How islamic finance works webinar by aus cif com

How Islamic Finance works?

Almir Colan | @almircolan | [email protected] | www.AusCIF.com

mailto:[email protected]

http://www.AusCIF.com

AusCIF aims to:

»Raise the awareness of Islamic Finance by developing comprehensive and unique educational programs and research capabilities;

»Encourage and improve links between academics, practitioners, government and community;

»Attract leading international Islamic finance scholars and researchers in order to build lasting high-level international linkages, global partnerships and contribute to the developments of the Islamic banking and finance industry;

»Enhance Islamic finance research, practices and public awareness via Islamic finance events and conferences; and

»Facilitate the development of local research programs in new and emerging fields of Islamic banking and finance.

Islam = “way of life” (Qur’an 5:3)

Set of rules = Shari’ah (Prohibi=ons, obliga=ons, clarifica=ons and so on) !

Objec=ves of Shariah Preserving:

1. Religion

2. Life 3. Family Progeny 4. Wealth

5. Intellect and honorIbadaat

(Acts of Worship)Muamalaat

(Interac=ons with People)v Islamic finance, economy…

What does religion have to do with wealth and economic life?

:: www.auscif.com :: facebook.com/Islamic.Finance.Au ::

Money & wealth? Story of Yusuf a.s.; Shu’ayb a.s. (Madyan)

1 (out of 5) of the Maqasid (aims) of sharia is preservation of wealth. (other: Religion, Life, Family Progeny and Intellect/honor)

1 (out 4) questions on Day of Judgment is about wealth: “where he earned it and how he spent it.” (other: life, knowledge, body) (Tirmidhi)

Riba: “a war [against you] from Allah and His Messenger.” (Qur’an, 2:279)

Zekat and Hajj (2/5 pillars of Islam) directly linked with your financial ability.


“A #me will come when one will not care how they gain their money, whether legally or illegally” [Bukhari]

Do we fall under this descrip=on? Do we follow what is halaal (permissible) to the best of our ability?


Is Islamic Finance knowledge fardh ‘ein?

• Our daily financial transac=ons, halaal or not? Do we know? Who to ask?

• What about more complex transac=ons?

A muslim is expected to support himself. Muhammad al-‐Shaybani said that according to the majority of the fuqaha from the Ahl sunnah wal Jamaa’a is that supporCng one’s self to the level of need is fardh.


Why Islamic Finance?

Universal demand for a fair and just system that is socially responsible and sustainable.

Change the greedy and inhumane system we have created.

To provide a stable and secure ethical alternative, especially in these uncertain times.

• The Prophet said, “Two hungry wolves let loose among sheep are no more harmful to them than a man’s craving a=er wealth and status is to his religion.” (Tirmizi)

Such individuals may be willing to compromise themselves, exploit others, their religion and so on. Their craving drives them to make money anyway and anyhow.


"The best of people are those who are the most beneficial to the (other) people" (Daraqutni, Hasan)

What is Islamic finance?

• Islamic finance represents financial ac=vity that is consistent with the principles of Islamic law or the Shariah, which prohibits unethical, immoral, specula=ve ac=vi=es as well as interest, gambling, uncertainty and so on.

• Islamic finance encourages entrepreneurship, mutual coopera=on, generosity and a spirit of partnership which connect the capital-‐owner with real economic ac=vi=es that may actually contribute to the welfare of society via commerce, manufacturing, construc=on and so on.


Growth and potential• 1963 Egypt (town of Mit Ghamr) first savings bank based on profit-

sharing

• 1975 Dubai Islamic Bank (The first modern commercial Islamic bank), Islamic Development Bank (provide funding to projects in the member countries

• 1999 The first index launched - The Dow Jones Islamic Market Index (DJIM)

• Top 500 Islamic Finance Institutions by The Banker (No #1 Al Rajhi Bank)

• 2011 A consortium of Islamic banks and financial industry associations launched the industry's first International Islamic interbank rate (alternative to LIBOR)


Growth and potential• Fastest growing segments of the finance service industry.

• Growing at over 10% - 15% per annum

• Estimated to be worth more than AUD$1.4 trillion

• Assets held by Islamic financial institutions may rise five-fold to more than $5 trillion. (Moody’s Investors Service)

• The world’s Muslim population is expected to increase to 2.2 billion by 2030 or 26.4% of the world’s total projected population.(Projections by the Pew Research Center’s Forum on Religion & Public Life)

• What will they do in next 5, 10 or 20 years?

• IBF in Australia...


Delay

ConvenConal Banks -‐ Money is considered a commodity

MoneyExchange/sale

Money

Surplus

The sale of money for money runs contrary to the nature of money as being a medium of exchange (judge), unit of

account and store of value. EG: bank loans and credit cards


Islamic banks -‐ Money used as a medium of exchange

Money

Profit

Asset

In Islamic finance money must be converted into something useful, which in turn generates profit for the investors. Linking money to produc=ve purposes brings into ac=on labour and other resources to iniCate a process from which goods and services are produced and benefits passed on to society.


