Islamic Finance (eBook)

Dr Nafis Alam is an Associate Professor of Finance at Henley Business School, University of Reading Malaysia. His research is focused on banking regulation, corporate finance, Islamic banking & finance and financial intermediation. He has co-authored five books in Islamic Finance, including an Encyclopedia of Islamic Finance. Lokesh Gupta has 17 years of experience in Financial Solution Consulting and Implementation. Currently, he is involved in Asset Liability Management, Basel III, Reporting Data Mart Development, as well as Remittance & Payments Solution implementations in South East Asia region. He has co-authored four books in Islamic Finance and has published papers in various magazines. Professor Bala Shanmugam is an academic advisor to FedUni, Malaysia, as well as Adjunct Professor at Asia e University, Malaysia. Professor Shanmugam has extensive industry experience and has served as Consultant to many Financial Institutions, including the World Bank.  He is also on the Editorial Boards of various journals in Banking and Finance domain.

Foreword 5
Preface 7
Contents 10
List of Figures 12
List of Tables 14
1: Introduction to Islamic Banking 16
1 Introduction 16
1.1 Definition of Islamic Banking 17
1.2 Islamic Banking Objectives 18
1.3 Islamic Banking Principles 19
1.4 Islamic Banking Evolution 22
1.5 Islamic Economics 23
1.6 Islamic and Conventional Banking 26
1.7 Advantages of Islamic Banking 29
References 30
2: The Religious Foundations of Islamic Banking 31
1 Islam: An Overview 31
1.1 Pillars of Islam 35
2 Syariah Overview 37
2.1 Sources of Syariah 38
2.2 Objectives of Syariah 42
2.3 Rulings of Syariah 44
2.4 Banking for All 45
3 Summary 47
References 47
3: Prohibition of Riba and Gharar in Islamic Banking 49
1 Introduction 49
1.1 Definitions of Riba 50
1.1.1 Types of Riba 51
1.1.2 Ribawi Materials 55
1.1.3 Riba and Profit 58
1.1.4 Why Riba Is Prohibited 60
1.2 Gharar Definition 63
1.2.1 Types of Gharar 65
References 67
4: Islamic Contracts 68
1 Fundamentals of Islamic Contracts 68
1.1 Essential Elements of a Valid Contract 69
1.1.1 Offer and Acceptance 70
1.1.2 Contract Subject Matter 71
1.1.3 Consideration 71
1.1.4 Capacity of the Parties to Contract 72
1.1.5 Legality 72
1.2 Classification Based on Nature of Contract 73
1.2.1 Unilateral Contract 73
1.2.2 Bilateral Contract 74
1.2.3 Quasi Contract 74
1.3 Classification According to Legal Consequences 75
1.3.1 Valid Contract (Sahih) 75
1.3.2 Invalid or Deficient Contract (Fasid) 76
1.3.3 Void Contract (Batil) 77
1.3.4 Binding Contract (Lazim) 77
1.3.5 Enforceable Contract (Nafidh) 78
1.3.6 Withheld Contract (Mawquf) 78
1.4 Islamic Sale Contract 78
1.4.1 Classification of Sale Based on the Things Sold 79
1.4.2 Classification of Sale Based on the Nature of Profit-Sharing 80
1.4.3 Possibilities of Payment Under Sales Contract 81
1.4.4 Essential Requirement for Sales Contract 81
Contract: Offer and Acceptance 81
Contract: Parties to the Contract 84
Contract: Conditions of Contract 84
Contract: The Subject Matter 85
Contract: The Price 86
1.5 Contracts in Islamic Banking 87
1.5.1 Trading Contracts 87
1.5.2 Participation Contracts 89
1.5.3 Supporting Contracts 90
References 91
5: Islamic Deposits in Practice 92
1 Introduction 92
1.1 Modus Operandi of Islamic Banks 93
1.2 Deposit Concept 95
1.3 Syariah Principle in Deposits 95
1.3.1 Wadiah Principle 96
1.3.2 Mudharabah Principle 98
1.4 Saving Account 99
1.4.1 Saving Account Practice 101
1.4.2 Saving Account Profit Computation 101
1.5 Current Account 105
1.5.1 Wadiah Current Account Practice 106
1.5.2 Mudharabah Current Account Practice 107
1.5.3 Mudharabah Current Account Profit Computation 112
1.6 Investment Account 114
1.6.1 Mudharabah Muthalaqah (General Investment Account) 115
1.6.2 Mudharabah Muthalaqah Practice (General Investment Account) 117
1.6.3 Mudharabah Muthalaqah Dividend Computation 117
1.6.4 Mudharabah Muqayyadah (Special Investment Account) 122
1.6.5 Mudharabah Muqayyadah (Special Investment Account) 123
1.7 Similarities and Differences of Deposits in Conventional and Islamic Bank 125
