The Islamic Banking and Finance Workbook: Step-by-Step Exercises to help you Master the Fundamentals of Islamic Banking and Finance

143 Pages·2011·3.03 MB·English

by  Brian B. Kettell

The Islamic Banking
and Finance Workbook
ForothertitlesintheWileyFinanceSeries
pleaseseewww.wiley.com/finance
The Islamic Banking
and Finance Workbook
Step-by-Step Exercises to Help You Master the
Fundamentals of Islamic Banking and Finance
Brian Kettell
A John Wiley and Sons, Ltd., Publication
Thiseditionfirstpublishedin2011
©2011BrianKettell
Registeredoffice
JohnWiley&SonsLtd,TheAtrium,SouthernGate,Chichester,WestSussex,PO198SQ,UnitedKingdom
Fordetailsofourglobaleditorialoffices,forcustomerservicesandforinformationabouthowtoapplyfor
permissiontoreusethecopyrightmaterialinthisbookpleaseseeourwebsiteatwww.wiley.com.
Therightoftheauthortobeidentifiedastheauthorofthisworkhasbeenassertedinaccordancewiththe
Copyright,DesignsandPatentsAct1988.
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,in
anyformorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,exceptaspermittedbythe
UKCopyright,DesignsandPatentsAct1988,withoutthepriorpermissionofthepublisher.
Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmaynotbe
availableinelectronicbooks.
Designationsusedbycompaniestodistinguishtheirproductsareoftenclaimedastrademarks.Allbrandnamesand
productnamesusedinthisbookaretradenames,servicemarks,trademarksorregisteredtrademarksoftheir
respectiveowners.Thepublisherisnotassociatedwithanyproductorvendormentionedinthisbook.This
publicationisdesignedtoprovideaccurateandauthoritativeinformationinregardtothesubjectmattercovered.It
issoldontheunderstandingthatthepublisherisnotengagedinrenderingprofessionalservices.Ifprofessional
adviceorotherexpertassistanceisrequired,theservicesofacompetentprofessionalshouldbesought.
ISBN978-0-470-97805-4(paperback)
ISBN978-1-119-99062-8(ebook)
ISBN978-1-119-99063-5(ebook)
ISBN978-1-119-99126-7(ebook)
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
Typesetin10/12ptTimesbyAptaraInc.,NewDelhi,India
PrintedinGreatBritainbyCPIAntonyRowe,Chippenham,Wiltshire
TomywifeNadia,oursonAlexeianddaughterAnna.Nadiakeepsthe
whole fleetonanevenkeelwithonlytheoccasionalshipwreck.
Contents
Preface xi
AbouttheAuthor xiii
1 WhatDoYouKnowAboutIslam? 1
1.1 LearningOutcomes,SummaryOverviewandProblems 1
1.1.1 LearningOutcomes 1
1.1.2 SummaryOverview 1
1.2 Questions 3
1.3 Answers 8
2 SourcesofSharia’aLawandtheRoleofSharia’aBoards 11
2.1 LearningOutcomes,SummaryOverviewandProblems 11
2.1.1 LearningOutcomes 11
2.1.2 SummaryOverview 11
2.1.3 Sharia’aSupervisoryBoard 14
2.2 Questions 14
2.2.1 General 14
2.2.2 ResponsibilitiesofthePartiestotheSharia’aContracts 16
2.2.3 IslamicFinanceTerminologyQuiz 18
2.3 Answers 20
2.3.1 General 20
2.3.2 ResponsibilitiesofthePartiestotheSharia’aContracts 21
2.3.3 IslamicFinanceTerminologyQuiz 22
3 PrinciplesofIslamicBankingandFinance 23
3.1 LearningOutcomes,SummaryOverviewandProblems 23
3.1.1 LearningOutcomes 23
3.1.2 SummaryOverview 23
