Islamic Finance - Ethical Underpinnings, Products, and Institutions

Preface

Acknowledgements

Contents

List of Figures

List of Tables

Part I Islamic Financial Markets, Its Ethical Foundation, Portfolio Performance, Customer Loyality and Products

Chapter 1 The Ethical Underpinnings of Islamic Economics and Finance

1.1 Background

1.2 Ethics of Economics

1.3 What Is Islamic Economics and Finance?

1.4 Features of Islamic Economics

1.5 Ethical Features of Islamic Finance

1.6 Ethical Dimension in Islamic Economics

1.7 Objective (Maqasid) of Islamic Economics

Philosophical-Based Objective

Operational-Based Objective

1.8 Examples

1.9 Why Islamic Economics and Finance?

1.10 Conclusion

References

Chapter 2 Islamic Finance: A Global Alternative

2.1 Theoretical Development

2.2 Foundations of Islamic Financial System

2.3 Distinguish Between Conventional and Islamic Financial System

2.4 Financing Principles in Islamic Financial System

2.5 Social Goal

2.6 Emerging as Alternative Financial Option

2.7 Universal Acceptability

2.8 Conclusion

Chapter 3 Justice, Balance, Trust and Benevolence: The Relationship of the Islamic Bank to Its Shareholders

3.1 Islamic Ethics Criteria

3.2 Taking Responsibility

3.3 A True Joint Venture

3.4 A Way of Life

Chapter 4 Following the Rules: How Do Islamic and Ethical Investing Impact Portfolio Performance?

4.1 Islamic Screening Criteria

4.2 Socially Responsible Investment Screening Criteria

4.3 Something in Common

4.4 Ethical Factors in Investment

The Effects of Ethical Behaviour on Company Share Price

Company Policies

Reputation

Consumers

Regulation

Employee Motivational Training

4.5 Effects of Islamic Ethical Investment on a Portfolio

Diversification

Sector and Stock Effects

Tracking Error

Concentration

Management of Funds

Many Possibilities

Chapter 5 A New Perspective: Islamic Business Ethics and Islamic Finance Customer Loyalty

5.1 Islamic Ethics Ensures Harmony in Banking Business

5.2 Customer Support Advisory—An Important Factor

5.3 Shari’ah—Basis of Customers’ Satisfaction

5.4 CSA Role Vis-à-vis Service Expectation

5.5 Sales Behaviour Model Based on Islamic Business Ethics

Customer Satisfaction with the Core Service (H1)

High-Level Customer Satisfaction (H2) Leads to Trust (H3) and Loyalty (H4)

Customer Trust (H3) to Islamic Banks

Customer Loyalty (H4) to Islamic Bank

5.6 Conclusions

Chapter 6 Unprecedented Opportunity: The Global Credit Crisis and Islamic Banking

