Financial Engineering 1 1 Financial Engineering: An Islamic Perspective Sami Al-Suwailem IRTI, IDB...
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Transcript of Financial Engineering 1 1 Financial Engineering: An Islamic Perspective Sami Al-Suwailem IRTI, IDB...
Financial EngineeringFinancial Engineering 11
Financial Engineering:An Islamic PerspectiveFinancial Engineering:An Islamic Perspective
Sami Al-SuwailemSami Al-Suwailem
IRTI, IDBIRTI, IDB
Rabie I, 1427 -- April, 2006Rabie I, 1427 -- April, 2006
Sami Al-SuwailemSami Al-Suwailem
IRTI, IDBIRTI, IDB
Rabie I, 1427 -- April, 2006Rabie I, 1427 -- April, 2006
Financial EngineeringFinancial Engineering 22
ConceptConcept
Finnerty (1988):Finnerty (1988):
• Design, development and implementation of Design, development and implementation of innovative financial instruments and innovative financial instruments and processes, and the formulation of creative processes, and the formulation of creative solutions to problems in financesolutions to problems in finance
Finnerty (1988):Finnerty (1988):
• Design, development and implementation of Design, development and implementation of innovative financial instruments and innovative financial instruments and processes, and the formulation of creative processes, and the formulation of creative solutions to problems in financesolutions to problems in finance
Financial EngineeringFinancial Engineering 33
DefinitionDefinition
• Principles and strategies for developing Principles and strategies for developing innovative financial solutionsinnovative financial solutions
• Principles and strategies for developing Principles and strategies for developing innovative financial solutionsinnovative financial solutions
Financial EngineeringFinancial Engineering 44
CharacteristicsCharacteristics
• Principles: Goals and rules for economic Principles: Goals and rules for economic transactionstransactions
• Strategies: methods and techniquesStrategies: methods and techniques
• Innovative: New and novelInnovative: New and novel
• Solutions: Satisfy real needs and create Solutions: Satisfy real needs and create added valueadded value
• Principles: Goals and rules for economic Principles: Goals and rules for economic transactionstransactions
• Strategies: methods and techniquesStrategies: methods and techniques
• Innovative: New and novelInnovative: New and novel
• Solutions: Satisfy real needs and create Solutions: Satisfy real needs and create added valueadded value
Financial EngineeringFinancial Engineering 55
State of F.E.State of F.E.
• Miller: Regulatory arbitrageMiller: Regulatory arbitrage
• Drucker: Products became commoditiesDrucker: Products became commodities
• Miller: Regulatory arbitrageMiller: Regulatory arbitrage
• Drucker: Products became commoditiesDrucker: Products became commodities
Financial EngineeringFinancial Engineering 66
CreativityCreativity
• Value of innovationValue of innovation
• Lateral thinkingLateral thinking
• Value of constraintsValue of constraints
• Shariah and creativityShariah and creativity
• Value of innovationValue of innovation
• Lateral thinkingLateral thinking
• Value of constraintsValue of constraints
• Shariah and creativityShariah and creativity
Financial EngineeringFinancial Engineering 77
PrinciplesPrinciples
• ObjectivesObjectives• BalanceBalance
• IntegrationIntegration
• Methodology:Methodology:• AcceptabilityAcceptability
• ConsistencyConsistency
• ObjectivesObjectives• BalanceBalance
• IntegrationIntegration
• Methodology:Methodology:• AcceptabilityAcceptability
• ConsistencyConsistency
Financial EngineeringFinancial Engineering 88
Principle of BalancePrinciple of Balance
• Balance for-profit and non-profit activitiesBalance for-profit and non-profit activities
• Capitalism: market-based solutionsCapitalism: market-based solutions
• Communism: voluntary-based solutionsCommunism: voluntary-based solutions
• Islamic Economics: balanced solutionsIslamic Economics: balanced solutions• Forbearance for unable debtorsForbearance for unable debtors
• Mutual insuranceMutual insurance
• Balance for-profit and non-profit activitiesBalance for-profit and non-profit activities
• Capitalism: market-based solutionsCapitalism: market-based solutions
• Communism: voluntary-based solutionsCommunism: voluntary-based solutions
• Islamic Economics: balanced solutionsIslamic Economics: balanced solutions• Forbearance for unable debtorsForbearance for unable debtors
• Mutual insuranceMutual insurance
Financial EngineeringFinancial Engineering 99
Principle of IntegrationPrinciple of Integration
• Integration of financial for-profit activities Integration of financial for-profit activities with real businesswith real business
• Riba: Separates finance from businessRiba: Separates finance from business
• Gharar: Separates risk from businessGharar: Separates risk from business
• Murabaha: Could be applied to bothMurabaha: Could be applied to both
• Integration of financial for-profit activities Integration of financial for-profit activities with real businesswith real business
• Riba: Separates finance from businessRiba: Separates finance from business
• Gharar: Separates risk from businessGharar: Separates risk from business
• Murabaha: Could be applied to bothMurabaha: Could be applied to both
Financial EngineeringFinancial Engineering 1010
Principle of AcceptabilityPrinciple of Acceptability
• All economic transactions are acceptable All economic transactions are acceptable unless otherwise statedunless otherwise stated
• Roots of prohibited dealings: Riba and Roots of prohibited dealings: Riba and gharar.gharar.
