Sharia like preserving religion, intellect, life, property, and dignity. In conclusion, while businesses generally seek profit, Islamic economy emphasizes using resources for broader human and social welfare within Sharia guidelines.
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ppt islamic busines and finance
1. 1
Derivatives in Islamic
Finance – An Overview
Obiyathulla Ismath Bacha
Management Centre,
International Islamic University, Malaysia
2. 2
What are derivatives?
A derivative security is a financial asset whose value is
dependent on the value of an underlying asset. The
underlying asset could be a basic financial asset like
common stocks, bonds, currencies or commodities.
Since by this definition, a derivative is a "claim on a
claim" the value of the derivative will depend on the
value of the asset (stocks, bonds, etc) on which it has a
claim.
Common forms : Forwards, Futures, Options, Swaps.
Also, exotics like, Swaptions; LEAPs, CMOs etc.
At a basic level; derivatives enable the avoidance of
unnecessary risks.
3. 3
Evolution of Derivative Markets/Instruments
If one examines the evolution of derivative markets and
instruments the progression has been as follows:
Forward Contracts
Options
Futures Contracts
Synthetic Instruments
Exotic Options
Swaps etc.
Financial Engineering
4. 4
As with any other financial product, derivatives were the result of financial
innovation. Innovation that responded to the existing need to help manage
risk in increasingly sophisticated business environments.
While forward contracts were originally innovated for risk-management of
agro-based products, the later instruments were needed as risk environments
changed.
Each step down the evolutionary chain; added value.
Forward Futures; reduced
• Liquidity risk
• Counterparty risk
• Avoid price squeeze etc.
Futures Options
• Increased flexibility
• Ability to take advantage of favourable price movts (unlike lock-in)
*managing contingent claims/liabilities.
The objective of all these innovation is Risk Management.
Rationale: Why do we need derivatives?
5. 5
Risk, from a Finance viewpoint, refers to the uncertainties
associated with returns from an investment. These uncertainties
would translate into volatility or fluctuation of returns from an
investment. Measured by std. deviation.
An asset that does not come with “guaranteed” fixed returns has
some amount of uncertainty. Infact even a “guaranteed” instrument
has risks if the issuer’s credibility is questionable.
Risk-Management; refers to the process/techniques of reducing
the risks faced in an investment.
It generally involves three broad steps;
Identifying the source and type of risk.
Measuring the extent of the risk.
Determining the appropriate response (either on Balance Sheet or Off
Balance Sheet) methods.
What makes risk management challenging is the fact that risks and
returns are generally positively correlated. Thus, the risk-return
tradeoff.
The challenge of risk-management is to protect the expected
returns while simultaneously reducing or laying-off the risks.
6. 6
All risk management techniques involving derivatives are Off
Balance Sheet. What this means is that, the hedging
mechanism/method is “detached” from the underlying
transaction.
The advantage: No need to change the way one does
business. No loss of competitiveness, customer convenience
etc.
An On Balance-Sheet technique is one where a transaction is
structured in such a way as to manage the inherent risk.
Example: Malaysian Exporter; Foreign Customer.
On Balance Sheet Technique
Quote only in Ringgit (HC)
Increase the FC price equivalent to cover risk (pricing strategy)
CRSA .(Currency Risk Sharing Agreement)
Off Balance Sheet vs On Balance Sheet techniques of risk
management.
7. 7
Forwards; Short FC forward contracts.
Futures; Short FC futures contracts.
Options; Long FC Put Options.
Swaps; FC payer, HC receiver
Off Balance Sheet techniques have become
tremendously popular;
Cheap and flexible
No inconvenience to customer
Can enhance competitiveness
Despite the popularity of derivatives based off
Balance-Sheet techniques; Islamic Jurists have
generally not been in favor.
Off Balance Sheet
8. 8
All Islamic financial instruments in general must meet a number of critiera
in order to be considered halal (acceptable).
At a primary level all financial instruments and transactions must be free of
at least the following five items: (i) riba (usury), (ii) rishwah (corruption),
(iii) maysir (gambling), (iv) gharar (unnecessary risk) and (v) jahl
(ignorance).
Riba can be in different forms and is prohibited in all its forms. For
example, Riba can also occur when one gets a positive return without
taking any risk.
As for gharar, there appears to be no consensus on what gharar means. It
has been taken to mean, unnecessary risk, deception or intentionally
induced uncertainty.
In the context of financial transactions, gharar could be thought of as
looseness of the underlying contract such that one or both parties are
uncertain about possible outcomes.
Masyir from a financial instrument viewpoint would be one where the
outcome is purely dependent on chance alone – as in gambling.
