Introduction to Islamic Banking and Finance

Introduction to Islamic Banking and Finance is a succinct guide to the key characteristics of Islamic banking highlighting how these differ from conventional banking. This detailed book illustrates how Islamic banking is consistent with the Sharia'a, a key element of which is the prohibition on collecting and paying interest. This central religious precept appears to rule out most aspects of modern finance but it does allow money to be used for trading tangible assets and business, which can then generate a profit. Brian Kettell's book looks at all aspects of Islamic banking, including chapters on its creation and evolution through to detailed discussions of the issues involved in the Sharia'a contracts of Murabaha, Mudaraba, Musharaka, Ijara, Istisna'a, and Salam. Islamic insurance (Takaful) is also covered. Finally the book takes a look at Sharia'a law and Sharia'a boards, indicating the roles and responsibilities that come with membership. Islamic banks have been operating in places such as Bahrain, Saudi Arabia, Malaysia and Dubai for some time. Conventional bankers have traditionally viewed the sector as a small, exotic niche but recent years have seen a dramatic surge in popularity. A number of Western investment banks have started working with Muslim clerics to create new ranges of financial products designed for devout Muslims, a large and growing market. Although estimates of the size of the Islamic finance industry vary greatly, everyone agrees that it is expanding rapidly and this is the perfect book for anyone looking to understand the industry.

