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This edition first published 2018
© 2018 Syeda Fahmida Habib
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Library of Congress Cataloging-in-Publication Data
Names: Habib, Syeda Fahmida, author.
Title: Fundamentals of Islamic finance and banking / by Syeda Fahmida Habib.
Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2018. | Series: Wiley finance series | Includes bibliographical references and index. |
Identifiers: LCCN 2018014020 (print) | LCCN 2018014740 (ebook) | ISBN 9781119371045 (pdf) | ISBN 9781119371038 (epub) | ISBN 9781119371007 (pbk.)
Subjects: LCSH: Finance—Religious aspects—Islam. | Finance—Islamic countries. | Banks and banking—Religious aspects—Islam. | Banks and banking—Islamic countries.
Classification: LCC HG187.4 (ebook) | LCC HG187.4 .H33 2018 (print) | DDC 332.0917/67—dc23
LC record available at https://lccn.loc.gov/2018014020
Cover Design: Wiley
Cover Images: © Denis Burdin/Shutterstock; © Aun Photographer/Shutterstock; © Wang An Qi/Shutterstock; © Pichu/Shutterstock
This book is dedicated to my parents, my friend and husband Anwar Habib, my daughter Anika and son Ishraq, my sister Fauzia and my many, many students, who have always inspired and motivated me. Thank you all for being my family and for being there for me always, with your love and trust in me.
| Figure 3.1 | Islamic financial intermediation in comparison with conventional financial intermediation |
| Figure 4.1 | Murabaha contract |
| Figure 5.1 | Comparison of Mudaraba-based financial intermediation with interest-based financial intermediation |
| Figure 6.1 | Musharaka Mutanaqisa |
| Figure 7.1 | The Ijara contracts |
| Figure 8.1 | Salam and parallel Salam contracts |
| Figure 9.1 | Istisna and parallel Istisna contracts |
| Figure 10.1 | Pure Wakala model |
| Figure 10.2 | Pure Mudaraba model |
| Figure 10.3 | Wakala and Mudaraba combined model |
| Figure 10.4 | Waqf–Wakala–Mudaraba combined model |
| Figure 11.1 | Ijara Sukuk |
| Figure 11.2 | Istisna Sukuk |
| Figure 11.3 | Salam Sukuk |
| Figure 11.4 | Murabaha Sukuk |
| Figure 11.5 | Mudaraba Sukuk |
| Figure 11.6 | Musharaka Sukuk |
| Table 1.1 | Differences between conventional and Islamic economics |
| Table 3.1 | Differences between conventional and Islamic banking |
| Table 3.2 | Differences between conventional and Islamic financial intermediation |
| Table 4.1 | Differences between Murabaha and conventional loans |
| Table 6.1 | Payment schedule for the house purchase example |
| Table 6.2 | Payment schedule for the service sector example |
| Table 6.3 | Comparison of Musharaka financing with interest-based financing |
| Table 6.4 | Comparison of Musharaka and Mudaraba financing |
| Table 7.1 | Differences between Ijara and a conventional lease |
| Table 9.1 | Differences between Istisna and conventional interest-based loans |
| Table 9.2 | Differences between Istisna and Salam contracts |
| Table 10.1 | Comparison of the Wakala, Mudaraba, Wakala–Mudaraba hybrid and Waqf–Wakala–Mudaraba models (Hassan, Kayed & Oseni, 2013) |
| Table 10.2 | Differences between conventional insurance and Takaful |
| Table 10.3 | Differences between reinsurance and Retakaful |
| Table 11.1 | Similarities between REITs and I-REITs |
| Table 11.2 | Differences between REITs and I-REITs |
| Table 11.3 | Differences between Islamic and conventional investments |
| Table 11.4 | Differences between conventional bonds and Islamic Sukuks |
| Table 11.5 | Differences between Sukuks and Shariah-screened shares |
Writing a textbook on a still-developing subject is a lonely journey through a less traversed path that you chart for yourself. As I walked this path, I worked hard and long, and came across many interesting resource materials and people as I researched and they all shaped my learning with their work, their ideas and encouragement. They not only formed the references of this book, but helped complete the project.
I spent 22 years of my life in Dubai as the city worked towards playing a bigger role in the development of Islamic finance and banking. I spent a large part of this time teaching at the Higher Colleges of Technology, and there at some point I became the team leader to develop and lead courses related to Islamic finance and banking. I was encouraged to complete a diploma on the subject from the Institute of Islamic Banking and Insurance, London and certification from the Chartered Institute of Securities and Investment, UK. Islamic finance and banking was the topic of my doctoral thesis and all of this laid the path for me to write this book; as a long-time instructor in the areas of Islamic finance and banking, I felt the need for more structured textbooks designed for colleges and universities.
This was a journey that was often difficult, and often challenging, but towards the end became much more exciting than it was at the start. I found the motivation somewhere within myself, as I continued in this life-changing journey. Thank you to all who were part of my journey.
SYEDA FAHMIDA HABIB
Dr Syeda Fahmida Habib is a passionate, student-centred educator with 23 years of teaching experience at universities and colleges. Her core teaching areas are finance and banking. Fahmida has also taught accounting, marketing and general management courses. She has been involved in textbook writing, curricula, course material and assessment development, as well as managing teaching teams. Fahmida completed her DBA from SMC University, Zürich and has a Masters in Applied Finance from Macquarie University, Sydney plus an MBA, majoring in marketing, from the Institute of Business Administration. Fahmida believes that learning happens when the material is adapted to the learner's abilities and interest. She has great rapport with her students and colleagues. She strives to instil in her students her own passion for lifelong learning, and learning beyond borders. Fahmida began her teaching career with Australia's Wollongong University and then spent 19 years with the Higher Colleges of Technology in the United Arab Emirates. Currently she teaches at the School of Continuing Studies, York University, Canada. Earlier in her academic career, Fahmida spent five valuable years in the industry, in multiple organizations gaining experience in business consultancies, feasibilities, planning and control.