Finally, jahl refers to ignorance. From a financial transaction viewpoint, it
would be unacceptable if one party to the transaction gains because of the
other party’s ignorance.
Requisites for a Shariah Compliant Derivative Instrument
9. 9
In addition to these requirements for financial
instruments, the shariah has some basic conditions
with regards to the sale of an asset (in this case a real
asset as opposed to financial assets).
According to the shariah for a sale to be valid, (a) the
commodity or underlying asset must currently exist in
its physical sellable form and (b) the seller should have
legal ownership of the asset in its final form.
These conditions for the validity of a sale would
obviously render impossible the trading of derivatives.
However, the shariah provides exceptions to these
general principles to enable deferred sale where
needed.
10. 10
A number of instruments/contracts exist in Islamic finance
that could be considered a basis for forward/futures
contracts within an Islamic framework.
We will examine three such contracts. These are (i) the
Salam Contract, (ii) the Istisna Contract and (iii) Joa’la
Contract.
Each of these contracts concern deferred transactions,
and would be applicable for different situations. The first
and probably the most relevant of these to modern day
forward/futures contracts would be the Salam Contract or
Ba’i Salam.
Futures Contracts and Islamic Finance
11. 11
Salam is essentially a transaction where two parties agree to carry
out a sale/purchase of an underlying asset at a predetermined
future date but at a price determined and fully paid for today
This is similar to a conventional forward contract however, the big
difference is that in a Salam sale, the buyer pays the entire
amount in full at the time the contract is initiated. The contract
also stipulates that the payment must be in cash form.
The idea behind such a ‘prepayment’ requirement has to do with
the fact that the objective in a Ba’i Salam contract is to help needy
farmers and small businesses with working capital financing.
Since there is full prepayment, a Salam sale is clearly beneficial to
the seller. As such, the predetermined price is normally lower
than the prevailing spot price.
This price behavior is certainly different from that of conventional
futures contracts where the futures price is typically higher than
the spot price by the amount of the carrying cost.
Ba’i Salam
12. 12
The lower Salam price compared to spot is the “compensation” by
the seller to the buyer for the privilege given him.
Despite allowing Salam sale, Salam is still an exception within the
Islamic financial system which generally discourages forward
sales, particularly of foodstuff.
Thus, Ba’i Salam is subject to several conditions:
i) Full payment by buyer at the time of effecting sale.
ii) The underlying asset must be standardizable, easily
quantifiable and of determinate quality.
iii) Cannot be based on an uniquely identified underlying.
iv) Quantity, Quality, Maturity date and Place of delivery must be
clearly enumerated.
13. 13
It should be clear that current exchange traded futures
would conform to these conditions with the exception of the
first, which requires full advance payment by the buyer.
Given the customized nature of Ba’i Salam, it would more
closely resemble forwards rather than futures. Thus, some
of the problems of forwards; namely “double-coincidence”,
negotiated price and counterparty risk can exist in the
Salam sale.
Counterparty risk however would be one sided. Since the
buyer has paid in full, it is the buyer who faces the seller’s
default risk and not both ways as in forwards/futures.
In order to overcome the potential for default on the part of
the seller, the shariah allows for the buyer to require
security which may be in the form of a guarantee or
mortgage.
14. 14
The Salam Contract & Islamic Financial
Institutions
Since the Salam Contract involves transacting
in the underlying asset and financial institutions
may not want to be transacting in the
underlying asset, there are a number of
alternatives available. These are in the form of
parallel Salam Contracts.
(Jurists however are not all in agreement of the
permissibility).
15. 15
(I) Parallel with Seller
Here, after entering into the original Salam Contract, the
bank can get into a parallel Salam sale to sell the
underlying commodity after a time lapse for the same
maturity date.
The resale price would be higher and considered justifiable
since there has been a time lapse. The difference
between the 2 prices would constitute the bank’s profit.
The shorter the time left to maturity, the higher would be
the price.
Both transactions should be independent of each other.
The original transaction should not have been priced with
the intention to do a subsequent parallel Salam
16. 16
(II) Offsetting Transaction with Third
Party
Here, the bank which had gone into an original Salam Contract
enters into a contract promising to sell the commodity to a third
party on the delivery date.
Since this is not a Salam Contract the bank does not receive
advance payment.
It would be a transaction carried out on maturity date based on
a predetermined price.
Note : This is very much like modern day forward/futures. The
difference here being that the Islamic bank is offsetting an obligation –
not speculating.
17. 17
Istisna and Joala Contracts
In addition to Ba’i Salam , there are two other contracts where a
transaction is made on a “yet to” exist underlying assets.
These are the Istisna and Joala contracts.
The Istisna Contract has as its underlying, a product to be
manufactured.
