Intermediate Islamic Finance

Nabil Maghrebi is Professor of Finance at Wakayama University, Visiting Professor at Osaka University, and previously Research Fellow at the International Institute for Advanced Studies, Kyoto, Japan. His publications focus on international financial markets and Islamic finance. Abbas Mirakhor is the First Holder of the Chair of Islamic Finance at the International Centre for Education in Islamic Finance (INCEIF). He is the author of An Introduction to Islamic Finance, Risk Sharing in Finance, and The Stability of Islamic Finance. Zamir Iqbal is Lead Financial Sector Specialist at the Finance and Markets Global Practice of the World Bank and heads the World Bank Global Islamic Finance Development Center in Istanbul. He is co-author of An Introduction to Islamic Finance, Economic Development and Islamic Finance, and Risk Sharing in Finance.

Preface xi About the Authors xix CHAPTER 1 Epistemology of Finance 1 Epistemology of an Ideal Conventional Financial System 3 Epistemology of an Ideal Islamic Financial System 17 Risk-Sharing Finance in a World of Uncertainty 27 Summary and Conclusions 41 CHAPTER 2 Finance and Ethics 47 Renewed Interest in Ethical Finance 48 Embedded Ethical Issues in Financial Theory 50 Cases of Ethical Issues in Finance 51 Virtue Ethics Model 55 Islamic Framework of Business Ethics 58 Summary and Conclusions 69 CHAPTER 3 The Analytics of Finance 71 The Theory of Interest 73 The Concept of Time Value 76 Utility Theory, Risk Aversion, and Risk Premium 87 The Individual s Optimal Consumption and Portfolio Choices 95 Market Efficiency and the Random-Walk Hypothesis 105 Risk Sharing in Finance 108 Summary and Conclusions 111 CHAPTER 4 Equity, Efficiency, and Firm Behavior 113 Methodological Issues in Islamic Economics 114 Theories of Firm Behavior in Islamic Economics 116 The Profit-Sharing Principle 122 A Theoretical Construct of Equity and Allocative Efficiency 125 Summary and Conclusions 126 CHAPTER 5 Asset Pricing and Corporate Finance 129 Capital Asset Pricing Model 130 Arbitrage Pricing Theory 151 Capital Structure Theory 155 Summary and Conclusions 167 CHAPTER 6 Scope of Financial Engineering and Derivatives 171 Risk Hedging with Forward and Futures Contracts 173 Properties of Options Contracts 188 Option Valuation Theory 200 Applications of Option Pricing Theory in Islamic Finance 210 Risk Hedging and the Scope of Financial Engineering in Islamic Finance 216 Summary and Conclusions 220 CHAPTER 7 Financing Models and Ownership Transfer 223 Structure and Dynamics of Outstanding Balances 225 Ownership Transfer 237 Hybrid Financing Models Based on Risk Sharing 241 Summary and Conclusions 255 CHAPTER 8 Securitization and Structured Finance 257 Risk Transfer with Credit-Default Swaps 258 The Mechanics of Securitization and Structured Finance 264 Complexity of Contract Structures 268 Securitization, Structured Finance, and Completeness of Contracts 273 Securitization, Risk Transfer with Wa ad Structures, and Options Strategies 276 Summary and Conclusions 288 CHAPTER 9 Financial Stability 291 The Financial System and the Real Economy 292 Financial Crises and Debt Financing 299 Stability of the Islamic Financial System 305 Summary and Conclusions 313 CHAPTER 10 Financial Regulation 315 The Economics of Financial Regulation 316 The Complexity of Financial Regulation 323 The Regulatory Framework under Islamic Finance 329 The Regulatory Challenges in Islamic Finance 336 Summary and Conclusions 340 Appendix A 343 Appendix B 347 References 349 Index 375