Mastering Islamic Finance: A practical guide to Sharia-compliant banking, investment and insurance
MASTERING ISLAMIC FINANCE – Book Sample
Contents – MASTERING ISLAMIC FINANCE
- Publisher’s acknowledgements Author’s acknowledgements
- Part BACKGROUND
- The Islamic finance phenomenon
- The Islamic finance phenomenon
- Why does Islamic finance exist?
- Why is Islamic finance a sizeable and growing market?
- Key challenges facing the industry
- Islam – key beliefs, principles and practices
- Belief system
- Key practices – the five pillars of action
- Importance of the Qur’an and the Sunnah
- Interpretation of the sharia
- The role of scholars and sharia supervisory boards in Islamic
- How Islamic finance differs from conventional banking
- The Islamic economic model
- Key Islamic finance principles
- Valid commercial contracts in Islamic finance
- Key conditions for validity of contracts
- Integrity of contractual arrangements
- Status and use of promises
- Part ISLAMIC FINANCE IN PRACTICE
- Key transaction types in Islamic finance
- Equity-type: transactions
- Mudarabah (Partnership – one party contributes capital)
- Musharakah (Partnership – all parties contribute capital)
- Asset finance:
- Murabaha (Sale of an asset at a known profit mark-up)
- Ijarah (Leasing of an asset)
- Istisn’a (Sale of an item to be constructed or manufactured)
- Salam (Sale of fungible item yet to be produced)
- Other key transaction types:
- Wakala (Agent providing services to a Principal)
- Hawalah (Transferring a debt)
- Rahn (Providing security)
- Kafalah (Providing a guarantee)
- Mechanics of a sukuk transaction
- Types of sukuk
- Asset-based versus asset-backed sukuk
- Sukuk and the secondary market
- A strong future for sukuk
- Sharia-compliant investments and wealth management
- Sharia-compliant investments
- Zakat by Iqbal Nasim
- Sharia-compliant estate distribution and Islamic wills by Haroon Rashid
- Takaful – Islamic insurance
- Takaful – Islamic insurance
- Sharia perspective on conventional insurance
- Takaful – the Islamic alternative
- Takaful models
- Types of takaful policy
- The future of the takaful industry
- The future of Islamic finance
- Recommendations for success by IFSB and IDB/IRTI
- Opinion pieces
- The Christian view of usury by Robert Van de Weyer
- The future of Islamic finance by Dr Sayd Farook
- The secret to long-term success: get the direction of travel right
- by Faizal Karbani
About the author
Faizal Karbani is the founder and CEO of Simply Sharia Ltd, a UK firm solely dedicated to providing sharia-compliant financial solutions along with supporting Islamic finance through recruitment and training.
Over the last decade Faizal has become a leading UK practitioner of the industry. Highly trusted and recognised, he supported both the technical team advising the UK government on tax implications for sharia-compliant products and the government consultation on sharia-compliant student finance in Britain. Under his leadership and direction, Simply Sharia launched the first certified sharia-compliant green energy EIS, offered to UK investors in .
His clients have included Qatar Islamic Bank in London (QIB UK), Gatehouse Bank, Arab Banking Corporation, Barclays Capital, British Bankers Association (BBA) as well as a host of individuals and other businesses.
Faizal is also an Approved Trainer for the Islamic Finance Qualification (IFQ) and undertakes bespoke Islamic finance training programmes for professionals. He is a regular speaker on Islamic finance related topics and is a member of the Advisory Board appointed by the University of Nottingham in respect of its Islamic finance programmes.
Prior to working in Islamic finance, Faizal, who is a qualified Chartered Accountant, worked at PriceWaterhouseCoopers and GlaxoSmithKline.
Islam has a profound effect on how Muslims invest and manage their wealth. The following are key influencing factors:
- Investments must be sharia-compliant – the subject/activity under- pinning the financial transaction has to be a permitted activity (e.g. cannot relate to alcohol, gambling, etc.), it has to be free of interest, it has to be free from contractual ambiguity/uncertainty and an investor can seek a return only if they take some commercial risk in the investments they are making.
- Contractual principles (as per Chapter 4) need to be adhered to.
- The sharia has comprehensive guidance on how one’s wealth should be distributed on death, i.e. inheritance laws.
- It is obligatory for Muslims who possess a certain minimum level of wealth to give a part of their wealth in charity every year (system of zakat).
- As we saw in Chapter 3, Islam has a distinctive perspective on wealth and upholds certain principles and values with respect to wealth.
In this chapter, we will focus on:
- sharia-compliant investments – what are the key asset classes and key principles underpinning each asset class;
- zakat – the obligatory charity due on wealth acquired. The chief executive of the National Zakat Foundation in the UK, Iqbal Nasim, discusses the key principles underpinning this important area;
- Islamic wills and estate planning – a leading practitioner in this field, Haroon Rashid, gives an explanation of how important this area is from an Islamic perspective, the key principles underpinning Islamic inher- itance law, and the implications for practitioners in light of practical issues such as taxes levied on inheritance. This area is a fundamental part of sharia-compliant wealth management.
