Understanding Islamic Finance / Edition 1

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"Muhammad Ayub has provided the most comprehensive treatment to date of the contracts, products and systems used in Islamic finance. He explores how the concepts are rooted in the Islamic economic system in a way that will appeal to academics while at the same time giving a coherent account of the products that finance practioners should find helpful."
Professor Rodney Wilson, Director of Postgraduate Studies, Durham University

"The author has rendered a great service to the field of Islamic finance through this painstaking encyclopedic effort that could have only been undertaken by a dedicated scholar-teacher-trainer like Dr Ayub. This detailed compilation of the views of the four majority jurisprudential schools of thought in Islam on matters relating to financial transactions, presented and explained in clear language and applied to contemporary developments in Islamic banking and finance, is highly useful to students and practitioners of Islamic finance. The book is of particular significance for financial engineers who wish to design financial instruments compatible with the requirements of Islamic jurisprudence"
Dr Abbas Mirakhor, Executive Director, IMF Washington DC

"Understanding Islamic Finance is the fruit of many years of hard work by the author based on his understanding of Islamic law and the principles of Islamic economics. Islamic economic system being a rule-base system can be understood very well when viewed as a set of contracts. Therefore, this book provides the vital bridge between the legal foundation and the theory of economic and financial systems in Islam. This bridge helps the reader better understand Islamic finance."
Dr Zamir Iqbal, World Bank, Washington DC

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Product Details

  • ISBN-13: 9780470030691
  • Publisher: Wiley
  • Publication date: 12/4/2007
  • Series: Wiley Finance Series, #458
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 542
  • Product dimensions: 6.91 (w) x 9.69 (h) x 1.42 (d)

Meet the Author

MUHAMMAD AYUB is Director Training, Development and Shari’ah Aspects at IIBI, London. Formerly, he was with the State Bank of Pakistan (central bank) where he headed the Islamic Economics Division and Shari’ah Compliance Division as Senior Joint Director in the Research and Islamic Banking Departments. He also served as Head of Islamic Banking at NIBAF, the training wing of SBP. Besides contributing a large amount of material, he has been serving as Master Trainer on theory and practice of Islamic finance.
For last two decades, he has been involved in R&D for facilitating I.B. Industry, Products Development, IB Prudential regulations, Risk management and Shari’ah related controls and audit of Islamic banking institutions. This, along with his association with various Commissions set up from time to time on application of Islamic banking system, has lent him a pragmatic and balanced approach, a prerequisite for presenting such a book.

