Ciarb conferenece- Islamic-finance and banking practices- Mohammad-Majd-Bakir

Islamic Finance and Banking PracticesReconciling Tradition and Modernity

Mohammad Majd BakirSenior ManagerAccounting and Governance Standards DevelopmentAAOIFI 31 October 2016

Kingdom of Bahrain, 31 October 2016

Chartered Institute of Arbitration (CIArb)

An Overview of the Islamic Economics and Islamic

Finance

Islamic Theory of Economics

• Officially, no “generally accepted” theory of economics does exist. Though it is there (like a hidden gem).

• There exists a collection of maxims, rules, and propositions that are idiosyncratic, and provide for a workable framework for Islamic economics.

• The framework is derived from Shari’ah sources, primary and secondary.

• The framework for a distinct “Islamic economics” is not isolated from other disciplines [it is broader than conventional economics].

MMB, AAOIFI, 31 October 2016


• Islamic economics has its own defining propositions:– Rationality: preservation and productive deployment of Mal

(wealth) [ وتنميته المال [صالح– Ceteris paribus: Islamic economists pioneered the proposition

“other factors being held constant” ( تساوت إذا بحالها، المسألةاألخرى الشروط استوت ((أو

– Relative Rarity: • Common resources vs. economic resources.• Limited resources vs. unlimited needs (economic problem).• frugality and prudence are called for in state of abundance, let alone

rarity. – Maximization: utilization, profit, yield, etc. Social and economic

impact is considered.



• Economic teachings of Islam:– Prohibition of harmful practices (Riba, Gharar, Maysir, etc.)– Dynamic potential of Zakah and charity.– Concept of property.– Promotion of economic activities (idle funds are considered

harmful to individuals and the society at large).– Role of state (Bait al-Mal, Dawawin, Hisbah, etc.)– Economic development and well-being (public finances, Waqf,

etc.).• Islamic economics is an integral part of the broader social system.• Islamic economics is embedded with ethical norms/values (e.g.,

benevolence, justice, sacrifice, altruism, etc).



• Principles of Islamic Economics :– Dual ownership (private and public).– Restricted economic freedom.– Social solidarity and balance.– Adherence to Shari’ah rules and guidelines:• Rule of “permissibility and impermissibility”• Rule of “vicegerency” (االستخالف)• The Rule of state intervention.


Maqasid al-Shari’ah: Framework for Distribution of Wealth

• Shari’ah involves striking a balance between the interest of individuals and the society.

• Shari’ah ordains that wealth must not be confined to and circulated among the rich. Hence, it imposes Zakah, a religious duty on capable and liable Muslims.

• It also encourages other means of wealth circulation: Waqf, social solidarity, charity, etc.

• Shari’ah promotes productive activities, ensuring economic expansion and wide-reaching benefits to all economic units and society’s stakeholders.


Assets Under Shari’ah

• Assets include anything that generates value, usufruct, or positive cash flows, now or in the future, alone or jointly with other assets. An asset must be “Mal Mutaqawwim”.

• Assets exclude money and measures of value and means of payment, and Mal Ghair Mutaqawwim.

• Concept of Mutaqawwim: a Shari’ah-compliant asset is one:– That is valuable in the sense that it has value (market

value, fair value, etc.).– That is free from prohibitions.



• Intangible assets: assets that have no physical form. Examples: patents, goodwill, usufruct, financial rights.

• Intangible assets have value and are deemed a source of wealth, and can generate benefits.

• According to majority of Fuqaha, intangible assets are Mal, and hence they belong to the broader category of assets.

• Tradability of intangible assets: assets established initially as legitimate rights (haqq al-khuluw), and easement rights (haqq al-irtifaq) can be traded and exchanged.



• However, rights such as Haqq al-Shufaa (pre-emption) is not tradable.

• AAOIFI adopted the stance that the sale of rights in the form of options is impermissible.

• Non-tradable rights, however, can be disposed of in many ways: exchange contracts, donation, rebates, partnerships, assignment of rights.

• Trading of receivables is a sale of debt, which Shari’ah prohibits.


Trade and Investment Under Shari’ah

• Trade and investment are the foundation of economic activities in the society.

• Islam expressly encourages trade and investment.• Shari’ah maxim: Ibahah Asliyah; all business activities are

permissible unless turned out to be otherwise (due to a specific prohibition).

• Shari’ah regulates such activities in line with the rules of permissibility and impermissibility.

• A great deal of such activities are governed by Urf (customary practices). This is a typical stance as to Muamalat (business activities and dealings).


Financing Economic Activities Under Shari’ah

• Specific Modes of financing: – Debt-based: Murabahah and deferred payment sales.– Forward sales: Salam and Istisna’a.– Partnerships: Musharakah, Mudharabah, Muzaraah

(agriculture), etc.– Usufruct transfer: Ijarah, IMT, Muqawalah .– Sukuk.– Qardh Hasan.

• Modes of financing are very flexible and can be used in many contexts (financing trade, acquisition of assets, lease of assets, agriculture, industry, construction, etc.)


Financing Economic Activities Under Shari’ahTrade Industry/

constructionAgriculture Financing assets

Murabahah × ×

Musharakah ×

Mudharabah ×

Muzara'ah/Mugharasah

× ×

Ijarah ×

Salam ×

Istisna'a ×

Sukuk × × × ×


Islamic Economic Precepts Relevancy in Global Markets

• Islamic finance accounts for 1% or slightly more of global finance.• However, its share and growth rates are rapidly increasing

(expanding base and more markets).• A standalone asset class.• Integration with the broader financial system is unavoidable in

certain areas.• Appeal to Non-Muslim investors:

– Better rates of return.– Idiosyncratic types of products.– Cautiously and prudently managed risks.– Diversification and risk considerations.


Are Islamic financial institutions immune to global financial crises?

• Not across the board. But to some extend they managed to withstand the latest crisis.

• Factors contributing to this fact:– Business model.– Focus on real economic transactions.– Lower leverage.– Credit and asset growth.– Vigilant calculation of some types of risks.– Better levels of capital adequacy.


Are Islamic financial institutions immune to global financial crises?

• The latest crisis revealed an opportunity for IFIs along with challenges. The way forward involves a number of actions:

• Improvement of liquidity management.• Harmonization and standardization to unleash

potential of sustainable growth.• Continuous upgrading of supervisory and legal

infrastructure.


Thank YouAccounting and Auditing Organization for Islamic Financial Institutions

(AAOIFI)+973 1737 5418

Kingdom of [email protected]

www.aaoifi.com


mailto:[email protected]

http://www.aaoifi.com/

Economy & Finance

Ciarb conferenece- Islamic-finance and banking practices- Mohammad-Majd-Bakir