Introduction to Islamic Banking and Finance / Edition 1

Introduction to Islamic Banking and Finance / Edition 1

by Brian Kettell
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Introduction to Islamic Banking and Finance / Edition 1

Introduction to Islamic Banking and Finance is a succinctguide to the key characteristics of Islamic banking highlightinghow these differ from conventional banking. This detailed bookillustrates how Islamic banking is consistent with the Sharia'a, akey element of which is the prohibition on collecting and payinginterest. This central religious precept appears to rule out mostaspects of modern finance but it does allow money to be used fortrading tangible assets and business, which can then generate aprofit. Brian Kettell's book looks at all aspects of Islamicbanking, including chapters on its creation and evolution throughto detailed discussions of the issues involved in the Sharia'acontracts of Murabaha, Mudaraba, Musharaka, Ijara, Istisna'a, andSalam. Islamic insurance (Takaful) is also covered. Finally thebook takes a look at Sharia'a law and Sharia'a boards, indicatingthe roles and responsibilities that come with membership.

Islamic banks have been operating in places such as Bahrain,Saudi Arabia, Malaysia and Dubai for some time. Conventionalbankers have traditionally viewed the sector as a small, exoticniche but recent years have seen a dramatic surge in popularity. Anumber of Western investment banks have started working with Muslimclerics to create new ranges of financial products designed fordevout Muslims, a large and growing market. Although estimates ofthe size of the Islamic finance industry vary greatly, everyoneagrees that it is expanding rapidly and this is the perfect bookfor anyone looking to understand the industry.

Product Details

ISBN-13: 9780470978047
Publisher: Wiley
Publication date: 08/23/2011
Series: Wiley Finance Series , #551
Pages: 192
Sales rank: 651,445
Product dimensions: 6.50(w) x 9.40(h) x 0.60(d)

About the Author

Brian Kettell has a wealth of practical experience in thearea of Islamic banking and finance. He worked for several years asan Advisor for the Central Bank of Bahrain where he had numerousIslamic banking responsibilities.
Subsequently, Brian taught courses on Islamic banking and financeat a range of financial institutions including the World Bank,National Commercial Bank (Saudi Arabia), Global Investment House(Kuwait), Noor Islamic Bank (UAE), the UK Treasury, the CentralBank of Iran, the Central Bank of Syria, the Chartered Institutefor Securities and Investment, the Institute for Financial Servicesand Scotland Yard.
Brian's vast academic expertise in Islamic finance is highlightedby his role as former Joint Editor of the Islamic FinanceQualification Handbook and his past teaching work at a numberof top universities worldwide including the London School ofEconomics, the City University of Hong Kong, the AmericanUniversity of the Middle East in Kuwait and London MetropolitanUniversity Business School.
Brian's impressive list of publications include over 100 articlesin journals, business magazines and the financial press includingIslamic Business and Finance, Islamic Banking and Finance, theCentral Banking Journal, Euromoney, the SecuritiesJournal and the International Currency Review. He hasalso published 6 books on Islamic banking and financial markets.

