Islamic Capital Markets: Products and Strategies

Islamic Capital Markets......Page 3
Contents......Page 7
About the Contributors......Page 17
Preface......Page 27
PART I GENERAL CONCEPTS AND LEGAL ISSUES......Page 31
1.1 Introduction......Page 33
1.2.1 General Observations......Page 34
1.2.2 Specific Provisions......Page 36
Notes......Page 43
2.2 Product Development, Financial Engineering, and Innovation in Islamic Finance......Page 53
2.2.1 Principles to be Considered in Product Development, Innovation, and Financial Engineering......Page 54
2.2.3 Failure of Innovation and Financial Engineering......Page 55
2.3.1 Sources of Shariah Law......Page 56
2.3.2 Maqasid al Shariah......Page 61
2.3.3 Legal Maxims......Page 63
2.3.4 Regulators and Standard-Setting Organizations: Regulations, Standards, and Parameters for Islamic Finance (AAOIFI, IFSB, and Others: Shariah Standards, Corporate Governance, and Prudential Regulations)......Page 64
2.4.1 Shariah-Based Products......Page 67
2.5 Process of Product Development in Shariah-Based Products......Page 69
2.5.1 Example of Product Development in Shariah-Based Product: Ijarah Muntahiah Bittamlik (Leasing Ending with Ownership)......Page 70
2.6 Process of Product Development in Shariah-Compliant Products......Page 71
2.7.1 The Flow of the Process of Approval of the New Product: From the Product Owner to the Market Place......Page 73
2.7.2 Mechanism for Obtaining Rulings......Page 76
2.7.3 Position of the IFI with Regard to the Resolutions of SSB and IFSB Principles Governing the SSB......Page 77
2.8 The Methodology Used in the Approval Process......Page 79
2.8.3 Methodology of fatawa in Islamic Finance in Issuing the Islamic Ruling......Page 80
2.8.4 Methodology of Presenting fatawa in Islamic Finance......Page 81
2.9 Product Approval in Securities in Islamic Capital Markets......Page 82
2.9.2 Primary Activities Criteria......Page 83
2.9.3 The Product Approval of Securities in Mixed Companies......Page 84
2.9.5 Quantitative and Qualitative Approach in Screening Process in Capital Market......Page 86
2.9.9 Relationship of Image and Principle of Shariah......Page 87
2.10.1 Case 1: Wawasan Holding......Page 90
2.10.2 Case 2: Gemada Berhad......Page 91
2.11.1 FTSE Shariah Index Screening Methodology......Page 92
2.11.3 DJIM Shariah Screening Process......Page 93
Notes......Page 97
3.1 Introduction......Page 99
3.2 The Conflicting Ideologues within Islamic Finance......Page 100
3.3 Core Motivations of Conventional Business Models and Their Social Responsibility Mandates......Page 101
3.4.1 “Taqwa-Centricity” (God Consciousness) and Human Beings as Vicegerents on Earth......Page 103
3.4.2 Primary Responsibilities: To Educate and Establish Justice......Page 104
3.4.4 Individual vs. Institutional Responsibility......Page 105
3.5 Case for Broader Social Responsibility Mandate......Page 106
3.5.1 IFIs’ Special Obligation......Page 107
3.5.3 New Realities......Page 108
3.6.1 Regularize a Framework of Mandatory and Recommended Social Responsibilities......Page 109
3.6.2 Mandatory Forms of Social Responsibility......Page 110
3.6.3 Recommended Forms......Page 111
3.7 Disclosure as a Means of Accountability......Page 114
3.8.1 Key Lessons from Current Practices......Page 115
Notes......Page 116
References......Page 118
Further Reading......Page 119
4.1 Introduction......Page 121
4.2.1 Relevant Legislations Regulating ICM in Malaysia......Page 122
4.2.2 Guidelines and Practice Notes......Page 125
4.3 The Nature of Disputes Among Market Players......Page 126
4.4.1 Jurisdiction of the High Court vs Shariah Court of Appeal......Page 127
4.4.2 Shariah Dispute Resolution in the Malaysian ICM......Page 128
4.4.3 Inadequacy of the Existing Legal Reforms......Page 131
4.5.1 The Saudi Arabian Model......Page 132
4.5.2 United Arab Emirates Dispute Resolution Framework for the Capital Market......Page 134
4.5.3 A Hybrid Model for the Malaysian Islamic Capital Market......Page 135
4.6 Conclusion......Page 136
Case Studies......Page 137
References......Page 143
5.1 Introduction......Page 145
5.2 Shariah Scholars in the GCC – A Network Analytic Perspective......Page 146
5.3 Good Governance-Related Points......Page 148
5.4 Summary......Page 153
References......Page 154
