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This book is result of five years teaching of Islamic finance course to MBA Finance students. This book is written with a clear focus on learning of Islamic banking & finance by accounting, banking, business and finance students/professionals. Resources available, so for, on the subject have focused on legal side and very negligible work is available on financial front for a common user. This book is written in financial perspective and author has focused upon financial impacts, generated by application of Islamic financial laws. However a summary of Islamic commercial laws of each chapter has been provided. Author has adopted balance sheet method to inculcate the knowledge; hence, understanding of elementary balance sheet is recommended to get maximum out of this book. This book is divided into five parts. Part-1 presents an update on Islamic finance. Part two is about asset backed financing provided by IFIs. It includes trading (selling) modes of financing including Murabaha, Salam and Istisna'a; it also includes Ijarah financing. At the start of part two, summary of Shari’a rulings about sales is reported. Part three of the book deals with profit and loss sharing modes of financing including Musharaka, diminishing Musharaka and Mudaraba. A special section is devoted to discuss the causes of lesser application of Musharaka in operations of IFIs, in addition to Shari’a rulings and financial impact. Chapter seven is about Diminishing Musharaka; a form of gradually declining partnership between an IFI and clients; generally used to finance real estates. Under diminishing Musharaka, I have discussed the basic Shari’a rulings, Islamic house financing, comparative study of conventional and Islamic mortgages and installment calculation under different assumptions for house financing. Chapter eight is about Mudaraba. Under this scheme of financing IFIs provide capital to financially weak but skilful people to do the business and share outcome with IFIs. Part four is about deposits management. Part five of the book presents special topics in Islamic Finance. In this part areas of liquidity management and Islamic insurance are discussed. Under Islamic capital market two dedicated chapters have been included; each for equities and Sukuk. Chapter 12 is dedicated for Islamic insurance. Last chapter has focused on challenges to Islamic finance industry. Third edition is definitely outcome of very encouraging response by academic community to earlier editions. In this edition due attention has been given to present material in reader friendly mode in addition to thorough review of content, exercises and figures. In this edition Islamic capital market is re-written by including separate chapters on equities and Sukuk. Also a special chapter is devoted to Islamic insurance. Updated figures on global volume of assets, regional shares, equity funds and Sukuk are also part of this edition. Also more examples included in the text to make the concept clear. In appendix guidance for establishment of Islamic bank and appointment of Shari’a advisor as provided by local central bank is included. Increased number of true/false, multiple choice questions and mini cases are also forming part of updated edition. This book is useful for MBA/BBA students as a three credit hour course as well as for banking/finance students and practitioners of Islamic banking & finance. It is also useful for accounting & finance professionals, trainers in Islamic banking, regulators, investors, corporate managers and general public, interested in understanding Islamic finance. I hope this book will serve its purpose through imparting knowledge of Islamic banking & finance among accounting, business and finance graduates as well as practitioners of Islamic financial system, investors and general public.
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Islamic banking is based on principles of Islamic financial laws. Interest is prohibited by Islamic law hence operations of Islamic banking are different from conventional banking although both types of banking fulfill the same needs of customers. In financing customers' needs Islamic banks use either asset based financing or profit and loss sharing modes of financing. Islamic banking was started in last quarter of 20th century to cater the needs of Muslims around the world although it is not limited to Muslims only. It has shown marvelous growth and expansion worldwide. This book is written with a clear focus on learning of Islamic banking by accounting, business and finance students/professionals. Resources available on the subject have so for focused on legal side and very negligible work is available on financial front for a common user. This book is written in financial perspective and author has focused upon financial impacts, generated by application of Islamic financial laws. However a summary of Islamic commercial laws of each chapter has been provided. Author has adopted balance sheet method to inculcate the knowledge; hence, understanding of elementary balance sheet is recommended to get maximum out of this book. A special section in each chapter is developed for concept building through illustrations. To test the concept essay questions, true/false statements, multiple choice questions and sufficient number of exercises in addition to mini cases are included at chapters end. This book is useful for MBA/BBA students as a three credit hour course as well as practitioners of Islamic banking. It is also useful for accounting & finance professionals, trainers in Islamic banking, regulators, investors, corporate managers and general public interested in understanding Islamic finance. For Comments please send message at firstname.lastname@example.org.From the Inside Flap:
There are certain customer needs including payment of operating expenses, an urgent payment to a vendor, long distance travels and tours, children education, marriage expenses, health expenses and credit card facility etc. which cannot be fulfilled through any of above listed modes of financing, hence require cash loans. However in present practice of Islamic banks one cannot get loan in cash except Qarz e Hasna (charity loan). Qarz e Hasna is not a business model in itself. Islamic banks are not charitable institutions rather commercial houses. In fact Islamic banks or any other business can survive only through earning profit which does not exists in transaction of Qarz e Hasna. It is appreciable that Islamic banks must reserve a certain amount for Qarz e Hasna; however that can only be done in a prosperous Islamic bank.