• Deal with Money & documents not in goods.

• Money is considered a commodity that can be sold/bought and rented against profit or rent that one party has to pay, irrespec=ve of the use or role of the lent money in the hands of the borrower.

Islamic

Bank

ConvenConal

Bank

• Deal in goods and documents and not in money.

• Money used only as a medium of exchange for purchasing the goods for the purpose of leasing or selling onward, thereby earning income or profit.

• Hence, profit comes with Risk and Responsibility

Adapted from "Understanding Islamic Finance" M. Ayub, 2007


Basic modes of Islamic Financing

–Musharaka (Equity partnership, Joint Venture)

• Eg: purchasing property or assets such as machinery for a factory

–Mudaraba (Trustee/Investment Partnership) • Eg: Bank deposit (saving and investment accounts)

–Murabaha (Cost Plus Sale) • Eg: short term financing

–Ijarah (Leasing) • Eg: equipment financing,

–Salam (Deferred Delivery Sale, pre-paid sale) • Eg: agricultural produce

–Istisna (Manufacturing Sale) • Eg: construction and Infrastructure projects

• In addition to the above business activities, Islamic banks may provide services against service charges or management fees.


Lessee

SellerSPV Issuer /Trustee

Investor 1a Sukuk

1b Cash

2a Sale of assets

2b Price

3a Lease of assets 3b Rentals

3c Periodic payments

Servicing Agent

4 Servicing agreement

Other complex instruments: eg. Sukuk


AusCIF’s Islamic Finance Quiz: Results & Answers

• Average Score 63%

Q.1

• True of False: One of the core aims or objectives (maqasid) of the Shariah is the preservation of Wealth (Maal).

• True

Q.2

• True or False: Subject matter in a contract can not be anything that is not tangible. (Eg: usufruct (benefit from someone else's property) which is commonly found in a lease agreements)

• False

Q. 3

• True or False: It is permissible to sell a commodity before it comes under our control or we take (actual or constructive) possession of it. (Excluding Salam and Istisna arrangements)

• False

Q. 4

• True or False: Offer and acceptance are non-essential attributes of the contract and if they are missing then the contract can not be described as Void (batil).

• False

Q. 5

• True or False: It is permissible to have contract that combines contracts of sale and lease if they refer to the same asset (e.g. Hire Purchase contracts with e.g. a lease for 3 years and sale at 30% at the end of the lease period).

• False

• 43% Correct answers

Q. 6

• True or False: According to shari'ah, anything that has economic value is considered wealth.

• False


Q. 7

• True or False: Riba al-Fadl refers to a delay in the settlement of one or both counter-values.

• False

“Gold with gold, silver with silver, wheat with wheat, barley with barley, dates with dates, and salt with salt; same quanCty for same quanCty, equal for equal; transacCon being made hand to hand (i.e. on the spot payment).” (Muslim)

Q. 8

• True or False: Exchanging US$105 with AUD$100 on the spot (hand to hand, without delay) is permissible.

• True

Q. 9

• True or False: Buying a house for eg. $450,000 (to be paid in instalments over 5 years) is a permissible arrangement.

• True

• 85% correct answers

Q. 10

• True or False: Late fees are permissible as long as they are mutually agreed to at the start of a contract.

• False

• 36% correct answers

Q. 11

• True or False: Gharar refers to uncertainty and deception (amongst other things).

• True


Q. 12

• True or False: In Musharaka (joint venture), the profit ratio is fixed according to capital contribution, while loss ratio can be negotiated, but, must be fixed at the start.

• False

Q. 13

• True or False: In musharaka, partner who invest eg. $50,000 (or 10% of total investment capital) has right to specify from the beginning that his share of profit will be $5,000 per year (which equals to 10% of his initial contribution).

• False

Q. 14

• True or False: The result of a sale transaction is instant and results in an absolute transfer of the (asset) ownership.

• True

Q. 15

• True or False: Buying shares (stock) on a short term price fluctuations is considered speculation (rather than investment) and thus is a prohibited trading practice.

• True

Why learn about Islamic finance?

• Umar, the second Caliph and successor to the Prophet Muhammad, stated, “Whoever does not have an understanding of the rules of Islam should not deal in our market” (The Life of Umar, As-‐Sallabi 2007).

• He also warned, “No one should sell in our marketplace except one who has understanding of the rules of Islam, otherwise he is going to consume riba whether he wants to or not” (ibid).


Almir Colan @almircolan

www.almircolan.com [email protected] www.AusCIF.com

mailto:[email protected]

http://www.AUSCIF.com

How islamic finance works webinar by aus cif com

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