Essentially, in an Istisna, a buyer contracts with a manufacturer
to manufacture a needed product to his specifications.
The price for the product is agreed upon and fixed. While the
agreement may be cancelled by either party before production
begins, it cannot be cancelled unilaterally once the manufacturer
begins production.
18. 18
Unlike the Salam Contract, the payment
here is not made in advance. The time of
delivery too is not fixed.
Like Ba’i Salam, a parallel contract is often
allowed for in Istisna.
The Joala Contract is essentially a Istisna
but applicable for services as opposed to a
manufactured product.
19. 19
The Bai’bil-wafa & Bai ‘bil Istighlal Contracts
The Bail bil-wafa is a composite of bai (sale) and rahnu (pledge).
Under this contract, one party sells an asset to a buyer who pledges to sell
back the asset to the original owner at a predetermined future date.
The rahnu (pledge) being to sell back to the owner and not to a third party.
Looks like a REPO? Except that the resale price must be the same as the
original purchase price.
But like a REPO, the buyer has rights to benefits from ownership of the
asset.
The Bai bil-Istighlal is really a combination of the Bai wafa and Ijarah.
Under this contract, the buyer not only promises to resell at a
predetermined future price but to also lease the asset to the seller in the
interim period.
The Bai bil-Istighlal can therefore be a convenient means by which an IB
can provide short/medium term financing. The IB first purchases the asset,
leases it the customer before finally reselling it to the customer.
20. 20
Options in Islamic Finance
Recall our earlier argument that to be acceptable an
instrument/investment must be free of gharar and not
have zero risk in order to provide some positive return.
The Istijrar Contract is a recently introduced Islamic
financing instrument. The contract has embedded
options that could be triggered if an underlying asset’s
price exceeds certain bounds.
The contract is complex in that it constitutes a
combination of options, average prices and Murabaha
or cost plus financing
21. 21
The Istijrar involves two parties, a buyer which could be a company
seeking financing to purchase the underlying asset and a financial
institution.
A typical Istijrar transaction could be as follows; a company seeking
short term working capital to finance the purchase of a commodity like a
needed raw material approaches a bank. The bank purchases the
commodity at the current price (Po ), and resells it to the company for
payment to be made at a mutually agreed upon date in the future – for
example in 3 months. The price at which settlement occurs on maturity
is contingent on the underlying asset’s price movement from t0 to t90.
Where t0 is the day the contract was initiated and t90 is the 90th day
which would be the maturity day.
Unlike a Murabaha contract where the settlement price would simply be
a predetermined price; P* where P* = Po (1+r), with ‘r’ being the bank’s
required return/earning, the price at which the Istijrar is settled on
maturity date could either be P* or an average price ( ) of the
commodity between the period t0 an t90.
Overview of Istijrar
P
22. 22
As to which of the two prices will be used for settlement
will depend on how prices have behaved and which
party chooses to “fix” the settlement price. The
embedded option is the right to choose to fix the price
at which settlement will occur at anytime before
contract maturity.
At the initiation of the contract; to, both parties agree
on the following two items (i) in the predetermined
Murabaha price; P* and (ii) an upper and lower bound
around the Po. (bank’s purchase price at to).
23. 23
where Po = The price that bank pays to purchase
underlying commodity.
P* = Murabaha price; P* = Po (1+r).
PLB = The lower bound price
PUB = The Upper bound price
The settlement price (Ps) at t90 would be;
(i) Ps = ; if the underlying asset price remained within
the bounds.
or (ii) Ps = P*; if the underlying asset exceeds the bounds
and one of the parties chooses to exercise its
option and use P* as the price at which to
settle at maturity.
PLB P0 P* PUB
P
24. 24
The basic idea behind such a contract is to spread out the
benefits of favourable price movement to both parties. – i.e. Not
a zero sum game.
Such a contract fulfills the need to avoid a fixed return on a
riskless asset which would be considered “riba” and also avoids
gharar in that both parties know up front, P* and the range of
other possible prices. (by definition between the upper and lower
bounds).
The Istijrar from an Options Viewpoint
Given our description of the Istijrar Contract, the contract comes
across as something that is the result of modern day financial
engineering.
Many of the products of financial engineering tend to have the
complexities, bounds, trigger points etc. similar to that of the
Istijrar.
25. 25
Payoff to Istijrar
where Ps = Settlement Price at Maturity
= Average price; Pto to Ptqo
Pt = Spot Price of underlying commodity on day t.
P* = The predetermined, cost-plus or Murabaha price.
