Islamic Service Board. Some of the ways in which

Islamic Finance

 

Definition of Islamic
Finance, Islamic Finance is any finance activity which is carried out within
the stipulated principles of Islamic law.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

 

The components of
this Islamic financial services industry consists of a) Islamic banking
industry b) Islamic capital markets c) Islamic insurance d) Islamic non banking
financial services and e) Islamic money market Islamic Methods of Finance
Islamic methods of finance refer to the applications of the concepts of Islam
to the financial aspects of one’s life.

 

Islamic Banking
Islamic banking is any banking activity carried out on the broad principles of
Islamic methods of finance.

 

The establishment
of regulatory bodies such as Accounting and Auditing Organization for Islamic
financial institutions in the 1990s and Islamic Financial Services Board in
2002 to oversee the standardization of the banking practices of Islamic methods
of finance has also contributed to the growth of Islamic financial institutions
across the globe.

 

Islamic holding
banks, these banks are established with the objective to assist other Islamic
banks to identify Islamic investment opportunities and to finance them.

 

Several Islamic
financial institutions are offering their products and services across the UK,
Europe and the USA. While Dubai in the Middle East has been attracting a lot of
Islamic financial pool, London is not lagging behind and is expected to become
the Islamic Economy hub in the West.

 

As efforts are
being made to introduce and implement Islamic finance in India, this study
would help the conveners and policy makers of Islamic finance to understand the
demographic profile of the potential customers of Islamic banks and their level
of awareness of and their perception towards Islamic finance in general and
Islamic banking in particular.

 

 

 

Surge in Islamic
Finance Service Industry

 

The
last five years have witnessed a huge expansion in the Islamic Finance Service Industry.
The annual market capitalization of the stocks meeting the Dow Jones Islamic
Market Index Criteria in Islamic countries is estimated at US $ 300 billion.

 

Islamic
banking is also gradually moving into the retail banking space with the
introduction of Islamic cards and Shariah compliant consumer finance products.

Another
boost to Islamic banking is coming from the pro-active approach of the
regulators particularly under the aegis of the Islamic Finance Service Board.

 

Some
of the ways in which the Islamic finance industry is integrating into the
global financial system and adding value are outlined below: Convergence
between ethical investments and Islamic finance.

 

The
attraction of Islamic Finance to the non-Muslim investors all over the world
lies in their quest for diversifying their portfolios Islamic Finance provides
them new asset classes, new instruments and new products with low correlation
with established asset classes or products.

 

On
the asset side Islamic banks take ownership stakes in the contractual
relationships and offer products and services different from those offered by
conventional banks.

 

Islamic
Banking in Pakistan

 

Steps
for Islamization of banking and financial system of Pakistan were started in
1977-78.Separate Interest free counters started operating in all the
nationalized commercial banks and one foreign bank on January 1, 1981 to
mobilize deposits on profit and loss sharing basis.

 

A
legal framework is designed to encourage practice of Islamic banking by banks
and financial institutions as subsidiary operations of their main operations.

 

Setting
up new full fledged commercial banks to carry out exclusively banking business
based on proposed Islamic products. Accordingly, the State Bank issued detailed
criteria in December 2001 for establishment of full-fledged Islamic commercial
banks in the private sector.

Al
Meezan Investment Bank received the first Islamic commercial banking license
from SBP in January 2002 and the Meezan Bank Limited commenced full-fledged
commercial banking operation from March 20, 2002.

The
Government as also the State Bank is mainly concerned with stability and
efficiency of the banking system and safeguarding the interests, particularly,
of small depositors.

 

(Article: 1)An
economic theory of Islamic finance

 

 

Money is issued
in AlJarhi’s model in the form of central bank investment deposits or central
deposits for short with banks, placed on the basis of PLS.The return on CDs
would ?ow back to the central bank as seignior age for the ultimate bene?t of
the government budget.

Owing to the
different nature of banks’ assets and liabilities, an Islamic banking system
would be more stable relative to conventional banking. Assuming no regulatory
hindrances, Islamic banks, like universal banks, can carry out ?nance using a
multiplicity of contracts.

Like universal
banks, Islamic banks can therefore hold equity in the businesses they ?nance
while supplying them with funds under mudarabah, wakalahand Salam or any other
contract.

 

In mixed systems
with the absence of any means of internalization, Islamic bankers have to
compete with conventional bankers who use the classical loan contract, which is
simpler, requiring fewer procedures and less documentation than the Islamic
modes of ?nance.