1.8 Account Types 126
1.8.1 Minor Accounts 127
1.8.2 Individual Accounts 127
1.8.3 Joint Accounts 128
1.8.4 Sole Proprietorship Accounts 129
1.8.5 Partnership Accounts 130
1.8.6 Professionals’ Accounts 132
1.8.7 Company Accounts 133
1.8.8 Executor’s and Administrators’ Accounts 135
1.8.9 Trustee Account 137
1.8.10 Societies Clubs and Association Accounts 137
1.8.11 Religious Bodies Accounts 138
1.8.12 Co-operative Societies 139
1.8.13 Government Accounts 139
1.8.14 School Accounts 140
1.8.15 Eligible Account Holders 141
1.9 Deposit Products Summary 141
References 142
6: Islamic Financing in Practice 144
1 Introduction 144
1.1 Islamic Financing Concept 144
1.2 Key Features of Islamic Financing 145
1.3 Al Bai Bithaman Ajil 146
1.3.1 Essential Elements of BBA Contract 147
1.3.2 Contracts in BBA 147
1.3.3 Modus Operandi of House Financing 150
1.3.4 Modus Operandi of Umrah Financing 152
1.3.5 Modus Operandi of Cash Line Facility 154
1.3.6 BBA Financing Practice 154
1.3.7 BBA Financing Instalment Computation Using CRR 159
1.3.8 BBA Financing Instalment Computation Using Rule 78 162
1.3.9 BBA with Floating Rate 164
1.4 Murabahah 166
1.4.1 Essential Elements of Murabahah Contract 167
1.4.2 Modus Operandi of Murabahah Financing 169
1.4.3 Modus Operandi of Murabahah Financing for Working Capital 170
1.4.4 Murabahah Financing Practice 172
1.4.5 Murabahah Financing Computation 172
1.4.6 Challenges in Murabahah Financing 175
1.4.7 Comparison Between BBA and Murabahah Practice in Malaysia 178
1.5 Ijarah 178
1.5.1 Modus Operandi of Ijarah Financing 181
1.5.2 Essential Elements of Ijarah Contract 183
1.5.3 Ijarah Financing Practice 183
1.5.4 Ijarah Financing Computation 186
1.5.5 Comparison Between Ijarah and Conventional Leasing 188
1.6 AITAB Financing 188
1.6.1 Modus Operandi of AITAB Financing 191
1.6.2 Essential Elements of AITAB 193
1.6.3 AITAB Financing Computation 193
1.6.4 Challenges in Implementing AITAB 197
1.6.5 Comparison Between AIAB and Conventional Hire Purchase 201
1.7 Musharakah 201
1.7.1 Musharakah Classification 203
Shirkat-ul-Milk 204
Shirkat-ul-Aqd 204
1.7.2 Essential Elements of Musharakah Contract 205
1.7.3 Modus Operandi of Musharakah Financing 207
1.7.4 Musharakah Financing Practice 209
1.7.5 Musharakah in Venture Financing 209
1.7.6 Challenges in Implementing Musharakah 211
1.7.7 Comparison Between Mudharabah and Musharakah 212
1.8 Diminishing Musharakah 213
1.8.1 Modus Operandi of Diminishing Musharakah 214
1.8.2 Diminishing Musharakah in Financing Practice 216
1.8.3 Diminishing Musharakah Financing Computation 217
1.8.4 Comparison Between Diminishing Musharakah and BBA Financing 219
1.9 Bai Salam Financing 219
1.9.1 Essential Elements of Bai Salam Contract 231
1.9.2 Modus Operandi of Bai Salam Financing 233
1.9.3 Bai Salam Financing Practice 234
1.10 Istisna Financing 235
1.10.1 Structuring an Istisna Financing Transaction 236
1.10.2 Istisna Financing in Practice 237
1.10.3 Comparison between Istisna and Bai Salam 238
1.11 Qard Hassan Financing 238
1.12 Ar-Rahnu Financing 240
1.12.1 Objective of Ar-Rahnu Scheme 241
1.12.2 Rahnu Financing Mechanism 242
1.12.3 Implementation of Ar-Rahnu 244
1.13 Bai al Inah Financing 244
1.13.1 Bai al Inah Financing Mechanism 245
1.13.2 Permissibility of Bai al Inah Financing Mechanism 246
1.14 Two-Tier Mudharabah Model 247
1.15 Challenges in Financing 248
1.16 Comparison Between Islamic and Conventional Financing 250
1.17 Regulating and Supervising Islamic Financing 252
1.18 Summary 253
References 253
7: Comparative Analysis: Islamic Banking Products and Services in Different Countries 258
1 Introduction 258
2 Comparison of Islamic Financial Institution by Country 259
2.1 Islamic Banking Evolution 260
2.2 Functions and Principles 272
2.2.1 The Use of Terminology 273
3 Products and Services 283
3.1 Current Account 283
3.2 Saving Account 285
3.3 Investment Deposits 289
3.4 Murabahah Financing 293
3.5 Bai Bithaman Ajil Financing 297
3.6 Musharakah Financing 298
3.7 Mudharabah Financing 303
3.8 Ijarah Financing 305
3.9 Qard Hassan Financing 307
3.10 Bai Inah 309