3.1.3 HistoryofIslamicBanking 24
3.1.4 IslamicBankingPrinciples 24
3.2 Questions 25
3.2.1 General 25
3.2.2 IslamicBankingPrinciples 31
viii Contents
3.3 Answers 32
3.3.1 General 32
4 TheMurabahaContractasaModeofIslamicFinance 37
4.1 LearningOutcomes,SummaryOverviewandProblems 37
4.1.1 LearningOutcomes 37
4.1.2 SummaryOverview 37
4.2 Questions 39
4.2.1 WhataretheFeaturesoftheMurabahaContract? 39
4.2.2 TheMurabahaContract 39
4.2.3 RiskswiththeMurabahaContract 45
4.3 Answers 46
4.3.1 WhataretheFeaturesoftheMurabahaContract? 46
4.3.2 TheMurabahaContract 46
4.3.3 RiskswiththeMurabahaContract 48
5 TheMudarabaContractasaModeofIslamicFinance 49
5.1 LearningOutcomes,SummaryOverviewandProblems 49
5.1.1 LearningOutcomes 49
5.1.2 SummaryOverview 49
5.2 Questions 52
5.2.1 WhataretheFeaturesoftheMudarabaContract? 52
5.2.2 TheMudarabaContract 52
5.2.3 MusharakaversustheMudarabaContract 57
5.2.4 RiskswiththeMudarabaContract 58
5.3 Answers 59
5.3.1 WhataretheFeaturesoftheMudarabaContract? 59
5.3.2 TheMudarabaContract 59
5.3.3 MusharakaversustheMudarabaContract 62
5.3.4 RiskswiththeMudarabaContract 63
6 TheMusharakaContractasaModeofIslamicFinance 65
6.1 LearningOutcomes,SummaryOverviewandProblems 65
6.1.1 LearningOutcomes 65
6.1.2 SummaryOverview 65
6.1.3 CriticismofMusharaka 68
6.2 Questions 68
6.2.1 WhataretheFeaturesoftheMusharakaContract? 68
6.2.2 TheMusharakaContract 69
6.2.3 RiskswiththeMusharakaContract 73
6.3 Answers 74
6.3.1 WhataretheFeaturesoftheMusharakaContract? 74
6.3.2 TheMusharakaContract 74
6.3.3 RiskswiththeMusharakaContract 75
Contents ix
7 TheIjaraContractasaModeofIslamicFinance 77
7.1 LearningOutcomes,SummaryOverviewandProblems 77
7.1.1 LearningOutcomes 77
7.1.2 SummaryOverview 77
7.2 Questions 80
7.2.1 WhataretheFeaturesoftheIjaraContract? 80
7.2.2 TheIjaraContract 81
7.2.3 TheIjarawaIqtinaContract 82
7.2.4 TheIjaraContractinmoredetail 82
7.2.5 RiskswiththeIjaraContract 86
7.3 Answers 86
7.3.1 WhataretheFeaturesoftheIjaraContract? 86
7.3.2 TheIjaraContract 87
7.3.3 TheIjaraWaIqtinaContract 87
7.3.4 TheIjaraContractinmoredetail 88
7.3.5 RiskswiththeIjaraContract 89
8 TheIstisna’aContractasaModeofIslamicFinance 91
8.1 LearningOutcomes,SummaryOverviewandProblems 91
8.1.1 LearningOutcomes 91
8.1.2 SummaryOverview 91
8.2 Questions 93
8.2.1 WhataretheFeaturesoftheIstisna’aContract? 93
8.2.2 TheIstisna’aContract 94
8.2.3 Istisna’aandSalamContracts 96
8.2.4 RiskswiththeIstisna’aContract 97
8.3 Answers 97
8.3.1 WhataretheFeaturesoftheIstisna’aContract? 97
8.3.2 TheIstisna’aContract 98
8.3.3 Istisna’aandSalamContracts 99
8.3.4 RiskswiththeIstisna’aContract 99
9 TheSalamContractasaModeofIslamicFinance 101
9.1 LearningOutcomes,SummaryOverviewandProblems 101
9.1.1 LearningOutcomes 101
9.1.2 SummaryOverview 101
9.2 Questions 103
9.2.1 WhataretheFeaturesoftheSalamContract 103
9.2.2 TheSalamContract 104
9.2.3 Istisna’aandSalamContracts 106
9.2.4 RiskswiththeSalamContract 107
9.3 Answers 108
9.3.1 WhataretheFeaturesoftheSalamContract 108
9.3.2 TheSalamContract 108
9.3.3 Istisna’aandSalamContracts 110