Table of Contents:
Preface xiii About the Author xvii 1 Muslim Beliefs 1 1.1 Five Pillars of Faith 1 1.2 Six Islamic Creeds 4 1.3 Belief in Allah and His Attributes 5 1.4 Belief in Destiny 6 1.5 Belief in Angels 7 1.6 Belief in Apostles 7 1.7 Belief in the Revealed Books 8 1.8 Belief in the Hereafter 9 2 Sharia'a Law and Sharia'a Boards: Roles, Responsibility and Membership 13 2.1 Definition of the Sharia'a 13 2.2 Allah is the Law Giver 13 2.3 Objectives of the Sharia'a 14 2.4 Sources of the Sharia'a 16 2.5 Sharia'a Islamic Investment Principles 22 2.6 Conditions for Investment in Shares 23 2.7 Sharia'a Supervisory Board (SSB) 23 2.7.1 Function and Responsibilities 24 2.8 Sharia'a Board Scholar Qualifications 27 2.9 State Bank of Pakistan (SBP): Proper Criteria for Appointment of Sharia'a Advisors 29 3 Definition of Islamic Banking 31 3.1 Conventional Bankers and Islamic Banking 31 3.2 Six Key Islamic Banking Principles 33 3.3 Definition of Asymmetric Information 36 3.4 Origins of Asymmetric Risk within Islamic Banking 37 3.5 Riba in the Qur'an and Sunnah or Hadith 37 3.6 Five Reasons for the Prohibition of Riba 39 4 Murabaha as a Mode of Islamic Finance 43 4.1 Murabaha Transactions 43 4.2 What Makes Murabaha Sharia'a Compliant? 45 4.3 Islam Treats Money and Commodities Differently 46 4.4 Murabaha and the Sharia'a 47 4.5 Practicalities of Implementing Murabaha 47 4.6 Sharia'a Rules Concerning Murabaha 48 4.7 Reasoning Behind Sharia'a Rules 49 4.8 Practical Examples of the Application of Murabaha 50 4.9 Key Issues Associated with Murabaha 52 4.10 Comparison of Murabaha with Interest-Based Finance 58 4.11 Murabaha Differences from the other Islamic Financing Techniques 58 4.12 Summary 60 5 Mudaraba as a Mode of Islamic Finance 63 5.1 Definition of Mudaraba 63 5.2 What makes Mudaraba Sharia'a Compliant? 67 5.3 Practicalities of Implementing Mudaraba 68 5.4 Sharia'a Rules Concerning Mudaraba 68 5.5 Practical Examples of Mudaraba 69 5.6 Key Issues Associated with Mudaraba 72 5.7 Comparison of Mudaraba with the Conventional Banking Equivalent 72 5.8 Mudaraba: Differences from the other Islamic Financing Techniques 73 5.9 Summary 75 6 Musharaka as a Mode of Islamic Finance 77 6.1 Definition of Musharaka 77 6.2 What makes Musharaka Sharia'a Compliant? 78 6.3 Practicalities of Implementing Musharaka 79 6.4 Sharia'a Rules Concerning Musharaka 79 6.5 Practical Examples of Musharaka 80 6.6 Problems Associated with Musharaka 84 6.7 Comparison of Musharaka with the Conventional Banking Equivalent 85 6.8 Summary 87 7 Ijara as a Mode of Islamic Finance 89 7.1 Definition of Ijara 89 7.2 What makes Ijara Sharia'a Compliant? 91 7.3 Practicalities of Implementing Ijara 91 7.4 Sharia'a Rules Concerning Ijara 92 7.5 Basic Rules of Islamic Leasing 93 7.6 Practical Examples of Ijara 95 7.7 Key Differences between an Ijara Contract and a Conventional Lease 97 7.8 Comparison of Ijara with the Conventional Banking Equivalent 98 7.9 Ijara: Differences from the other Islamic Financing Techniques 98 7.10 Summary 101 8 Istisna'a as a Mode of Islamic Finance 103 8.1 Definition of Istisna'a 103 8.2 What makes Istisna'a Sharia'a Compliant? 105 8.3 Practicalities of Implementing Istisna'a 105 8.4 Sharia'a Rules Concerning Istisna'a 106 8.5 Practical Examples of Istisna'a 107 8.6 Key Issues Associated with Istisna'a 108 8.7 Comparison of Istisna'a with the Conventional Banking Equivalent 111 8.8 Istisna'a: Differences from the other Islamic Financing Techniques 111 8.8.4 Differences between Istisna'a and Ijara 114 8.9 Summary 114 9 Salam as a Mode of Islamic Finance 117 9.1 Definition of Salam 117 9.2 What makes Salam Sharia'a Compliant? 118 9.3 Practicalities of Implementing Salam 118 9.4 Sharia'a Rules Concerning Salam 119 9.5 Sharia'a Rules Concerning Parallel Salam 120 9.6 Practical Examples of Salam 121 9.7 Benefits of the Salam Contract 121 9.8 Problems Associated with Salam 121 9.9 Comparison of Salam with the Conventional Banking Equivalent 122 9.10 Salam: Differences from the other Islamic Financing Techniques 122 9.11 Summary 124 10 Takaful: Islamic Insurance 127 10.1 Case for Islamic Insurance 127 10.2 Islamic Issues with Conventional Insurance 127 10.3 Definition and Concept of Takaful 128 10.4 Islamic Origins of Takaful 129 10.5 Where Insurance Fits within Islam 129 10.6 Definition of the Parties to a Takaful 129 10.7 Takaful in Practice 130 10.8 Takaful and Conventional Insurance 130 10.9 Alternative Models of Takaful 130 10.10 Sharia'a Law as Applied by Takaful Operators 132 10.11 Takaful Operators 135 10.12 Definition of ReTakaful (Reinsurance) 136 10.13 Retakaful 136 10.14 Role of the Sharia'a Board in Takaful 137 Appendix 1. Comparative Features of Islamic Financing Techniques 141 A.1 Nature of the Financing 141 A.2 Role of the Finance Provider in the Management/Use of Funds 141 A.3 Risk Bearing by the Finance Provider 142 A.4 Uncertainty of the Rate of Return on Capital for the Finance Provider 142 A.5 Cost of Capital for the Finance User 144 A.6 Relationship Between the Cost of Capital and the Rate of Return on Capital 144 Appendix 2. Top 500 Islamic Institutions 1–73 145 Glossary 151 Bibliography 157 Index 165

About the Author :
Brian Kettell has a wealth of practical experience in the area of Islamic banking and finance. He worked for several years as an Advisor for the Central Bank of Bahrain where he had numerous Islamic banking responsibilities. Subsequently, Brian taught courses on Islamic banking and finance at a range of financial institutions including the World Bank, National Commercial Bank (Saudi Arabia), Global Investment House (Kuwait), Noor Islamic Bank (UAE), the UK Treasury, the Central Bank of Iran, the Central Bank of Syria, the Chartered Institute for Securities and Investment, the Institute for Financial Services and Scotland Yard. Brian's vast academic expertise in Islamic finance is highlighted by his role as former Joint Editor of the Islamic Finance Qualification Handbook and his past teaching work at a number of top universities worldwide including the London School of Economics, the City University of Hong Kong, the American University of the Middle East in Kuwait and London Metropolitan University Business School. Brian's impressive list of publications include over 100 articles in journals, business magazines and the financial press including Islamic Business and Finance, Islamic Banking and Finance, the Central Banking Journal, Euromoney, the Securities Journal and the International Currency Review. He has also published 6 books on Islamic banking and financial markets.