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Principles of Islamic Economic System

 
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Posted by on June 20, 2019 in Relax, Video

 

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Islamic finance is becoming so attractive that even non-Muslims want in

Islamic finance is becoming so attractive that even non-Muslims want in
  • Sovereign Islamic debt issuance by non-Muslim countries is set to hit a 3-year high in 2017
  • Islamic finance complies with Sharia, or Islamic law, which prohibits earning interest and bars funding activities involving alcohol, pork, pornography or gambling
  • The non-speculative nature of Islamic finance can help to ensure financial stability — a reason why it’s gaining traction globally, experts told CNBC
Islamic Bank of Britain was launched in London, England in 2004. The bank has since been renamed to Al Rayan bank.

Islamic finance has traditionally been dominated by Muslim-majority countries in the Middle East and Southeast Asia. Now much of the rest of the world is getting in on it.

Buoyed by the perception of more tranquil market conditions and an improving regulatory backdrop, issuance of Islamic debt by non-Muslim countries is set to climb to a three-year high in 2017, according to Dealogic data.

Islamic financial products comply with Sharia, or Islamic law, and are based on the principles of risk and profit-sharing. Sharia prohibits earning interest on loans, and it bars funding activities involving alcohol, pork, pornography or gambling.

The value of sovereign sukuk, or Islamic bonds, issued outside the Middle East and Southeast Asia by non-Muslim countries reached $2.25 billion in the 11 months through November, data by Dealogic showed. That’s higher than 2016’s $2 billion and more than double the $1 billion recorded in 2015.

Standardisation of Sharia would be advantageous

Fitch on the standardization of Islamic banks  

Islamic finance’s metamorphosis from a niche corner of global banking to a growing source of funding for rest of the world has been aided by a storied list of borrowers who have sold sukuk in recent years.

The government of Singapore was one of the earliest non-Muslim entrants into the space, followed by the United Kingdom, Luxembourg and Hong Kong, which issued their first sukuk in 2014. More recently, African nations such as South Africa, Nigeria and Ivory Coast have made legal and tax changes to, among others, make it easier for borrowers to issue sukuk.

Companies haven’t been far behind, with the likes of Goldman Sachs and General Electric‘s GE Capital also selling Islamic bonds in the past few years.

Chinese entities such as Country Garden and Beijing Enterprises Water Group have also issued Islamic bonds through their Malaysian subsidiaries in 2015 and 2017, respectively. The companies used those proceeds to finance projects in the Southeast Asian country.

“The crisis that took place was a result of excessive speculation, which is harmful. Islamic finance has avoided such pitfalls.” -Ahmad Fuzi Abdul Razak, secretary general, World Islamic Economic Forum Foundation

Experts said the global financial crisis spurred governments and companies to diversify their funding options. Islamic finance is seen as a more stable alternative to the conventional banking system and therefore appealed to borrowers still haunted by the gyrations in global bond and equity markets when the U.S. housing bubble burst, they added.

In addition, the asset class has also attracted the attention of investors taking a more ethical approach to managing their money.

“Heightened appeal for sustainable and responsible investing could also be driving the growth for Islamic finance due to the commonalities in values and shared principles,” Ruslena Ramli, head of Islamic finance at Malaysian credit rating agency RAM, told CNBC.

Variety of categories

There are several categories of Islamic financial products, according to the World Bank:

  • Mudaraba — a financial expert offers specialist investment advice to a customer and they share any profits at an agreed ratio.
  • Musharaka — an investment partnership in which two or more parties, such as the bank and its clients, share profits and losses from a pooled investment at an agreed ratio.
  • Murabaha— the financial institution buys the asset, such as a home or a car, and sells it to a client at a profit. Payment could be in a lump sum or in instalments.
  • Ijara— the financial institution buys the asset and leases it to a customer for a fixed rental payment. The bank retains the ownership but may transfer that to the client eventually.
  • Sukuk — similar to a bond but a sukuk buyer owns part of the underlying asset that is invested for returns.