Table of Contents

Preface xiii

About the Author xvii

1 Muslim Beliefs 1

1.1 Five Pillars of Faith 1

1.2 Six Islamic Creeds 4

1.3 Belief in Allah and His Attributes 5

1.4 Belief in Destiny 6

1.5 Belief in Angels 7

1.6 Belief in Apostles 7

1.7 Belief in the Revealed Books 8

1.8 Belief in the Hereafter 9

2 Sharia'a Law and Sharia'a Boards: Roles, Responsibility andMembership 13

2.1 Definition of the Sharia'a 13

2.2 Allah is the Law Giver 13

2.3 Objectives of the Sharia'a 14

2.4 Sources of the Sharia'a 16

2.5 Sharia'a Islamic Investment Principles 22

2.6 Conditions for Investment in Shares 23

2.7 Sharia'a Supervisory Board (SSB) 23

2.7.1 Function and Responsibilities 24

2.8 Sharia'a Board Scholar Qualifications 27

2.9 State Bank of Pakistan (SBP): Proper Criteria forAppointment of Sharia'a Advisors 29

3 Definition of Islamic Banking 31

3.1 Conventional Bankers and Islamic Banking 31

3.2 Six Key Islamic Banking Principles 33

3.3 Definition of Asymmetric Information 36

3.4 Origins of Asymmetric Risk within Islamic Banking 37

3.5 Riba in the Qur'an and Sunnah or Hadith 37

3.6 Five Reasons for the Prohibition of Riba 39

4 Murabaha as a Mode of Islamic Finance 43

4.1 Murabaha Transactions 43

4.2 What Makes Murabaha Sharia'a Compliant? 45

4.3 Islam Treats Money and Commodities Differently 46

4.4 Murabaha and the Sharia'a 47

4.5 Practicalities of Implementing Murabaha 47

4.6 Sharia'a Rules Concerning Murabaha 48

4.7 Reasoning Behind Sharia'a Rules 49

4.8 Practical Examples of the Application of Murabaha 50

4.9 Key Issues Associated with Murabaha 52

4.10 Comparison of Murabaha with Interest-Based Finance 58

4.11 Murabaha Differences from the other Islamic FinancingTechniques 58

4.12 Summary 60

5 Mudaraba as a Mode of Islamic Finance 63

5.1 Definition of Mudaraba 63

5.2 What makes Mudaraba Sharia'a Compliant? 67

5.3 Practicalities of Implementing Mudaraba 68

5.4 Sharia'a Rules Concerning Mudaraba 68

5.5 Practical Examples of Mudaraba 69

5.6 Key Issues Associated with Mudaraba 72

5.7 Comparison of Mudaraba with the Conventional BankingEquivalent 72

5.8 Mudaraba: Differences from the other Islamic FinancingTechniques 73

5.9 Summary 75

6 Musharaka as a Mode of Islamic Finance 77

6.1 Definition of Musharaka 77

6.2 What makes Musharaka Sharia'a Compliant? 78

6.3 Practicalities of Implementing Musharaka 79

6.4 Sharia'a Rules Concerning Musharaka 79

6.5 Practical Examples of Musharaka 80

6.6 Problems Associated with Musharaka 84

6.7 Comparison of Musharaka with the Conventional BankingEquivalent 85

6.8 Summary 87

7 Ijara as a Mode of Islamic Finance 89

7.1 Definition of Ijara 89

7.2 What makes Ijara Sharia'a Compliant? 91

7.3 Practicalities of Implementing Ijara 91

7.4 Sharia'a Rules Concerning Ijara 92

7.5 Basic Rules of Islamic Leasing 93

7.6 Practical Examples of Ijara 95

7.7 Key Differences between an Ijara Contract and a ConventionalLease 97

7.8 Comparison of Ijara with the Conventional Banking Equivalent98

7.9 Ijara: Differences from the other Islamic FinancingTechniques 98

7.10 Summary 101

8 Istisna'a as a Mode of Islamic Finance 103

8.1 Definition of Istisna'a 103

8.2 What makes Istisna'a Sharia'a Compliant? 105

8.3 Practicalities of Implementing Istisna'a 105

8.4 Sharia'a Rules Concerning Istisna'a 106

8.5 Practical Examples of Istisna'a 107

8.6 Key Issues Associated with Istisna'a 108

8.7 Comparison of Istisna'a with the Conventional BankingEquivalent 111

8.8 Istisna'a: Differences from the other Islamic FinancingTechniques 111

8.8.4 Differences between Istisna'a and Ijara 114

8.9 Summary 114

9 Salam as a Mode of Islamic Finance 117

9.1 Definition of Salam 117

9.2 What makes Salam Sharia'a Compliant? 118

9.3 Practicalities of Implementing Salam 118

9.4 Sharia'a Rules Concerning Salam 119

9.5 Sharia'a Rules Concerning Parallel Salam 120

9.6 Practical Examples of Salam 121

9.7 Benefits of the Salam Contract 121

9.8 Problems Associated with Salam 121

9.9 Comparison of Salam with the Conventional Banking Equivalent122

9.10 Salam: Differences from the other Islamic FinancingTechniques 122

9.11 Summary 124

10 Takaful: Islamic Insurance 127

10.1 Case for Islamic Insurance 127

10.2 Islamic Issues with Conventional Insurance 127

10.3 Definition and Concept of Takaful 128

10.4 Islamic Origins of Takaful 129

10.5 Where Insurance Fits within Islam 129

10.6 Definition of the Parties to a Takaful 129

10.7 Takaful in Practice 130

10.8 Takaful and Conventional Insurance 130

10.9 Alternative Models of Takaful 130

10.10 Sharia'a Law as Applied by Takaful Operators 132

10.11 Takaful Operators 135

10.12 Definition of ReTakaful (Reinsurance) 136

10.13 Retakaful 136

10.14 Role of the Sharia'a Board in Takaful 137

Appendix 1. Comparative Features of Islamic FinancingTechniques 141

A.1 Nature of the Financing 141

A.2 Role of the Finance Provider in the Management/Use of Funds141

A.3 Risk Bearing by the Finance Provider 142

A.4 Uncertainty of the Rate of Return on Capital for the FinanceProvider 142

A.5 Cost of Capital for the Finance User 144

A.6 Relationship Between the Cost of Capital and the Rate ofReturn on Capital 144

Appendix 2. Top 500 Islamic Institutions 1–73145

Glossary 151

Bibliography 157

Index 165

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