There is a need for investments that meet the requirements of the sharia – invariably planning for life events such as university fees for our children or having the best possible income in retirement, or simply putting surplus monies to productive use requires investing money for the future.
There are now more than 1,000 sharia-compliant funds around the globe (see Figure 7.1),…
Human beings have long recognised the need to protect themselves against the impact of risks they face, such as natural disasters, travel accidents, unemployment, sickness or dying at a young age and leaving a vulnerable young family behind.
Islam teaches its followers to put their trust in God; at the same time, it also encourages them to use the resources, skills and abilities bestowed on them by God to act responsibly and protect their wealth and property.
In this chapter we will look at the reasons why conventional proprietary insurance is not regarded as sharia-compliant and explore the Islamic alter- native called takaful.
SHARIA PERSPECTIVE ON CONVENTIONAL INSURANCE
In conventional proprietary insurance schemes, a commercial entity seeks to provide insurance cover for a particular risk by charging an insurance premium and make a profit net of any claims and other costs. This model is at odds with the sharia in three key respects:
Gharar (excessive uncertainty)
Insurance aims to provide protection against an event that could happen but is uncertain in terms of if or when it might happen. Actuaries model the probability of events occurring and seek to set insurance premiums at a level that both compete effectively in the market and maximise profit for the insurance company. These attempts to model the future will invariably be imperfect. Some uncertainty will exist in almost all commercial dealings (for example, when a consumer buys fruit, there is a chance that it will not be ripe). This level of uncertainty is seen as natural and accepted in the market. However, the sharia does not tolerate ‘excessive’ levels of uncertainty (gharar) and most scholars are of the opinion that the uncertainty found in commercial insurance contracts falls into this category.
Related to the fact that the occurrence of certain events is uncertain, sharia scholars are generally of the opinion that the premium charged by commercial insurance companies is similar to placing a bet (maysir) on whether a particular event will happen. So this is another sharia objection to
ntional proprietary insurance.
Mastering Islamic Finance
In conventional insurance schemes, either the policy holder will receive more than they pay as a premium (if a successful claim is made) or the insurance company will receive more in premiums than it pays out in claims. Given that the ultimate outcome is a money-for-money exchange, i.e. a premium paid in money is exchanged for a potential payout in money later, and that these two values will invariably be different, in a commercial context this would amount to riba. Riba can also arise if the insurance company invests in interest-bearing instruments such as gilts.
TAKAFUL – THE ISLAMIC ALTERNATIVE
Takaful means mutual cooperation or joint guarantee. It refers to a not-for- profit set-up in which individuals club together by contributing into a common pool. The monies in this fund are used to pay out to members of the pool who have been afflicted by certain events that the members have mutually agreed to cover each other for – travel accidents, for example. The monies left in the pool after paying claims belong to the members.
The Takaful Act enacted by Malaysia in 1984 defines takaful as follows:
A scheme based on brotherhood, solidarity and mutual assistance, which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for the purpose.
The sharia violations of riba, gharar and maysir that are prevalent in conven- tional commercial insurance contracts do not occur in such a system. Instead of a premium payable in a commercial insurance contract, pool members donate (tabarru means donation) a sum of money to the pool. If a member is paid compensation from the pool, this payment is regarded as a form of mutual assistance rather than as a countervalue paid under a contract of exchange. Hence the issue of riba does not arise in such a system.
Similarly, the non-commercial nature of the arrangement means that the prohibitions of gharar and maysir do not apply. It is in a commercial context that the sharia demands as much certainty as possible in the exchange between the two parties to a transaction (i.e. absence of gharar) and forbids gambling/betting (maysir) by either party.
Takaful also differs from commercial proprietary insurance with regard to who bears the risk. In commercial proprietary insurance the risk is transferred to the insurance company, which takes on the risk(s) covered in the insurance policy in exchange for the insurance premium. Under the takaful system, risk is not transferred to any third party but is borne by and distributed among the members of the pool.
Takaful – Islamic insurance
The relationship between the pool members and the pool is framed in terms of two binding promises: the members promise to contribute to the fund, and the pool promises to pay out in the event of a claim.
The takaful system is virtually identical to the concept of mutual insurance, which is still alive today and has a deep heritage in the United Kingdom, rooted in local communities putting money into a common pool to protect members from certain misfortunes.
It is worth noting at this point that in markets such as the United Kingdom, the provision of takaful products is limited. Where the law demands protection (for example, car insurance is required to drive a car in the United Kingdom) and there is no sharia-compliant alternative available, scholars have permitted the use of conventional insurance products. This is based on the fact that it is a legal requirement of the country and Islamically it is of paramount importance to be law abiding and maintain social order and harmony in society. Where there is no legal imperative but there is no sharia-compliant alternative available, scholars are reluctant to permit the use of conventional insurance products, but depending on the circumstances of a particular case, may endorse it if it is deemed that the potential loss to
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