9.3.4 RiskswiththeSalamContract 110
x Contents
10 Takaful:IslamicInsurance 111
10.1 LearningOutcomes,SummaryOverviewandProblems 111
10.1.1 LearningOutcomes 111
10.1.2 SummaryOverview 111
10.1.3 TakafulProductsareBasedonThreeMainBusinessModels 112
10.2 Questions 113
10.2.1 TakafulTerminologyandConcepts 113
10.2.2 TakafulPrinciples 114
10.3 Answers 115
10.3.1 TakafulTerminologyandConcepts 115
10.3.2 TakafulPrinciples 119
Glossary 121
Bibliography 127
Index 135
Preface
Theongoingturbulenceintheglobalfinancialmarketshasdrawnattentiontoanalternative
systemoffinancialintermediation:Islamicbankingandfinance.Thissectorisnowoneofthe
fastestgrowingwithinthemarketplaceandhas,sofar,remainedonthesidelinesofthisfinancial
unrest.SincetheinceptionofIslamicbanking,aboutthreedecadesago,thenumberandreach
ofIslamicfinancialinstitutionsworldwidehasrisensignificantly.InstitutionsofferingIslamic
financialservicesconstituteasignificantandgrowingshareofthefinancialsysteminseveral
countries.
Indeed the Islamic finance industry is in the midst of a phenomenal expansionary phase,
exhibiting average annual growth rates of about 15% in recent years. This rapid growth has
beenfuellednotonlybyasurgingdemandforSharia’a-compliantproductsfromfinanciersin
theMiddleEastandMuslimcountries,butalsobyinvestorsaroundtheworld,thusrendering
theexpansionofIslamicfinanceaglobalphenomenon.
Besidesitswidegeographicalscope,therapidexpansionofIslamicfinanceisalsotaking
placeacrossthewholespectrumoffinancialactivities,rangingfromretailbankingtoinsurance
andcapitalmarketinvestments.Butperhapsthemoststrikinghasbeenthefastgrowthofsukuk
(Islamicbonds),themostpopularformofsecuritisedcreditfinancewithintheindustry.Sukuk
issuancesoaredovertheperiod2001–2007althoughithasfallenbackmorerecently.
Educationalandtrainingmaterialfortheindustryis,however,laggingfarbehindthespeedat
whichtheindustryisevolving.Indeedthelackofqualityeducationalandtrainingmaterialhas
nowbecomeaseriousobstacletoeffectivetrainingandeducation.Thisworkbookisdesigned
to provide students and practitioners with the first ever workbook that enables readers to
test theirunderstanding of the underlying principles. Emphasis isplaced on multiple choice
questionsandtestsofthebasicconcepts.Suggestedanswersareprovided.
Itmustbestressedthatthenewnessoftheindustrymeansthatdesigningqualityeducational
and training material is fraught with problems. In addition to this newness the industry also
faces the challenge of changing Sharia’a interpretations of many of the products. Although
thisfactorshouldnotbeexaggerated,giventhatSharia’alawhasbeenaroundforcenturies,
theexistenceofdifferentschoolsofIslamicjurisprudence(Fiqh)combinedwithcontroversies
revolvingaroundsomeofthecontractshascertainlycreatedsomeuncertaintiesastohowthe
contractsarebeingapplied.
Theseaspectsmayleadtothepotentialforcontroversyoversomeofmysuggestedanswers.
Nodoubtsomeoftheanswerswillbedisputed.Icannotclaimtohaveuniversalanswersand
wouldaskthatreaderspleaseassumethatthesemaychangeovertime.