6.1 Introduction

6.2 Delicateness of Capitalism

The Money Illusion and Debt

Real Economy and Financial Economy—Twin Economy Dilemma

The Boom and Bust Virus

6.3 The Credit Crunch

Subprime Market

Securitization

Collapse of Subprime Market

Self-Interest

Impact on Global Economy

Economic Recession

6.4 Islamic Economics as Solution to Financial Crisis

Riba Is Unlawful But Trade Is Lawful

No Twin Economy in Islamic System

Proper Distribution of Wealth

Circulation of Wealth

Limited Taxation

Islamic Monetary Policy Curbs Inflation

Promotion of Businesses and Creation of Jobs

Islam Encourages Spending

Challenges Before Islamic Banking

6.5 Conclusion

References

Chapter 7 Shari’ah Compliant Equity

7.1 Investment in Islamic Equity

Equity Shares

Equity Funds

7.2 The Company’s Business and Its Structure

Enterprise’s Business

Structure of the Company Business

Obligation of the Enterprise

Earnings from Unlawful (Haram) Activities

Cash and Receivables or Payables of the Company

7.3 Conclusion

Chapter 8 Sukuk—Shari’ah-Based Asset Securitization

8.1 Securitization and Sukuk

8.2 Types of Sukuk

Trust Certificates

8.3 Mudarabah Sukuk

8.4 Musharakah Sukuk

8.5 Murabahah Sukuk

8.6 Ijarah Sukuk

Asset-Backed Ijarah Sukuk

8.7 Global Sukuk Market Performance

8.8 AAOIFI’s Concern on Shari’ah Compliance of Sukuk

8.9 Conclusion

Chapter 9 Islamic Mutual Funds: A Vehicle for Mobilization of Small Savings

9.1 Islamic Mutual Fund Is Managed Pool of Capital

9.2 Types of Islamic Mutual Funds

9.3 Pricing of Islamic Mutual Funds

9.4 Islamic Investment

9.5 Islamic Investment Criteria

9.6 Trading and Investing Practices

9.7 Growing Importance of Islamic Mutual Funds

9.8 Islamic Mutual Funds Worldwide

An Important Issue to Address

Chapter 10 Joining Forces: Islamic Finance and Private Equity

10.1 Venture Capital vs. Private Equity

10.2 Private Equity and the Muslim World

10.3 Structuring Private Equity

10.4 Deal and Screening Process

10.5 Currently Islamic Private Equity

Fast Growth Ahead

10.6 Development of Private Equity

Chapter 11 Financial Futures, Stock Options and Warrants in the Islamic Capital Market

11.1 Introduction

11.2 Strategies for the Sophisticated Conventional Investors: Stock Options, Warrants and Futures

Options

Stock Options

Making Money with Stock Options

Pricing

Warrants

Futures Contracts

11.3 Shari’ah Bans Maysir, Gharar and Dayn Bi-Dyan

11.4 Obstacles to Practice Stock Index Futures, Stock Options and Warrants in the Islamic Market

Stock Index Futures

Stock Options

Warrants

11.5 Conclusion

References

Chapter 12 Small Solutions: Poverty Alleviation Through Islamic Microfinance

12.1 Introduction

Brief Introduction of Islamic Microfinance Programme: RDS

Shari’ah Compliance Financial Plan of RDS and Growth

12.2 Literature Review

12.3 Islamic Microfinance Model Study

Income

Assets

Health

Schooling of Children

Family Harmony

12.4 Methodology of the Study

Sampling

Data Collection

Regression Equation and Statistical Test

12.5 Empirical Results

12.6 Financial and Social Development (Harmony) Among Beneficiaries

12.7 Diversification of the Scheme: Experts’ Opinion

12.8 Conclusion and Policy Recommendations

12.9 Food for Thought

12.10 Role of Zakah and Awqaf

12.11 Fitting the Pieces Together

References

Chapter 13 Home Sweet Home: Islamic Housing Financing

13.1 Shari’ah-Compliant Mortgage Models

13.2 Ijarah Mortgage

13.3 Murabahah Mortgage

13.4 Musharakah Mutanaqisah

13.5 Tiered Financing Product

13.6 Market Players in Islamic Mortgage

13.7 Shari’ah Mortgage Payment and Fees

13.8 Sector Growth

13.9 Regulation Help

13.10 Does Being Ethical Pay?

13.11 Leading Europe

Chapter 14 Operational Mechanism of Takaful and Re-Takaful

14.1 Concept of Takaful

14.2 Takaful Operations

14.3 General Takaful

14.4 Family Takaful

14.5 Models of Takaful

Operation of Mudarabah Model

Wakalah Model

Hybrid Wakalah–Mudarabah Model

Hybrid of Wakalah–Waqf Model

Re-Takaful (Islamic Reinsurance)

14.6 Methods

Part II Regulation, Risk Management, CSR of Islamic Financial Services, Accounting, Governance, and Their International Islamic Infrastructure Institutions

Chapter 15 Courting Change: Development of Islamic Legal System Could Bring Growth

