A Primer on Islamic Finance by Bala Shanmugam

By Bala Shanmugam

This straightforward yet complete advent to Islamic finance is reader pleasant and vast in scope. It covers the fundamental options, markets, items, and problems with Islamic finance and indicates the various nature of Shari'a criteria in several nations.

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In this structure, the bank directly or indirectly buys an asset and immediately sells it to a customer on a deferred-payment basis. The customer then sells the same asset to a third party for immediate delivery and payment. The result is that the customer receives an immediate cash payment with an obligation to make deferred payments to the bank for the marked-up price of the asset. The asset financed is typically a freely tradable commodity, such as platinum or copper. Gold and silver are treated by the Shari’a as currency and cannot be used.

Such loans may be given to the needy for a fixed term. ” The use of qard refers to the fact that the giving of the loan depletes a certain amount of the lender’s property. The word “hassan” derives from the Arabic “ihsan,” which means kindness to others. So, hassan is an act that benefits a party other than the party from whom the act proceeds and requires no obligation from the receiving party. 8 The Islamic banking industry now encompasses Muslim and non-Muslim participants, including major Western financial institutions, such as Citibank, HSBC, Standard Chartered Bank, the Royal Bank of Scotland, the Australia and New Zealand Banking Group, and JPMorgan Chase.

The second factor slowing the pace of Islamic capital market development was the conflict surrounding interpretation of what constitutes Shari’a compliance (Iqbal and Tsubota 2006; Khan 2006). Yet, for the Islamic capital market to achieve sustainability, finding new and competitive products was imperative. Deregulation in several Muslim nations opened the door to the creation of two products largely responsible for the serious growth of the Islamic capital market—Shari’a-compliant equity funds and sukuk (Islamic bonds) (Iqbal and Tsubota 2006; Khan 2006).

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