Another questionable practice in current Islamic finance industry is the use of Inter Bank Offered Rate (IBOR) as a bench mark in pricing products, which although makes the operation competitive with conventional banking, however reduces the gap between conventional and Islamic banking as for economic substance is concerned. This practice has further contributed in negative perception among masses and many people find it as a mere copy of conventional products. Linkage of pricing with IBOR, further contributes in matching return on deposits with conventional finance industry, although deposits of Islamic finance are accepted on the basis of profit and loss. So what is the way out? Should there be a national rate or not for pricing? Ideally there should not be a single national rate on capital. It should base upon regional activity plus sector specific. For example housing rate in Islamabad should base on two factors including expected return in housing sector and that expected return should be region based and not economy based. As we know return depends upon riskiness of an investment and all investments do not carry the same risk, hence rate on mortgages in Islamabad city should not be same as for car Ijarah. At present Islamic finance industry charges the same IBOR plus for every transaction, which is although allowed, but economic substance is not very much different from conventional finance......
Trained human resource is must for make or break of any system and Islamic finance has no exception. We can categories present human resource of Islamic finance industry into two groups, objectively, including bankers with professional (conventional finance) knowledge without any exposure to Islamic financial studies and Shari'a scholars with no background understanding of banking. Decisions are taken at joint meetings, however the essence of view point given by each group in a meeting is not fully understood by other group. As we know when we talk about banking in a gathering, we speak a specific language (banking language, not mere English language words) and to get the message fully transposed, expertise of audience in that language is required, which is absent in case of Muftis (Jurists in Islamic law); and same is true when Shari'a scholars speak in the same meeting; hence without doubting the intentions, it is concluded that this system of corporate governance is ok to start with, however not ideal. Ideally it is required that both groups speak and understand the same language when they sit to gather in a meeting. It is recommended, initially, that regulator make it compulsory for both groups (bankers as well as Shari'a scholars) to have elementary understanding of the areas of other group. Short courses of three to six months would be sufficient for both groups to have an elementary understanding of the expertise of other group. There should be short courses of accounting and finance for Shari'a scholars and Shari'a courses for bankers. In the long run qualifications such MBA, Msc in the area of Islamic finance would meet the needs. In the long run same qualification (MBA, Msc) should be compulsory for both groups. Having said that, still traditional qualification of Mufti would be must to work as Shari'a advisor or Shari'a member of board.
Information technology plays very vital role in corporate governance of modern organizations. Under Islamic financial system more disclosure is required to ensure transparency. Also AAOIFI standards demand different types of financial reports from a Shari'a compliant business. At present in majority cases information gathering software including accounting information are either the same as for conventional banking industry or copied on those lines. Consequently financial section of annual reports of Islamic finance industry is not very different from conventional industry's financial reports. Islamic financial industry needs to develop different information system based upon AAOIFI framework and computer software play vital role in recording transections and generation of reports. Available software are based upon requirements of conventional finance and lacks many things to depict the required information for Islamic finance industry. For example there is no such built in option in any available accounting software to check the Shari'a compliant status of a transection or investment. Also available software ensure calculations based upon time value of money, which is not appreciated for Islamic finance. This is one of the challenges for practitioners of Islamic finance to ensure building of required software in order to achieve objective of more transparency and Shari'a compliance............
As we know Islamic finance is asset based financing and use either trading modes or rental modes. Although minimum criteria of ownership risk is met through purchase and then either sale or Ijarah. However this is more of risk transferring exercise than of risk sharing. If Islamic banks are dealer of goods then why not to have inventory of goods kept for sale or lease. This will benefit both customer as well as banker and will send a very positive message in the market. Bulk purchase would enable Islamic finance industry to pass on discount to customers as well as maintain prices. Imagine if major portion of agricultural products is purchased and stored by Islamic finance industry, problem of hoarding and overcharging would be minimized.
Regulation is another aspect of Islamic finance industry to be addressed. Except few countries, in majority of societies Islamic finance is regulated through conventional laws, which is against the spirit of the industry. Consequently AAOIFI standards are not applied in financial reporting and one would not find much difference in financial reports of both streams of banking. It is suggested that a central law should be prepared, ideally by AAOIFI and efforts should be made for implementation of that law globally with a cushion for certain extremely required changes by local society.
In the following sections some of the challenges are elaborated in detail to assist the industry in further understanding as well as to move for solutions.
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