3.11 Islamic Charge Card 309
3.12 Istisna 311
4 Financial Reporting 312
5 Summary 314
References 316
8: IT in Islamic Banks 319
1 Introduction 319
1.1 Evolution of Technology in Islamic Banking 320
1.2 Islamic Core Banking System 322
1.2.1 Customer Information System 323
1.2.2 Financing Information 324
1.2.3 Deposits 327
1.2.4 Investment 328
1.2.5 Treasury 329
1.2.6 Trade Finance 330
1.2.7 Share Margin System 331
1.2.8 Remittance 332
1.2.9 Card Management System 333
1.2.10 General Ledger 334
1.2.11 Internet Banking 336
1.2.12 Branch Teller System 338
1.2.13 Cash Management 340
1.2.14 Online Security Trading Portal 343
1.2.15 Risk Management 344
1.2.16 Security 345
1.2.17 Management Information System (MIS) 346
1.2.18 Enterprise Application Interface (EAI) 347
1.2.19 Other Touch Points 349
1.2.20 Mobile Banking 350
1.2.21 System Set Up 351
1.3 Payment and Settlement Network 351
1.3.1 Bankcard Network 352
1.3.2 Interbank Giro (IBG) 352
1.3.3 Financial Processing Exchange (FPX) 353
1.3.4 SWIFT 353
1.3.5 Western Union Money Transfer 354
1.3.6 VISA Payment Network 354
1.3.7 MasterCard Payment Network 354
1.3.8 National Cheque Image Clearing System (SPICK) 355
1.3.9 Real-Time Transfer of Funds and Securities (RENTAS) 356
1.4 Role of Technology for Regulatory Compliance 356
1.5 Islamic Core Banking Solution Provider 358
1.6 Fintech and Islamic Finance 358
1.7 Technology Challenges Ahead 366
1.8 Summary 368
References 368
9: Corporate Governance in Islamic Banks 371
1 Introduction 371
1.1 Corporate Governance Definition 372
1.2 Corporate Governance in Banks 374
1.3 Corporate Governance Model 375
1.3.1 Stakeholder in Islamic Banks 376
1.3.2 Governance Structures 377
1.4 Corporate Governance Components in Malaysia 379
1.4.1 Formal and Codified Law 380
1.4.2 Regulation and Regulatory Authorities 382
1.4.3 Malaysian Code on Corporate Governance 387
1.4.4 Recognized Global Standards 389
1.4.5 Internal Syariah Committee 394
1.4.6 Syariah-Compliance Review 395
1.5 Bank Negara Syariah Advisory Council 396
1.6 Social Dimension of Corporate Governance 397
1.7 Challenges in Corporate Governance Implementation 399
1.8 Standardization through Corporate Governance 402
1.9 Summary 405
References 405
10: Islamic Capital Market 409
1 Introduction 409
1.1 Role of the ICM in Global Financial System 409
1.2 Essential Components of ICM 410
1.2.1 The Islamic Equity Market—Public Listed Companies 412
Islamic Shares 412
Shares in Syariah-Compliant Companies 412
Regulatory Framework for Islamic Equity and Indexes 413
1.2.2 Unit Trusts/Mutual Funds 417
Managers, Trustees, and Unit Holders or Investors 418
The Attraction of Unit Trusts/Mutual Funds 419
Syariah Perspective 419
1.2.3 Islamic Private Equity Funds 421
1.2.4 Islamic Specialized Funds 421
Islamic Leasing Funds 422
Islamic Exchange-Traded Funds (ETFs) 422
Islamic Real Estate Investment Trust (IREIT) 423
1.2.5 Islamic Fixed-Income Instruments—Sukuk 424
Regulatory Framework for Sukuk Issuance 428
Features, Types, and Mechanisms of Islamic Sukuk 429
Recent Trends in Sukuk 434
1.2.6 Islamic Derivatives or Structured Products 439
References 441
11: Takaful 442
1 Introduction 442
1.1 Takaful Definition 443
1.2 History and Crucial Elements of Takaful System 444
1.3 Comparison Between Takaful and Conventional Insurance System 445
1.4 Mudharabah Model in Practice 445
1.5 Wakalah Model in Practice 449
1.6 Wakalah with Waqf Model in Practice 451
1.7 Types of Takaful 453
1.7.1 Family Takaful 453
1.7.2 General Takaful 455
1.8 Global Outlook of Takaful 455
1.9 Takaful in Malaysia 456
1.10 Challenges in Takaful 457
1.11 Summary 458
References 459
12: Islamic Wealth Management 461
1 Introduction 461
1.1 Wealth in Islam 462
1.2 Wealth Management from Islamic Perspective 464
1.3 Key Growth Drivers for Islamic Wealth Management 466
1.4 Islamic Will Writing 468
1.5 Islamic Investment Funds 470
1.5.1 Equity Funds 471
1.5.2 Ijarah Funds or REITs 472
1.5.3 Islamic Commodity Funds 474
1.6 Islamic Investment Funds Statistics 475
1.7 Islamic Wealth Management—The Way Ahead 478
1.8 Challenges 479
1.9 Summary 480
References 481
Index 484