6.1 Introduction......Page 155
6.2 Jewish Funds......Page 156
6.4 Socially Responsible Investing (SRI) Funds......Page 157
6.5 Islamic Funds Redux......Page 158
6.6 Alpha: Quantitative Results of Abrahamic Funds......Page 162
6.7 Amana and the Benchmarks......Page 165
6.8 Conclusion......Page 166
Notes......Page 167
References......Page 172
PART II GLOBAL ISLAMIC CAPITAL MARKET TRENDS......Page 175
7.1 Introduction......Page 177
7.2.1 Forwards and Futures......Page 178
7.2.2 Options......Page 179
7.2.3 Swaps and Currency Transactions......Page 181
7.3 Substantive Shariah Objections and Resolutions......Page 183
7.3.1 Existence, Ownership, Possession......Page 184
7.3.2 Speculation, gharar, and maysir......Page 185
7.4.1 Cross-currency Swap......Page 188
7.4.2 Profit Rate Swap......Page 191
7.4.3 FX Option......Page 193
7.4.4 Total Return Swap......Page 194
7.5 ISDA/IIFM Tahawwut Master Agreement, Published 1 March 2010......Page 196
Notes......Page 197
8.1 Introduction......Page 201
8.2 Incentive Problems of Conventional Securitization......Page 202
8.3 The Rise of Islamic Finance......Page 205
8.4.1 Definition of Islamic Securitization......Page 206
8.4.2 Current Market Situation......Page 207
8.4.3 Sukuk – The Good Side of Securitization?......Page 209
8.4.5 Legal Challenges – Regulatory Consolidation and Supervisory Harmonization......Page 211
Notes......Page 212
References......Page 213
9.1 Insurance under Islam......Page 215
9.2 Organizational Structures and Operational Models......Page 218
9.2.1 Mudaraba Model......Page 220
9.2.2 Wakala Model......Page 221
9.2.4 Waqf Model......Page 222
9.3.1 Products......Page 223
9.3.2 Prospects......Page 225
References......Page 228
10.1 Looking for Islamic Derivatives: A Legal Oxymoron?......Page 231
10.2 Options, Western Law, and Islamic Justice......Page 233
10.3 Khiy¯a r ash-shart. and al-’urb ¯ un as Islamic Analogues to Options: Critical Elements......Page 234
10.4 In Search of a Shariah-Based Substitute: The ij ¯a ra wa-hiba Structure......Page 236
10.5 Trading ij ¯a ra wa-hiba Options? Clearing House, Issuance of S. uk ¯ uk al-manfa‘a, and Lack of Speculation......Page 241
10.6 Pricing S. uk ¯u k al-manfa‘a in Relation to the Rental Rate of Return......Page 243
10.7 ij ¯a ra wa-hiba Options and the Path towards Legitimacy References......Page 245
PART III NATIONAL AND REGIONAL EXPERIENCES......Page 249
11.1 Introduction......Page 251
11.2.1 The Securities Commission Malaysia......Page 252
11.2.2 The Shariah Advisory Council (SAC)......Page 253
11.3.1 The Capital Market Master Plan......Page 255
11.3.3 Malaysian Sukuk......Page 256
11.3.4 Malaysian Shariah-Compliant Equities and Fund Management......Page 257
11.3.5 Government, Regulation, and Taxation......Page 259
11.3.6 Promoting International Linkages......Page 260
11.4 Conclusion......Page 261
Notes......Page 262
12.1.1 Brief Background on Islamic Finance......Page 265
12.1.2 Development and Market Potential of Islamic Finance......Page 266
12.1.4 Immigrants and the Muslim Community in Germany......Page 268
12.1.5 Products and Services Focused on the Muslim Community in Germany......Page 269
12.1.6 Status Quo of Islamic Finance and Shariah-Compliant Products in Germany......Page 270
12.1.7 One Clear Objective is to Attract Major Muslim Investors......Page 271
12.2 Research and Studies on the Muslim Population in Germany......Page 272
12.2.1 Research and Studies on Financial Services and Islamic Finance......Page 274
12.3.2 Methodology and Approach......Page 276
12.3.3 Description of the Dataset......Page 277
12.3.4 Quantitative Results......Page 278
12.4 Conclusion and Practical Implications for Financial Institutions in Germany......Page 290
12.4.3 Elaboration of Marketing Activities......Page 292
Notes......Page 293
References......Page 295
13.1 Legal Aspects......Page 297
13.1.1 The Positions of Public Authorities......Page 298
13.1.2 The Trends......Page 301
13.2 Economic Dimensions......Page 302
13.2.1 The Demand Side......Page 303
13.2.2 The Supply Side......Page 305
References......Page 307
14.1 Introduction......Page 309
14.2.1 The Development of an Ijara-Istisna’a Contract for Real Estate Construction......Page 310
14.2.2 The First Entrants......Page 312