Sharia principles, which prohibit “speculative-type of businesses,” ensured Islamic finance products were less volatile when global financial markets were rumbled during the debt crisis, said Ahmad Fuzi Abdul Razak, the secretary general of the World Islamic Economic Forum Foundation.

“The crisis that took place was a result of excessive speculation, which is harmful. Islamic finance has avoided such pitfalls,” he told CNBC.

Growing, but still small

Yet, the involvement by those outside the Muslim world is still “sporadic,” experts said. The Middle East and Southeast Asia still account for a large majority of Islamic financial assets. In the sovereign sukuk space, Middle Eastern countries raised $11.85 billion in the 11 months through November, followed by Southeast Asia at $3.96 billion, Dealogic data showed.

Total Islamic financial assets have grown by 10 to 12 percent annually over the past decade to hit $2 trillion. But at less than 1 percent, they remain only a small fraction of global financial assets, according to the International Monetary Fund.

One hurdle standing in the way is the lack of standardization, Fitch Ratings said. Currently, different jurisdictions interpret Sharia differently and there is also variation in how Islamic finance products are structured. Differences in how disputes are resolved and reporting standards are monitored add to the complexity.

“In some cases, there is still little standardization even at a local level, while in others, progress would be needed on a regional, or international, basis,” Fitch said in an October report.

Such divergence in interpretation can deter investors and the progress to resolve that issue will likely be “slow and patchy” given the scale of the challenge, Fitch added.

Experts told CNBC that notwithstanding the challenges, the Islamic finance sector is still poised for growth. The industry’s size is expected to expand further to $3.5 trillion by 2021 as countries and companies look for alternative funding sources, and tap a larger pool of investors.

As an example, Maybank’s head of global banking business, Arshad Ismail, said the sukuk market allows issuers to attract both Muslim and non-Muslim investors and therefore widen their sources of funds.

The financing costs for sukuk are also “generally similar” to conventional bonds as there is more expertise to execute such transactions now, which adds to the product’s appeal, he added.

Yen Nee Lee , CNBC

 
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Posted by on December 21, 2017 in News, Relax

 

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Islamic Finance for Dummies

From Islamic Finance For Dummies

By Faleel Jamaldeen

Islamic finance is a global financial system that complies with sharia(Islamic law) — a code of conduct that guides all aspects of Muslim life. Sharia prohibits certain elements that are common in conventional finance, such as interest and speculation. As the world’s Muslim population increases, the demand for Islamic financial firms and products is growing dramatically.

KEY SHARIA PRINCIPLES AND PROHIBITIONS IN ISLAMIC FINANCE

Sharia law differentiates Islamic finance from conventional finance. The Islamic financial system is constructed on economic concepts specified by sharia — a code of conduct that guides Muslims (the followers of Islam) in social, economic, and political matters. Sharia promotes balance and justice and discourages behaviors of excess. Some of the core ideas promoted by sharia include the following:

  • Allah (God) is the owner of all wealth. Humans are merely the trustees of wealth, which belongs to Allah. Humans must manage wealth according to Allah’s commands, which promote justice and prohibit certain activities, including wasting or destroying resources. Muslims have the right to enjoy whatever wealth they acquire and spend in sharia-compliant ways.

  • Material pursuits must be balanced with an individual’s spiritual needs. A Muslim’s economic activities and pursuit of wealth should balance with the spiritual aspects of life. Economic activity conducted according to sharia is, itself, an act of worship, but finding balance between economic activities and spirituality is key. A Muslim is expected to seek moderation in the material world — to avoid being either miserly or too materialistic.

  • An individual’s needs must be balanced with society’s needs. A Muslim needs to consider society in general when enjoying Allah’s bounties. These considerations include promoting justice in all economic activities, remembering that all people have mutual responsibility for all others, and using the earth’s resources wisely.

  • Economic transactions should take place within a just, responsible, free-market economy. Islam does not restrict economic activity but instead directs it toward being responsible to other people, to the earth, and to Allah. Islam allows for a free-market economy where supply and demand are decided in the market, but it directs the function of the market mechanism by imposing specific laws and ethics. A primary purpose for imposing these laws and ethics is to promote social justice: a balance in which wealth is not accumulated only by a few while most others suffer.