15.1 Shari’ah Laws in Islamic Banking

15.2 Creating New Contracts

15.3 Adoption of Shari’ah Laws for Islamic Finance

15.4 Dispute Resolution

15.5 Shari’ah Courts for Dispute Settlement

15.6 Standardization of Islamic Products

15.7 Value-Added Roles of Shari’ah Scholars

15.8 Global Harmonization

Chapter 16 Gaining Strength: Prudential Regulations in Islamic Banking

16.1 Rationale Behind Prudential Regulation

Public Good View

Protection of Public Resources View

Integrity of Fiduciary Contracts View

16.2 Supervision in Islamic Banking

16.3 Looking to the Future

Chapter 17 Risk Management in Islamic Financial Institutions

17.1 Risks in Islamic Financial Institutions

17.2 Market Risk

Unsystematic Risk

Systematic Risk

17.3 Credit Risk

17.4 Liquidity Risk

17.5 Operational Risk

17.6 Legal Risk

17.7 Reputation Risk

17.8 Risk Related to Human Resources

17.9 Room for Adaptation

References

Chapter 18 The Basel Accords in Relation to Islamic Finance

18.1 Introduction

18.2 Base Accord Application in Islamic Banks

18.3 Capital Adequacy Framework Under Basel Accord

New Basel II

Basel III: Higher Capital Requirements and Liquidity Rules

New Capital Requirements

New Capital Buffer

Leverage Ratio

Systemically Important Banks

Liquidity Rules

18.4 Basel Methodology to Islamic Banking and Finance

AAOIFI Capital Adequacy Framework

The IFSB Capital Adequacy Framework

The IFSB Proposal

Higher Capital Requirements and Liquidity Under Basel III and IFSB’s Revised Proposal (Capital Conservation Buffer)

Leverage Ratio

18.5 Risk Specification of Islamic Banks/IFIs

Risk Specification in IFSB Guidelines

Liquidity Risk in Basel III Framework

Stock of High-Quality Liquid Assets

Total Net Cash Flow

18.6 Case Study: Capital Adequacy Analysis of Al-Rajhi Bank Under Basel Framework

Capital and Buffer

Leverage Ratio

Liquidity Coverage Ratio

RWA of Al-Rajhi Bank and Minimum Capital Requirement & Buffers Risk-Weighted Assets

18.7 Conclusions

References

Chapter 19 CSR Disclosure for Islamic Financial Institutions

19.1 Stakeholder Engagement

19.2 Disclosure and Accountability

19.3 The Need for Standards

19.4 Proposed Model

Ethical Behaviour, Stakeholder Engagement, Customer Relations and Good Governance

Interest-Free, Lawful Products and Services

Opinion of Shari’ah Supervisory Board

Development and Social Goals

Zakah (Religious Tax)

Qardh-Hassan (Benevolent Loan)

Charity and Other Activities

Commitment to Community Development

Research, Training and Development

Employees

Environment

19.5 Joining Global Standards

Chapter 20 Just and Balanced: The Importance of Accounting in Islamic Finance

20.1 Shari’ah Laws in the Operation of IFIs

20.2 Value-Based Accountability

20.3 Islamic Finance Works Differently

20.4 Principles of Islamic Accounting

20.5 Challenges for Islamic Accounting

20.6 Ethics for All

Chapter 21 Bigger Than the Bottom Line: Islamic Principles of Accounting

21.1 Prohibition of Riba

21.2 Ban on Gharar

21.3 Adoption of Acceptable Valuation Techniques

21.4 Valuation of Zakah

21.5 Forbidden Business Activities

21.6 Environmental Awareness

21.7 Trusteeship

21.8 Information and Financial Statements

Financial Statements

21.9 Assets and Liabilities

21.10 Shari’ah-Based Accountability in Accounting

Chapter 22 Rich Architecture: Briefing on Shari’ah-Compliant Corporate Governance

22.1 Providing a Foundation for Good Governance

22.2 Role of the Shari’ah Supervisory Board

22.3 Division of Responsibilities

22.4 Conclusion

Chapter 23 International Islamic Financial Infrastructure Institution: AAOIFI

Chapter 24 International Islamic Financial Infrastructure Institution: IFSB

24.1 Constituent Member

24.2 Adoption of Standard

24.3 PSIEIs Data and Publications

Chapter 25 International Islamic Financial Infrastructure Institution: IIRA

25.1 International Recognition

25.2 Type of Ratings IIRA Offers

25.3 Sovereign Ratings

Methodology

25.4 Issuer Ratings

Methodology of Issuer Ratings

25.5 Sukuk Ratings

Methodology of Sukuk Ratings

25.6 Insurer Financial Strength Ratings

25.7 Publications and Training

Chapter 26 International Islamic Financial Infrastructure Institution: IILM

Index