14.2.3 The Entry of Private Equity......Page 313
14.2.4 Growth Accelerates......Page 316
14.2.5 Conclusion......Page 320
14.3 Wholesale Islamic Finance within the United States......Page 321
14.4 Mutual Funds and Exchange Traded Funds......Page 325
14.5 Legal, Tax, and Regulatory Issues in Islamic Finance......Page 327
14.6 Sukuk Issued by US-Based Companies......Page 330
14.7 Conclusion......Page 332
Notes......Page 333
15 An Analysis of Global Trends and Regional Pockets in the Application of Islamic Financial Contracts in Malaysia and the Gulf Cooperation Council......Page 337
15.1 Regional Pockets and Global Trends......Page 339
15.2 The Influence of the Shariah Framework......Page 340
15.3 The Function of Shariah Boards......Page 341
15.4 The Role of Shariah Boards in Malaysia......Page 344
15.5 The Role and Function of Shariah Boards in the GCC......Page 346
15.6 Convergence Between the GCC and Malaysia......Page 347
15.7 Slight Divergence in Interpretations......Page 348
15.8 The Impact of the Regulatory Dimensions of the Jurisdictions......Page 349
15.9 The Role of the Creation of International Hubs in Harmonizing Views......Page 357
15.10 Conclusion......Page 361
Notes......Page 363
16.1 Introduction......Page 371
16.2.1 The Australian Economy......Page 372
16.3 Potential Problems in the Development of Islamic Finance in Australian Market......Page 373
16.3.4 Doubt Concerning Shariah-Compliant Finance and Investment Products......Page 374
16.3.7 Absence of a Standard Rate of Return......Page 375
16.3.10 International Perspective......Page 376
16.4 Prospects of Islamic Finance in Australia......Page 377
16.4.2 Prospects of Islamic Banking and Finance in the Academic Sphere......Page 379
16.5.2 Suggestions and Policy Recommendations for the Study......Page 385
References......Page 386
PART IV LEARNING FROM ISLAMIC FINANCE AFTER THE GLOBAL FINANCIAL CRISIS......Page 389
17.1 Introduction......Page 391
17.2 Causes of the Global Financial Crisis......Page 392
17.3.1 Implications for the Global Economy......Page 395
17.3.2 Implications for Islamic Finance......Page 396
17.4.1 Islamic Theory of Finance and the Global Financial Crisis......Page 397
17.4.2 The Current Financial Crisis Would not have Occurred Under an Islamic Financial System......Page 400
17.4.3 A Systemic Trade-off Between Risks and Returns......Page 403
17.5.1 Types of “Bad” Risks......Page 405
17.5.2 Individual vs. Systemic Effects of “Bad” Risks......Page 407
17.6.1 Reputational Risk and the Recreation of Trust......Page 408
17.6.2 Real vs. Virtual Transactions: sukuk and the Escape from the Debt Trap......Page 409
17.7 Conclusions and Outlook......Page 410
17.7.2 Convergence Between Conventional and Islamic Financial Industry......Page 411
Notes......Page 412
References......Page 413
18.1.1 Financial Engineering and Financial Innovation......Page 415
18.2.1 Value of Innovation......Page 416
18.2.3 Regulatory Arbitrage......Page 417
18.3 Principles of Islamic Financial Engineering......Page 418
18.3.1 Principle of Balance......Page 419
18.3.2 Principle of Acceptability......Page 420
18.3.3 Principle of Integration......Page 422
18.3.4 Principle of Consistency......Page 423
18.4 Strategies for Product Development......Page 424
18.4.1 Imitation......Page 425
18.4.2 Mutation......Page 426
18.4.3 Satisfaction......Page 427
18.5.1 Fragmented Approach to Shariah......Page 428
References......Page 429
19.1 Introduction......Page 431
19.2.1 Shariah Issues in Investment Policy Analysis......Page 432
19.2.3 Shariah Issues in Portfolio Construction......Page 434
19.3.1 Shariah Compliance of Asset Classes......Page 435
19.3.2 Shariah Screening......Page 437
19.3.3 Purification......Page 440
19.4 Fund Performance......Page 442
Notes......Page 443
References......Page 444
20.1 Modes of Islamic Microfinance......Page 445
20.1.2 Indigenous Models......Page 446
20.2.1 Instruments for Mobilization of Funds......Page 447
20.3 Islamic Microfinance Projects Across the Globe......Page 448
20.3.2 South Asia......Page 449
20.4.1 Shariah Compliance......Page 450
20.4.3 Agency Problems......Page 452
20.5.1 Linkage with Banks......Page 454
20.5.4 Securitization......Page 455
Further Reading......Page 457
Index......Page 459