• Acceptability and creativityAcceptability and creativity
• All economic transactions are acceptable All economic transactions are acceptable unless otherwise statedunless otherwise stated
• Roots of prohibited dealings: Riba and Roots of prohibited dealings: Riba and gharar.gharar.
• Acceptability and creativityAcceptability and creativity
Financial EngineeringFinancial Engineering 1111
Principle of ConsistencyPrinciple of Consistency
• Form and substance of Islamic products Form and substance of Islamic products must be consistentmust be consistent
• Evaluation of products:Evaluation of products:• Evaluate substanceEvaluate substance
• Evaluate formEvaluate form
• Form and substance of Islamic products Form and substance of Islamic products must be consistentmust be consistent
• Evaluation of products:Evaluation of products:• Evaluate substanceEvaluate substance
• Evaluate formEvaluate form
Financial EngineeringFinancial Engineering 1212
EvaluationEvaluation
SubstanceSubstanceacceptable?acceptable?
nono
yesyes
FormFormacceptable?acceptable?
yesyes
ProductProductacceptableacceptable
nono
Product Product designdesign
reviserevise
Financial EngineeringFinancial Engineering 1313
ExamplesExamples
• MurabahaMurabaha: objective is a sale: objective is a sale
• TawarruqTawarruq: objective is a loan: objective is a loan
• MurabahaMurabaha: objective is a sale: objective is a sale
• TawarruqTawarruq: objective is a loan: objective is a loan
Financial EngineeringFinancial Engineering 1414
StrategiesStrategies
• Where to start?Where to start?
• From conventional products: ImitationFrom conventional products: Imitation
• From Islamic products: MutationFrom Islamic products: Mutation
• From real needs: SatisfactionFrom real needs: Satisfaction
• Where to start?Where to start?
• From conventional products: ImitationFrom conventional products: Imitation
• From Islamic products: MutationFrom Islamic products: Mutation
• From real needs: SatisfactionFrom real needs: Satisfaction
Financial EngineeringFinancial Engineering 1515
ImitationImitation
• Replicate conventional productsReplicate conventional products
• Give form priority over substanceGive form priority over substance
• Islamic industry becomes a followerIslamic industry becomes a follower
• Invite alien problemsInvite alien problems
• Produce inefficient resultsProduce inefficient results
• Replicate conventional productsReplicate conventional products
• Give form priority over substanceGive form priority over substance
• Islamic industry becomes a followerIslamic industry becomes a follower
• Invite alien problemsInvite alien problems
• Produce inefficient resultsProduce inefficient results
Financial EngineeringFinancial Engineering 1616
MutationMutation
• Start from Islamic productsStart from Islamic products
• Genetic AlgorithmsGenetic Algorithms
• IstisnaIstisna
• Lease-to-ownLease-to-own
• Value-based SalamValue-based Salam
• Start from Islamic productsStart from Islamic products
• Genetic AlgorithmsGenetic Algorithms
• IstisnaIstisna
• Lease-to-ownLease-to-own
• Value-based SalamValue-based Salam
Financial EngineeringFinancial Engineering 1717
SatisfactionSatisfaction
• Start from real needsStart from real needs
• What does the borrower need?What does the borrower need?
• Cash is 10% of moneyCash is 10% of money
• Most transactions are electronicMost transactions are electronic
• Money is a meansMoney is a means
• Efficiency of Islamic financeEfficiency of Islamic finance
• Start from real needsStart from real needs
• What does the borrower need?What does the borrower need?
• Cash is 10% of moneyCash is 10% of money
• Most transactions are electronicMost transactions are electronic
• Money is a meansMoney is a means
• Efficiency of Islamic financeEfficiency of Islamic finance
Financial EngineeringFinancial Engineering 1818
ConclusionConclusion
• Thinking out of the boxThinking out of the box
• Preserve the spirit of Islamic financePreserve the spirit of Islamic finance
• Provide solutions to world economyProvide solutions to world economy
• Thinking out of the boxThinking out of the box
• Preserve the spirit of Islamic financePreserve the spirit of Islamic finance
• Provide solutions to world economyProvide solutions to world economy