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Table of Contents

List of Boxes and Figures xvii

Foreword xix

Preface xxi

Acknowledgements xxv


1 Introduction 3

1.1 Economic Scenario in the Neoclassical Framework 3

1.2 Conventional Debt: A Recipe for Exploitation 4

1.3 Growth per se May not Lead to Socio-economic Justice 6

1.4 Social Welfare Activities of the States 8

1.5 The Main Culprit 8

1.6 The Need of the Hour 9

1.7 Economics and Religion 10

1.8 Islamic Principles Can Make the Difference 11

1.9 Regulating Trade and Business 13

1.10 Islamic Finance Passing Significant Milestones 15

1.11 Could it Work to Achieve the Objectives? 16

1.12 About this Book 17

2 Distinguishing Features of the Islamic Economic System 21

2.1 Introduction 21

2.2 Islamic Sharîáh and its Objectives 21

2.3 Why Study Islamic Economics? 25

2.4 Islamic Economics: What should it be? 30

2.5 Paraphernalia of Islamic Economics 32

2.6 Summary 41

3 The Main Prohibitions and Business Ethics in Islamic Economics and Finance 43

3.1 Introduction 43

3.2 The Basic Prohibitions 43

3.3 Business Ethics and Norms 64

3.4 Summary and Conclusion 70

4 The Philosophy and Features of Islamic Finance 73

4.1 Introduction 73

4.2 The Philosophy of Islamic Finance 73

4.3 Debt versus Equity 85

4.4 Islamic Banking: Business versus Benevolence 86

4.5 Exchange Rules 87

4.6 Time Value of Money in Islamic Finance 89

4.7 Money, Monetary Policy and Islamic Finance 90

4.8 Summary 96


5 Islamic Law of Contracts and Business Transactions 101

5.1 Introduction 101

5.2 Mâl (Wealth), Usufruct and Ownership 101

5.3 General Framework of Contracts 105

5.4 Elements of a Contract 106

5.5 Broad Rules for the Validity of Mu‘âmalât 110

5.6 W‘adah (Promise) and Related Matters 114

5.7 Types of Contracts 117

5.8 Commutative and Noncommutative Contracts 124

5.9 Conditional or Contingent Contracts 126

5.10 Summary 127

6 Trading in Islamic Commercial Law 129

6.1 Introduction 129

6.2 Bai‘ – Exchange of Values 130

6.3 Legality of Trading 131

6.4 Types of Bai‘ 133

6.5 Requirements of a Valid Sale Contract 133

6.6 Riba Involvement in Sales 142

6.7 Gharar – A Cause of Prohibition of Sales 143

6.8 Conditional Sales and “Two Bargains in One Sale” 144

6.9 Bai‘ al‘Arbûn (Downpayment Sale) 145

6.10 Bai‘ al Dayn (Sale of Debt) 146

6.11 Al ‘Inah Sale and the Use of Ruses (Hiyal) 147

6.12 Options in Sales (Khiyar) 150

6.13 Summary 152

7 Loan and Debt in Islamic Commercial Law 155

7.1 Introduction 155

7.2 The Terms Defined 155

7.3 Illegality of Commercial Interest 157

7.4 Loaning and the Banking System 158

7.5 Guidance from the Holy Qur’ân on Loans and Debts 159

7.6 The Substance of Loans 159

7.7 Repayment of the Principal Only 160

7.8 Time Value of Money in Loans and Debts 160

7.9 Instructions for the Debtor 161

7.10 Instructions for the Creditor 162

7.11 Husnal Qadha (Gracious Payment of Loan/Debt) 162

7.12 Remitting a Part of a Loan and Prepayment Rebate 163

7.13 Penalty on Default 165

7.14 Hawalah (Assignment of Debt) 167

7.15 Security/Guarantee (Kafalah) in Loans 168

7.16 Bai‘ al Dayn (Sale of Debt/Debt Instruments) 172

7.17 Impact of Inflation on Loans/Debts 172

7.18 Summary 174


8 Overview of Financial Institutions and Products: Conventional and Islamic 179

8.1 Introduction 179

8.2 What is Banking or a Bank? 179

8.3 The Strategic Position of Banks and Financial Institutions 180

8.4 Categories of Conventional Financial Business 181

8.5 The Need for Islamic Banks and NBFIs 185

8.6 The Issue of Mode Preference 195

8.7 Islamic Investment Banking 199

8.8 Islamic Financial Markets and Instruments 199

8.9 Summary and Conclusion 211

9 Murabaha and Musawamah 213

9.1 Introduction 213

9.2 Conditions of Valid Bai‘ 214

9.3 Murabaha – a Bai‘ al Amânah 215

9.4 Bai‘ Murabaha in Classical Literature 215

9.5 The Need for Murabaha 216

9.6 Specific Conditions of Murabaha 217

9.7 Possible Structures of Murabaha 220

9.8 Murabaha to Purchase Orderer (MPO) 222

9.9 Issues in Murabaha 229

9.10 Precautions in Murabaha Operations 233

9.11 Musawamah (Bargaining on Price) 234

9.12 Summary 238

10 Forward Sales: Salam and Istisna‘a 241

10.1 Introduction 241

10.2 Bai‘ Salam/Salaf 241