Universal banks
are de?ned as large scale banks that operate extensive networks of branches,
provide many di?erent services, hold several claims on ?rms, and participate
directly in the corporate governance of the ?rms that rely on the banks as
sources of funding or as securities underwriters”.

AlJarhi, M.A.
“Islamic banks and universal banks: need for leveled playing ?eld”,
paper presented at the International Seminar on Islamic Banking: Risk
Management, regulation and supervision organized by the ministry of finance
Indonesia, the Central Bank Indonesia and the Islamic Research and TrainingInstitute,Jakarta,30
September 2 October.

 

Methodology

 

Its methodology
is simple. It starts with listing the contributions to economic analysis
relevant to the required rationale in the theories of banking, finance, price,
money and macroeconomics to identify the main rationale for Islamic finance. A
concise description of the author’s model for an Islamic economic system within
which Islamic finance can be operational is provided.

 

Findings

 The paper finds distinct advantages of Islamic
finance, when properly applied within the author’s model. Islamic finance can
therefore be a candidate as a reform agenda for conventional finance. It opens
the door for significant monetary reform in currently prevalent economic
systems.

 

(Article: 2)Financial reporting of
intangible assets in Islamic finance

 

Objectives of the
study To con?rm and seek the consensus of expert opinions for the purpose of
facilitating the formulation of appropriate policy and effective strategy for
reporting intangible assets in the Islamic ?nancial services industry, the
principal objectives of the study are designed as follows: to highlight issues
on speci?c ?nancial reporting requirements on intangible assets as speci?ed in
IAS 38 Intangible Assets and relevant standards with reference to Islamic
?nancial transactions  and  to elicit professional accounting and sharia
expert opinion and views on the risk exposures of adopting ?nancial reporting
requirements of ?nancial assets as economic consequences of Islamic ?nancial
transactions.

 

Importance of
possession and control of intangible assets both the accounting and sharia
focus groups agree on the importance of possession and control of the asset.

 

Transferable as a
pertinent dimension to recognize an intangible asset the transferable dimension
of the intangible component is pertinent to enable recognition of a separable
intangible component as an intangible asset.

 

On the contrary,
if the intangible asset is a signi?cant separable and transferable component,
both the rights to possess, control and bene?t as an asset as well as rights to
usufruct should be reported separately from tangible assets.

Financial
reporting of intangible assets measurable value with certainty and management    choice for cost or valuation model on
initial and subsequent measurement of tangible and intangible asset value with
certainty, both the accounting and sharia focus groups acknowledged the
economic consequences of valuation of investors and creditors’ interest.

 

The risk
characteristics of an intangible asset, or the intangible component of a
tangible asset, may change over its lifecycle.

 

Economic decision
usefulness as propagated by the ?nancial reporting standards in reporting
intangible assets would require additional disclosures on the intangible
component of tangible assets in terms of sharia compliance and risk based
disclosures.

 

Methodology

 

The study uses
the qualitative research method by way of interviews followed by focus group
discussions with professional accountants/accounting academics and sharia
scholars/advisors from academia, the industry and regulatory bodies. Analysis
of relevant literature is made to understand the subject matter and sharia
related issues.

 

Findings

 

The study
observes that the accounting dimensions of tangible assets are generally
consistent with Sharia requirements. However, significant variation arises when
the dimensions of intangible assets are represented in financial assets.

 

 

 

 

 

 

(Article: 3)Integrating the social
maslaha into Islamic finance

 

 

The author thanks
Oxford Centre for Islamic studies and Harvard Law School ILSP   Islamic Finance Project for creating an
intellectually stimulating environment for his studies on Islamic finance as
well as the writing of this particular article.

 

Al Rajhi Bank
which is one of the first Islamic banks in the world says: “Our
responsibility to our community has always been at the fore front of our
obligations and is one of the main objectives of the Bank.” Likewise, HSBC
Amanah which is one of the important Islamic financial institutions in the west
declares that: In exercising all its banking or developmental activities, the
Islamic bank takes into prime consideration the social implications that may be
brought about by any decision or action taken by the bank.

 

Given the fact
that few other institutions in Muslim countries match the financial power and
international networking that the Islamic banks enjoy today which further
increases these banks’ responsibilities, any serious attempt to realize the
above mentioned broad principles must consider the essential link between these
principles and the structural elements of Islamic finance, such as the types of
contracts that Islamic banks rely on.