P
(bank losses, buyer gains until exercise)
(buyer losses, bank gains until exercise)
if; lower bound Pt upper boundPs
Ps =
If Pt upper bound
P
If Pt < lower bound
27. 27
Futures
1) Fatwa of Omam Al-Haramaini Al-Jauwaini
Futures Trading is Halal if the practice is based on Darurah and
the Needs or Hajaat of the Ummah
2) Syariah Advisory Council (SAC) of Securities
Commission
a) Futures trading of commodities is approved as long as underlying
asset is halal.
b) Crude Palm Oil Futures Contracts are approved for trading.
c) For Stock Index Futures contract, the concept is approved. However
since the current KLCI SE based SIF has non halal stocks, it is not
approved.
Thus is implies that a SIF contract contract of a halal index would be
acceptable.
28. 28
3) Ustaz Ahmad Allam; Islamic Fiqh Academy
(14/5/1992)
SIF trading is HARAM, since some of the underlying stocks are not
halal.
Until and unless the underlying asset or basket of securities in the SIF
is all Halal; SIF trading is not approved.
4) Mufti Taqi Usmani
Futures transactions not permissible.
For two reasons;
i. According to Syariah, sale or purchase cannot be affected for a
future date.
ii. In most futures transactions delivery or possession is not intended.
29. 29
Options
When viewed solely as a promise to buy or sell an asset at a
predetermined price within a stipulated period, shariah scholars find
nothing objectionable with options.
It is in the trading of these promises and the charging of premiums
that objections are raised.
Options have generally been examined under the fiqh doctrine of al-
khiyarat (contractual stipulations) or under the bai-al-urbun concept.
Urbun being a transaction in which a buyer places an initial good faith
deposit.
1. Ahmad Muhayyuddin Hassan (1986)
Objects to option trading for 2 reasons
i. Maturity beyond three days as in al-khiyarat is not acceptable.
ii. The buyer gets more benefits than the seller – injustice.
30. 30
2) Abu Sulayman (1992) (Fiqh Academy – Jeddah)
Acceptable when viewed in the light of bai-al-urbun
but considers options to have been detached and
independent of the underlying asset – therefore:
unacceptable.
3) Mufti Taqi Usmani (Fiqh Academy – Jeddah)
Promises as part of a contract is acceptable in
Shariah, however the trading and charging of a
premium for the promise is not acceptable.
Yet others have argued against options by invoking
“maisir” or unearned gains. That is, the profits from
options may be unearned.
31. 31
4) Hashim Kamali (1998)
Finds options acceptable
Invokes the Hanbali tradition
Cites Hadiths of Barira (RA) and Habban Ibn
Munqidh (RA).
Also draws parallels with the al-urbun in arguing that
premiums are acceptable.
Also cites that contemporary scholars such as Yusuf
al-Qaradawi and Mustafa al-Zarqa have
authenticated al-urbun. (similar stand by Iranian
scholars)
32. 32
5) Shariah Advisory Council; Securities
Commission
Though no formal opinion on stock or Index Options,
the SAC has allowed other option-like instruments.
Warrants
TSRs
Call Warrants
Each of these are really option like instruments. Call
Warrants for example, are simply long dated Call
Options. Have similar risk/payoff profile.
33. 33
Conclusion
The overall stance of Fuqaha, of conventional derivative
instruments appears to be one of apprehension even suspicion.
That these instruments could easily be used for speculation
appears to be the key reason for objection.
That derivatives form the basis of risk-management appears to
have been lost.
Key Problem: Evaluation has always been from a purely juridical
viewpoint. And like most juristic evaluation, have relied on
precedence? But there isn’t a precedence nor equivalence for
the kind of risk-management problems faced today.
When extrapolating/inferring : template may be wrong.
The object of juridical analysis appears to be a micro
examination of each and every feature of a derivative instrument
to see if it passes, a often subjective religious filter.
34. 34
The overall intended use of the instrument nor the
societal benefits that could accrue do not seem to have
been given due consideration.
Aside from individual interpretation, the differing
opinions among mazhabs/imams complicates the
situation further. Thus, an options contract may be
found objectionable for exactly opposite reasons.
While some mazhabs like the Hanbalis have been
broader in their acceptance, the Shafi’ and Hanafis
have been less so. The Hanbalis for example are
somewhat liberal when it comes to Option of stipulation
(Khiyar-al-Shart).
The Hanbalis hold that stipulations that remove a
hardship, fulfills a legitimate need, provide a benefit or
convenience, or facilitate the smooth flow of
commercial transactions are generally valid as a matter
of principle.
35. 35
Obvious need for a more coordinated
evaluation; need based rather than purely
juristic/precedent driven.
Muslim businesses operate in the same
environment and so face the same risks. Yet, in
the current state of affairs, shariah compliance
can impede risk management needs.
Unless there is a convergence between shariah
compliance and risk management needs,
Muslim business can be seriously handicapped.