10.3 Benefits of Salam and the Economic Role of Bai‘ Salam 242

10.4 Features of a Valid Salam Contract 243

10.5 Security, Pledge and Liability of the Sureties 249

10.6 Disposing of the Goods Purchased on Salam 250

10.7 Salam – Post Execution Scenarios 252

10.8 Salam-Based Securitization – Salam Certificates/Sukuk 254

10.9 Summary of Salam Rules 255

10.10 Salam as a Financing Technique by Banks 257

10.11 Istisna‘a (Order to Manufacture) 263

11 Ijarah – Leasing 279

11.1 Introduction 279

11.2 Essentials of Ijarah Contracts 280

11.3 General Juristic Rules of Ijarah 281

11.4 Modern Use of Ijarah 287

11.5 Islamic Banks’ Ijarah Muntahia-bi-Tamleek 291

11.6 Summary of Guidelines for Islamic Bankers on Ijarah 298

12 Participatory Modes: Shirkah and its Variants 307

12.1 Introduction 307

12.2 Legality, Forms and Definition of Partnership 308

12.3 Basic Rules of Musharakah 312

12.4 The Concept and Rules of Mudarabah 320

12.5 Mudarabah Distinguished from Musharakah 327

12.6 Modern Corporations: Joint Stock Companies 328

12.7 Modern Application of the Concept of Shirkah 330

12.8 Diminishing Musharakah 337

12.9 Diminishing Musharakah as an Islamic Mode of Finance 339

12.10 Summary and Conclusion 343

13 Some Accessory Contracts 347

13.1 Introduction 347

13.2 Wakalah (Agency) 347

13.3 Tawarruq 349

13.4 Ju‘alah 351

13.5 Bai‘ al Istijrar (Supply Contract) 355

14 Application of the System: Financing Principles and Practices 357

14.1 Introduction 357

14.2 Product Development 358

14.3 The Nature of Financial Services/Business 358

14.4 Prospects and Issues in Specific Areas of Financing 369

14.5 Islamic Banks’ Relationship with Conventional Banks 384

14.6 Fee-based Islamic Banking Services 384

14.7 Summary and Conclusion 386

Appendix: The Major Functions of a Sharîáh Supervisory Board In the Light of the AAOIFI’s Sharîáh Standard 387

15 Sukuk and Securitization: Vital Issues in Islamic Capital Markets 389

15.1 Introduction 389

15.2 The Capital Market in an Islamic Framework 390

15.3 Securitization and Sukuk 391

15.4 Summary and Conclusion 412

16 Takaful: An Alternative to Conventional Insurance 417

16.1 Introduction 417

16.2 The Need for Takaful Cover 417

16.3 The Sharîáh Basis of Takaful 420

16.4 How the Takaful System Works 422

16.5 Takaful and Conventional Insurance Compared 427

16.6 Status and Potential of the Takaful Industry 428

16.7 Takaful Challenges 429

Appendix: Fatâwa (Juristic Opinions) on Different Aspects of Insurance 430

17 An Appraisal of Common Criticism of Islamic Banking and Finance 433

17.1 Introduction 433

17.2 The Common Myths and Objections 433

17.3 Appraisal of Conceptual Criticism 436

17.4 Appraisal of Criticism on Islamic Banking Practice 445

17.5 Conclusion 456

18 The Way Forward 457

18.1 Introduction 457

18.2 Agenda for the Policymakers 457

18.3 Potential, Issues and Challenges for Islamic Banking 461

18.4 Conclusion 479

Acronyms 481

Glossary 485

Bibliography English Sources 497

Arabic/Urdu Sources 503

Suggested Further Readings 505

Index 509

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  • Posted October 28, 2008

    more from this reviewer

    Comprehensive work on Islamic finance

    Muhammad Ayub provides a thorough report on the major economic and political ramifications of Islamic finance, now practiced in more than 75 countries. This system follows specific, religion-grounded financial policies. For instance, it accommodates Riba, the Islamic prohibition of certain kinds of gains, including interest. Ayub makes it clear that Islamic finance, backed by billions in petrodollars, could come to compete with Western capitalist practices, which he roundly criticizes. His book is simultaneously academic, religious, legal, political and economic (as well as being rhetorical at times, with some challenging long and winding sentences). He also states some apparently opinion-based observations as facts, often with no references, but he knows his subject area and he sounds authoritative throughout, though you may differ with his political viewpoint. getAbstract finds this book critically important for anyone whose work is touched by Islamic banking or finance.

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