Contracts and Deals in Islamic Finance
By highlighting the underlying themes in Islamic finance and assessing the current practices, this book gives readers the solid understanding and up-to-date perspective that form a solid foundation upon which successful Islamic finance is practiced. For a solid introduction to the Islamic finance industry, Contracts and Deals in Islamic Finance is an accessible, practical guide.
Contracts and Deals in Islamic Finance
C ontracts and Deals in Islamic Finance is a unique idea for which I have my professors and industry peers to thank. It is a collaborative effort between two conventional bankers with Islamic roots and aims at addressing some basic fundamentals of Islamic finance and banking and explores complex enhancements to traditional contracts that are the pillars of Islamic banking.
This work we hope will be of use not only to students, beginners, and practitioners, but banks, central banks and governments that are trying to get a grip on this subject.
This work has been designed keeping in mind the cynic and the skeptic who feels that Islamic finance is a mere twisting of legal terms to achieve ends that replicate loans. To such a cynic we can only ask him or her to read the book. The coauthor of this book, who approached the subject of Islamic finance with equal skepticism, however, at one point had to question his own assumptions and expectations.
One key aspect that is explored is what do we as Muslims expect from Islamic financial institutions (IFIs)? If we expect IFIs to finance us with money and then forgive the resulting debt obligations later on, then this is an unrealistic expectation, as we see later that IFIs are not financing borrowers using their own money, but that of their depositors. If we expect IFIs to offer loans on "generous" terms, on terms that make losses for the IFI, then this is also incorrect as Islam allows a Muslim a right to profit making within certain conditions. If we expect IFIs to finance us money and only ask to be repaid when and if we as borrowers generate profits from investing the mobilized funds, then this expectation can be accepted but provided the debtor fulfills certain covenants of contracts and acts with a sense of responsibility as well.
Is it the purpose of Islamic finance to reduce poverty, or to extend money to poor people? This expectation can be addressed, but fundamentally, this depends on the type of IFI concerned. If the IFI is engaged in microfinance, then the answer would be yes, but if the IFI exists for commercial reasons, in that it exists to make a profit, then an IFI can no more be expected to give loans to the poor with high risk of default than a shoemaker can be expected to sell shoes at cost price to the poor.
In essence, IFIs exist not to make benevolent loans, to give charity, or to eradicate poverty, but to generate profits for shareholders and capital providers from providing financingproviders from providing financing through shariah -compliant financial products.
IFIs are as entitled to profit as any other commercial enterprise within the halaal industry. They are a component of a halaal economy and play the role of financial intermediaries.
The world of finance is rather different than the world of service providers, trading, or manufacturing. In the world of manufacturing, inventors evolve into entrepreneurs and raise funds through different means, either from banks or by selling shares in their businesses. The created entity, the firm, however, uses its own funds to manufacture goods and then sells them at a profit. Traders purchase goods from one market at a cost price and sell them in another market at a profit, at times in different countries and in different currencies. Service providers also use their capital to set up certain infrastructures to enable them to operate and then charge customers a price for the services they render.
Financial institutions are unique in that they are set up by shareholders who combine their capital to set up a retail bank, a commercial bank, an investment bank, an asset management company, a brokerage firm, a mutual fund, a finance company, or an insurance company. But shareholders do not lend their money to borrowers in the case of the banking model.
Shareholders provide capital to set up a conventional bank