where borrower repays more than amount borrowed to reflect
time delay in repayment
GhararExcessive uncertainty
and ambiguity about an outcome
!
Gambling and Insurance
HaramForbidden practices
!
No interest No selling what you do
not own No selling of debts
Interest Prohibited
Profit and Loss Sharing Permitted
Haram - Prohibited Interest
Halal - Permitted Profit and Loss Sharing
Avoid RibaNo interest elements
Null and void
Different cultures have different definitions of fairness and justice and
what is unfair and unjust
Islamic definition of fairness and justice
Money Profit Risk
Interest
Argument1. Can only charge rent on something that is a commodity !2. Unfair to charge rent on something that is not a commodity !3. Money is not a commodity. !4. Therefore money cannot be rented !5. Rent on money is called interest !6. Therefore cannot charge interest
Avoid Gharar
Gambling - Zero Sum Game
!
Seller should own what they intend to sell
Objectives
Maximize profit and wealth
!
Spread prosperity
Islamic Finance Money does not have
intrinsic value !
Just a measure of value or medium of exchange
Islamic Finance Must have an asset
involved in the exchange !
No money for money
Participatory-type finance
Share profit and loss Share risk
!
Equity position Debt position
Zakat - Religious Tax
2.5 Percent on profits !
Poor, orphans, charity Finance projects
Operations
Islamic Shariah - Interpreted
Non-Islamic Secular - Elected
Interest ChargingIslamic
Not allowed Profit and loss sharing
Non-Islamic Allowed
Fixed and variable
Interest on DepositsIslamic
Not allowed May share in profits
Non-Islamic Allowed
Interest plus principal
Risk Sharing
Islamic Must share risk
Non-Islamic May share risk
Penalty on Default
Islamic Not allowed to charge
Non-Islamic May charge
Gharar
Islamic Forbidden
Non-Islamic Allowed
Customer Relationship
Islamic Partner and Investor
Non-Islamic Partner and Investor Creditor and Debtor
Shariah Supervision
Islamic Requires Board
Non-Islamic No Board
Islamic Banks
Maximize shareholder wealth
!
Develop society
Source of Funds
Shareholders Depositors
Deposits
Current Savings
Investment
Hiba
A non-predetermined return paid
!
Gift
Current Deposit Accounts
Receive funds on demand Issue checks
No guarantee of return Bank may give Hiba
Savings Deposit Accounts
Wadiah Must get permission to
use for loans Bank may give Hiba
Investment Deposit AccountsMudarabah
Specific time period Profit and loss sharing based
on predetermined ratio Could lose deposit
Islamic Profit and loss sharing system
!
Non Islamic Profit and loss sharing system
interest-based system
Equity Financing
Musharakah !
Mudarabah
MusharakahPartnership
All contribute capital Profit shared on prior agreement
Only lose invested capital Charge a fee if manage
Project pays profit share to bank Entrepreneur pays bank capital
MudarabahPartnership
Bank contributes capital Entrepreneur contributes work
Profit shared on prior agreement Bank bears all capital losses
Asset Financing
Must own before reselling !
Murabahah Salem
Ijarah Leasing
Murabahah
Bank buys the asset Resells to customer
Price includes cost plus markup profit
Full disclosure transparency Customer pays installments or lump
sum at the end
SalemBank buys the asset today for
delivery in the future !
Agriculture !
Buyer responsible for delivery
Ijarah LeasingUsufruct: temporary use and enjoyment
of a property !
Bank (Lessor) buys the asset and rents to client (lessee)
!
Client may return or receive asset at the end of the term
!
Sukuk - Islamic BondsRegular bonds not permitted
Interest and reselling debt prohibited Investor owns a proportionate
undivided share of the asset !
Ownership equity position not a debt position
!
No guarantee or fixed return
Takaful - Islamic InsuranceDistribute losses among participants
Participants pool funds No insurer-insured relationship
!
Operator manages account fund Participants pay premiums to create fund