 

Studies on
Islamic finance from the perspective of both modern economics and Islamic law
have so far largely ignored the domain of social functions, which has in turn
resulted in the fact that we have very little, if any, discussion on, let alone
solutions for, the fundamental structural problems Integrating social maslaha
173 ARJ 25,3 174 of Islamic banking.

 

Finally, because
most of the Islamic financial institutions that exclusively focus on the
murabaha based mechanisms have become rather like capitalistic banks, they
suffer some problems in terms of maintaining their “Islamic” image
for certain groups in the Muslim world.

 

Sharia, economics
and the progress of Islamic finance: the role of sharia experts and Integrating
Islamic finance into the mainstream: Regulation, Standardization and
Transparency, Islamic Finance Project.

 

Methodology

 

The paper adopts
a critical analytic approach in considering the reasons of the failure of the
social dimension of Islamic financial intermediation based on real figures of
selected Islamic banks.

 

Findings

 

 Concepts of SR and corporate social
responsibility (CSR) are not enough to describe Islamic Banks’
responsibilities. Also, this failure cannot be understood only with reference
to the “external environment”, i.e. competition-driven, capitalistic market conditions;
but it is also closely related to the transformation of Islamic finance into an
almost exclusively murabaha based Islamic banking, which promotes more
individual maslahah than social maslahah. Compared to the murabaha, other
product structures such as mudaraba and musharaka seem to be better instruments
for expanding welfare and alleviating poverty.

 

 

(Article: 4)The global financial
crisis and Islamic finance: a review of selected literature

 

 

Edib Smolo, Abbas
Mirakhor,”The global financial crisis and its implications for the Islamic
financial industry”, International Journal of Islamic and Middle Eastern
Finance and Management.

 

The way forward
for both Islamic and conventional finance is, inter alia, greater reliance on
risk sharing to inject more discipline in the system; the establishment of a
strong and comprehensive regulatory body to safeguard the resilience of the
system; and the integration of Zakat, Awqaf and other voluntary institutions
into the financial system to cater for the financial needs of the poor.

 

Introduction The
global financial crisis, with its gargantuan amount of bankruptcies and other
financial distresses, has proven to be one of the major financial crises ever
known in modern history.

 

First, the
financial system in the modern economy has gained, over the years, a dominant
role to the extent that any instability of the financial sector is likely to be
transmitted to the real economy.

 

To him, financial
innovation was meant to enable the underprivileged to have access to affordable
housing facilities; the end result was totally the opposite, as it was
financial innovation itself that has failed them.

Al Suwailem
provides a background discussion of the theoretical debate on the place of the
financial sector in the economy, the impact of financial crises on the real economy
and the macroeconomic imbalances which characterized the American economy, in
particular, over the past decades.

Lim, M.M.,
“Old wine in a new bottle: subprime mortgage crisis causes and
consequences”, Working paper No. 532, The Levy, Economics Institute of
Bard College, New York, NY. Minsky, H., “Financial crises: systemic or
idiosyncratic”

 

Methodology

 

The paper
critically reviews selected writings of prominent Islamic economics on the
recent financial crisis.

 

Findings

Most of the
authors reviewed acknowledged the technical mistakes put forth by many conventional
analysts as causes of the crisis. However, they have showed that the adoption
of the principles of Islamic finance would have prevented most of those mistakes.

The way forward,
therefore, for both Islamic and conventional finance is, inter alia, greater
reliance on risk sharing to inject more discipline in the system; the
establishment of a strong and comprehensive regulatory body to safeguard the
resilience of the system; and the integration of Zakat, Awqaf and other
voluntary institutions into the financial system to cater for the financial
needs of the poor.

 

 

 

 

 

 

(Article: 5)Towards restructuring the
legal framework for payment system in international Islamic trade finance

 

First, the possibility
of harmonizing UCP 600 with Islamic finance products by modifying the former to
suit the needs of the Islamic economic system; and second, the feasibility of
overhauling the UCP 600-based documentary system of payment by producing an
independent system for the Islamic banks across the word.

 

The role of
International Islamic Trade Finance Corporation As part of its mission to
further economic development, enhance social progress and advance international
trade of member countries, the Islamic Development Bank established the
International Islamic Trade Finance Corporation in May 2006 but it formally
commenced operations in 2008.

 

The international
Islamic trade financing facilities Different Islamic banks utilize various
sharia compliant facilities for international trade financing.

 

The establishment
of Islamic commercial banks in the 1970s and the further development of the
Islamic finance industry in the 1980s and 1990s saw a gradual increase in
international trade financing by Islamic financial institutions.