In support of these principles, sharia prohibits business transactions based on the following:

  • Interest: Riba, the Arabic word for interest, means to increase, grow, or multiply into more than what would be due. Riba is prohibited by Islam because it creates societal injustice; in a riba-based transaction, the owner of the wealth gets return without making any effort, and the borrower carries all the risk.

  • Uncertainty: The Arabic word gharar means uncertainty or to cheat or delude. Transactions based on gharar are unclear or ambiguous; not everyone involved knows what to expect and can make an informed decision. Gharar exists when two parties enter a contract and one party lacks complete information or when both parties lack control over the underlying transaction.

  • Gambling: Two Arabic words — maysir and qimar — refer to transactions that involve gambling. Maysir is the acquisition of wealth by chance instead of by effort. Qimar refers to a game of chance. Both types of transactions are based on uncertainty; no one can know how a gamble will pay off.

  • Prohibited products and industries: Islam prohibits products and industries that it considers harmful to society and a threat to social responsibility. Examples include alcohol, pork, prostitution, pornography, tobacco, and any products based on uncertainty or gambling.

ISLAMIC FINANCIAL PRODUCTS BASED ON SHARIA-COMPLIANT CONTRACTS

In accordance with Islamic law (sharia), Islamic financial products are based on specific types of contracts. These Sharia-compliant contracts support productive economic activities without betraying key Islamic principles as some conventional financial products do. Sharia-compliant contracts cannot create debt, cannot involve the payment of interest, and must provide for a sharing of risk and responsibility between the involved parties.

To be valid, an Islamic contract must feature subject matter that is lawful, has value for a Muslim, and is specific enough to avoid uncertainties. The service or asset described in the contract generally must exist when the contract is being created, must be owned by the seller (hence prohibiting short sales of stock, for example), and must be deliverable.

Here are some of the most commonly used contracts in Islamic finance:

  • Contracts of partnership allow two or more parties to develop wealth by sharing both risk and return:

    • Mudaraba: One party gives money to another party, which invests it in a business or economic activity. Both parties share any profit made from the investment (based on a pre-agreed ratio), but only the investor loses money if the investment flops. The fund manager loses the value of the time and effort it dedicated to the investment. (However, the fund manager assumes financial responsibility if the loss results from its negligence.)

    • Musharaka: This contract creates a joint venture in which both parties provide investment capital, entrepreneurial skills, and labor; both share the profit and/or loss of the activity.

  • Contracts of exchange are sales contracts that allow for the transfer of a commodity for another commodity, the transfer of a commodity for money, or the transfer of money for money:

    • Murabaha: In this cost plus contract, an Islamic financial institution sells a commodity to a buyer for its cost plus the profit margin, and both parties know the cost and the profit in advance. The buyer makes deferred payments.

    • Salam: In this forward contract, the buyer (or an Islamic financial institution on behalf of the buyer) pays for goods in full in advance, and the goods are delivered in the future.

    • Istisna: This second type of forward sale contract allows an Islamic financial institution to buy a project (on behalf of the buyer) that is under construction and will be completed and delivered on a future date.

  • Contracts of safety and security are often used by Islamic banks; these contracts help individual and business customers keep their funds safe:

    • Wadia: A property owner gives property to another party for the purpose of safeguarding. In Islamic banks, current (checking) accounts and savings accounts are based on the wadia contract.

    • Hiwala: Debt is transferred from one debtor to another. After the debt is transferred to the second debtor, the first debtor is free from her obligation. This contract is used by Islamic financial institutions to remit money between people.

    • Kafala: A third party accepts an existing obligation and becomes responsible for fulfilling someone’s liability. In conventional finance, this situation is called surety or guaranty.

    • Rahn: A property is pledged against an obligation. A customer can offer collateral or a pledge via a rahn contract in order to secure a financial liability.

      source: https://myislamiceconofinance.wordpress.com/2016/11/10/islamic-finance-for-dummies-cheat-sheet/

 
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Posted by on November 10, 2016 in Relax, The message

 

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