This book is the culmination of the author's extensive teaching experience in finance and banking in general, and Islamic finance and banking specifically, as well as her research and interactions with industry participants in the Middle East and South-East Asia.
Modern Islamic finance and banking is a little more than half a century old compared with interest-based conventional banking that has been around since the 14th century, originating in Florence. Over these few decades, Islamic finance and banking has been able to make a place for itself in the global finance industry, showing considerable growth.
Islamic finance and banking is based on the rules and regulations arising from Shariah or Islamic law, which is an indispensable part of the Muslim faith. Its striking difference from the well-established conventional finance and banking lies in the prohibition of interest as a basis for financial intermediation, as well as other prohibitions on trading in financial risk, speculations, gambling, as well as any dealings with alcohol, pork, adult entertainment or immoral media, etc.
Religiously oriented Muslims constitute its major customers, though this niche alternative finance and banking sector has aroused the interest of non-Muslims as well, since Islamic banks profess to be more conservative and have ethical and social responsibility objectives. The oil boom and the establishment of OPEC brought affluence to many Muslim-majority countries, along with a renewed awareness of their need to conduct their financial dealings within the Shariah rules, and this served as a major catalyst for the establishment of Islamic financial institutions in Muslim-majority countries in the Middle East, South and South-East Asia and Africa.
The global Muslim population constitutes a quarter of the total world population, and some of them belong to the rich oil-producing nations. To meet their demands, several major players in the conventional finance industry have shown interest and entered the Islamic finance and banking sector in Europe, North America and Australia.
As Islamic finance and banking moves forward and aims to compete as a reliable alternative to the centuries-old conventional banking, its biggest challenge is the significant lack of knowledge about this unique banking system among stakeholders – customers, competitors, employees, regulators and the public. Customers, both Muslim and non-Muslim, do not fully understand Islamic banking: how it operates, what are its uniqueness and benefits, and how it differs from conventional banking.
From the Islamic finance and banking industry's perspective, a major hurdle is the shortage of manpower, both in respect of employees with Islamic banking as well as conventional banking skills and Shariah scholars with some knowledge of finance and banking. Educational initiatives and training opportunities are of the utmost importance to drive growth further. Major challenges in Islamic finance education and training are the lack of institutions offering specialized programmes and courses designed for Islamic finance and banking and the shortage of well-developed curricula, teaching resources and trained teachers with knowledge of the Arabic language and Shariah law. Modern textbooks geared towards tertiary education, as well as in-house training of finance professionals aiming to work in – or already working in – the Islamic finance and banking sector are also in short supply. The aim of this book is to meet this need. This book includes 12 chapters.
Chapter 1 lays down the foundation for learning about Islamic finance and banking by discussing Islamic finance and its features. It covers the core concepts of Islamic economics based on which the structure of Islamic finance and banking is developed. The chapter also discusses the evolution of Islamic finance from the birth of Islam to current times.
Chapter 2 is about the parts of Islamic Shariah law that design the products and processes of the Islamic finance and banking industry, highlighting the prohibitions and guiding principles. This chapter also elaborates the role of the Shariah scholars in ensuring the industry meets its religious requirements through the Shariah Supervisory Boards and Shariah governance.
After the first two chapters have laid down the basis of the subject, Chapter 3 moves towards the industry and discusses the Islamic banks in comparison with conventional banks and elaborates financial intermediation conducted by the Islamic banks and their sources and applications of funds, as well as the major challenges faced by Islamic banks. This chapter further covers the major international Islamic regulatory and standard setting bodies that are working to enhance the acceptability of the Islamic finance and banking industry in the global arena.
The next six chapters (Chapters 4–9) cover the six main Islamic banking products available in the industry: Murabaha, Mudaraba, Musharaka, Ijara, Salam and Istisna. Each chapter defines the instrument, discusses its key features and Shariah-compliance principles, the practical application of the products, problems faced in implementing them and their comparison to their conventional counterparts.
Chapter 10 is based on Takaful, the Islamic version of insurance, discussing the historical background of the product, its Shariah-compliance rules and general principles. This chapter also discusses the Takaful structure and models, compares Takaful with conventional commercial insurance as well as with mutual insurance, and finally touches on Retakaful, the Islamic alternative to reinsurance.
Chapter 11 covers Islamic investment products and markets, especially Sukuks, which are the Islamic substitutes for bonds. The chapter elaborates on Shariah-screened stocks, various Islamic investment funds, Islamic real estate investment trusts and compares them with their conventional counterparts. The chapter moves ahead with a discussion of Sukuks, their characteristics, the types of Sukuks, controversies related to Sukuks, their trading, rating and the comparison of Sukuks with traditional bonds.
Chapter 12 concludes the book with a discussion of Islamic finance and banking in comparison with conventional finance and banking and the global development of Islamic finance and banking amongst the Muslim community, in the Middle East, South and South-East Asia. The chapter also elaborates the opportunities, challenges and social responsibilities of this niche segment of the finance industry as it moves forward.
This book is accompanied by a companion website:
https://learning.oreilly.com/library/view/fundamentals-of-islamic/9781119371007/f10.xhtml
The website includes:
PowerPoint slides. The PowerPoint slides that accompany each chapter of the textbook can be used by instructors in class and by students to review the lessons.
Test bank. The test bank includes all questions from the End of Chapter Questions and Activities, with appropriate answers, to be utilized by instructors to prepare quizzes, tests and exams. The questions include multiple choice, true/false, discussion questions and calculation problems.