Contracts and Deals in Islamic Finance

Foreword xv Preface xvii Acknowledgments xxi Product Offerings xxiii Introduction 1 CHAPTER 1 The Islamic Finance Space 5 Modern Phase of Islamic Finance 8 CHAPTER 2 Bai al Inah 13 Definitions of Bai al Inah 13 Bai al Inah Process Flow 15 Legal Issues with Bai al Inah 17 Bai al Inah as a Financial Product 19 Transfer of Ownership 20 Documentation Involved 21 Resolutions on Bai al Inah 21 Conclusion 22 CHAPTER 3 Murabahah, Bai Mu'ajjal, and Bai Bithman Ajil 23 Murabahah Sale/Credit Sale/Credit 25 Enhancements to Murabahah 26 Murabahah Working Capital 28 Credit-Based Sale/Markup or Riba 28 Bonafide Murabahah/True Sale 29 Trading House Model 31 Financial Services Division of a Manufacturer or Retailer 32 Bai Bithman Ajil 32 BBA with Inah 32 Conclusion 34 CHAPTER 4 Tawarruq 35 Issue of Price Fixing 37 Transfer of Title 38 Payment of Sales Tax 39 Applications of Tawarruq in Banking Products 40 Real Economic Activity 43 Conclusion 44 CHAPTER 5 Deferred Payment Sale or Credit Sale 45 Accounting Entries for Murabahah by Purchase Orderer 47 Accounting Entries for a Bai al Inah Contract 48 Pricing of Deferred Sales under Murabahah, BBA, Inah, and Tawarruq 49 Risk Treatment of Deferred Payment Sales 53 Fixed Income Portfolio 57 Conclusion 58 CHAPTER 6 Bai Al Wafa 59 Financial Assets as Subject of Sale 60 Bai Al Wafa and Sale of Equities 60 Bai Al Wafa and Sale of Sukuk 60 Conclusion 61 CHAPTER 7 Salaam and Istisna: Deferred Delivery Sale 63 Salaam 63 Istisna 68 Conclusion 70 CHAPTER 8 Bai al Sarf 75 Basic Rulings on Bai al Sarf 75 Conclusion 77 CHAPTER 9 Bai al Dayn 79 Purchase Price, Rental Payments, Receivables, and Debt 80 Rental Payments Due in an Ijara Contract 81 Financial Products 81 Sale of Equity 82 Conclusion 83 CHAPTER 10 Bai al Urbun 85 Conclusion 89 CHAPTER 11 Ijarah and Its Variants 91 Normal Ijarah 92 Accounting Entries for Ijarah Contract 93 Ijarah Muntahiya Bi Tamleek 95 Al Ijarah Thumma al Bai (AITAB) 95 Sale and Leaseback 96 Conclusion 97 CHAPTER 12 Wadiah 99 Forms of Wadiah 100 Enhancements to Wadiah 100 Money Creation 104 Conclusion 108 CHAPTER 13 Qard 111 Applications of the Contract of Qard 112 Qard as a Deposit Instrument 113 Recording of Qard 113 Conclusion 114 CHAPTER 14 Mudharabah 115 Simple Application of Mudharabah 117 Perpetual Mudharabah 118 Re-Mudharabah 118 Restricted Mudharabah and Unrestricted Mudharabah 118 Mudharabah as a Deposit 120 Mudharabah as a Fund 121 Interbank Mudharabah Placements 122 Indicative Rate of Return 122 Profit Sharing Ratio 123 Importance of Disclosure and Accounting Treatments 123 Mudharabah as an Asset Product 124 Accounting Treatment of Mudharabah Transactions 126 Conclusion 126 CHAPTER 15 Musharakah 129 Musharakah and Banking 130 Mushrakah as Asset Product 132 Pooling of Assets in Mushrakah 132 Mushrakah Mutanaqisah 133 Conclusion 138 CHAPTER 16 Hibah 139 Forms of Hibah 139 Restrictions on Hibah 140 Applications of Hibah in Banking 140 Enhancements to Hibah 142 Conclusion 143 CHAPTER 17 Kafalah 145 Who Can Be a Guarantor? 147 Products Based on Kafalah 148 Back-to-Back Guarantees 148 Conclusion 149 CHAPTER 18 Wakalah, Hawalah, Ibra, and Rahn 151 Wakalah 151 Hawalah 153 Ibra 156 Rahn 159 Conclusion 161 CHAPTER 19 Shariah: Sources, Interpretation, and Implementation 163 Modern-Day Ijtihad 165 Whose Shariah Is It, Anyway? 167 Conclusion 171 CHAPTER 20 Islamic Asset Management and Shariah Screening 173 Capital Markets 177 IPO Stage 177 Market Integrity 180 Market Regulation 183 Valuations 187 Zero Sum Game 188 The Role of Capital Markets in the Sphere of Islamic Finance 189 Farmer Sukuk or Equity Notes 189 Conclusion 190 CHAPTER 21 Pricing, Income Distribution, and Risk Sharing in Islamic Banks 191 Pricing of Islamic Financial Products 191 Price versus Shariah 194 Benchmark for Pricing 195 Criticism on Pricing Models 195 Profit Equalization Reserve 196 Income Distribution 199 Risk Sharing in Islamic Banks 208 Conclusion 208 CHAPTER 22 Sukuk and Rights of Sukuk Holders 209 Rights of Lenders in Debt Financing 210 Rights of Equity Holders 212 Rights of Bondholders 214 Use of Subsidiary Companies and Special-Purpose Vehicles 216 How Sukuk Financing Could Work? 221 Sale and Leaseback 223 The Role of the SPV 227 Other Sukuk Structures 228 Istisna Sukuk 228 Simple Sukuk 229 Conclusion 233 CHAPTER 23 Risk Management for Islamic Banks 235 Credit Risk 235 Market Risk 257 Liquidity Risk 269 Profit-Sharing Investment Account 269 Conclusion 273 References 273 CHAPTER 24 Asset/Liability Management for Islamic Banks 275 Gap Limit 279 Spot Rates and Forward Rates 279 Funding Scenarios 281 Short-Term and Long-Term Rates 281 Time Value of Money 288 Conclusion 290 CHAPTER 25 Takaful 291 Contract of Agency 291 Shariah Issues with Insurance 292 Contract of Tabarru 293 Product Menu 295 General Takaful Business Model 300 Concepts Related to Takaful 300 The Rights of the Fund over the Participant and the Rights of the Participant over the Fund 302 Pricing General Takaful Plans 304 Observations of General Takaful 310 Family Takaful 311 Basic Accounting Entries for Takaful 314 Takaful Operator Models 315 Distribution of Underwriting Surplus 316 Conclusion 317 CHAPTER 26 Pricing of Takaful Policies and Retakaful 319 Case Study 1: Corporate Medical Takaful Plan under General Takaful 319 Case Study 2: Corporate Medical Takaful Plan under General Takaful 322 Case Study 3: Corporate Family Takaful Plan 323 Detailed Mortality Table for Life Takaful 325 Mortality Tables and Probability Calculations 327 Risk Profiling 331 Conclusion 336 Afterword 337 About the Authors 341 Bibliography 343 Index 347