 

The Sharia Board
of Faisal Islamic Bank of Bahrain followed the same line of argument in its
resolution on a similar question involving the issuance of a LC. 4.2 sharia
rulings on documentary credit system of selected banks just like the first
generation Islamic banks such as the Jordan Islamic Bank, Dubai Islamic Bank and
Faisal Islamic Bank, the KFH has been actively involved in international
Shar?ah compliant trade financing.

 

Can pay for any
actual harm caused by delay Faisal Islamic Bank of Bahrain Ujrah kafalah,
musharakah, or aqd al-bay Wakalah and aqd al bay Faisal Islamic Bank of Bahrain
Fatawa Mustafa alZarqa Faisal Islamic Bank of Bahrain Faisal Islamic Bank of
Bahrain Kuwait Finance House kafalah Ujrah Kuwait Finance House Kuwait Finance
House Wakalah Ujrah Kuwait Finance House Source/institution kafalah Islamic
finance facility Prohibition of riba 9.

 

The Islamic Fiqh
Council of OIC may convene an international workshop of Islamic financial
institutions across the world to come out with acceptable standards for
international trade payment and financing based on Islamic law.

 

Methodology

 

A partial
comparison of both the UCP 600 and the sharia framework for documentary credit
is given through the content analysis of relevant sources.

 

Findings

The AAOIFI Shar?ah
Standard on Documentary Credits as well as other applicable Shar?ah resolutions
of Islamic financial institutions, does provide a good framework for a Shar?ah compliant
documentary credit system which is unique to trade in Islamic finance products,
but there is scope for further improvement, taking into consideration the two
possibilities proposed in the available literature on the subject harmonization
or bifurcation of rules.

 The UCP 600 also allows for the exclusion or
modification of the rules to suit the specific needs of the Islamic finance
industry.

 

 

Conclusion

 

Islamic Finance
Definition of Islamic Finance, Islamic Finance is any finance activity which is
carried out within the stipulated principles of Islamic law.

 

The components of
this Islamic financial services industry consists of a) Islamic banking
industry b) Islamic capital markets c) Islamic insurance d) Islamic non-banking
financial services and e) Islamic money market Islamic Methods of Finance
Islamic methods of finance refer to the applications of the concepts of Islam
to the financial aspects of one’s life.

 

The establishment
of regulatory bodies such as Accounting and Auditing Organization for Islamic
financial institutions in the 1990s and Islamic Financial Services Board in
2002 to oversee the standardization of the banking practices of Islamic methods
of finance has also contributed to the growth of Islamic financial institutions
across the globe.

 

Objectives of the
study To con?rm and seek the consensus of expert opinions for the purpose of
facilitating the formulation of appropriate policy and effective strategy for
reporting intangible assets in the Islamic ?nancial services industry, the
principal objectives of the study are designed as follows: to highlight issues
on speci?c ?nancial reporting requirements on intangible assets as speci?ed in
IAS 38 Intangible Assets and relevant standards with reference to Islamic
?nancial transactions and to elicit professional accounting and sharia expert
opinion and views on the risk exposures of adopting ?nancial reporting
requirements of ?nancial assets as economic consequences of Islamic ?nancial
transactions.

 

Towards restructuring
the legal framework for payment system in international Islamic trade finance
First, the possibility of harmonizing UCP 600 with Islamic finance products by
modifying the former to suit the needs of the Islamic economic system; and
second, the feasibility of overhauling the UCP 600-based documentary system of
payment by producing an independent system for the Islamic banks across the
word.

 

The Sharia Board
of Faisal Islamic Bank of Bahrain followed the same line of argument in its
resolution on a similar question involving the issuance of a LC. 4.2 sharia
rulings on documentary credit system of selected banks just like the first
generation Islamic banks such as the Jordan Islamic Bank, Dubai Islamic Bank
and Faisal Islamic Bank; the KFH has been actively involved in international
Shar?ah compliant trade financing.

 

Can pay for any
actual harm caused by delay Faisal Islamic Bank of Bahrain Ujrah kafalah,
musharakah, or aqd al bay Wakalah and aqd al bay Faisal Islamic Bank of Bahrain
Fatawa Mustafa alZarqa Faisal Islamic Bank of Bahrain Faisal Islamic Bank of
Bahrain Kuwait Finance House kafalah Ujrah Kuwait Finance House Kuwait Finance
House Wakalah Ujrah Kuwait Finance House Source/institution kafalah Islamic
finance facility Prohibition of riba .