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Islamic Capital Markets: A Comparative Approach

توضیحات

"This excellent textbook is based on the premise that students have to understand the workings of conventional capital markets before they can appreciate how Islamic markets differ. Such an approach makes good sense. In practice, Islamic financial instruments aim to replicate their conventional equivalents while adhering to Shari'ah. Hence it is important to know the function of the instruments and their appeal to investors as well as to governments and companies seeking to raise capital.

"The textbook is well organised with an introductory overview of how the conventional, and the much newer Islamic, capital markets developed. A chapter on interbank money markets is followed by one on the Islamic interbank money market, drawing on the Malaysian experience as its markets are the most developed. Similarly, the chapter on bonds is followed by one on sukuk, and a chapter on equities by a chapter on stock screened for Shari'ah compliance. The coverage extends to the potentially controversial topic of derivatives, with the authors demonstrating how these can also be made Shari'ah-compliant."

—Rodney Wilson Emeritus Professor, Durham University, UK and INCEIF, Malaysia

"The book's coverage of both conventional and Islamic markets, institutions, and instruments should serve very well for both academics and professionals interested in furthering their knowledge of the subject matter. It is a great and valuable resource."

—Merouane Lakehal-Ayat Professor of Finance and Fulbright Fellow Bittner School of Business, St. John Fisher College

"Islamic Capital Markets is a valuable contribution to the Islamic finance literature. This book blends the intellect of Professor Mirakhor and the years of experience of Professor Bacha, offering the reader a rich and comprehensive volume on Islamic capital markets. The book not only explains the complex concepts of Islamic capital markets in clear and lucid fashion but also provides relevant references to conventional finance, which could be attractive to students of either Islamic or conventional finance. The strength of the book lies in its rich theoretical foundation, substantiated with the current practice of Islamic capital markets. Congratulations to Professors Bacha and Mirakhor for doing a great service to the students of Islamic economics and finance."

—Zamir Iqbal Chairholder of YTI Chair of Islamic Finance, Universiti Sains Islam Malaysia, Professional Faculty, Carey Business School, Johns Hopkins University, Lead Investment Officer, The World Bank, Washington, D.C.

"Besides being a descriptive textbook, it provokes the thoughts of readers, offering a critique of the financial system of capitalism. The book covers the founding thoughts and underlying philosophy of Islamic finance. It challenges by asking the question: "Can economics explain a positive predetermined rate of interest?" While there is a tendency toward fixed income financial instruments in the Islamic financial sector, it is timely to publish a book on Islamic capital markets emphasizing risk sharing and trust as its essential element, which has an organic relationship with the contract."

—Necdet Sensoy Board Member, Central Bank of the Republic of Turkey


Preface xv

Acknowledgments xvii

CHAPTER 1 Founding Thoughts--Adam Smith, Capitalism, and Islamic Finance 1

Introduction and Overview 1

Chapter Topics 1

Chapter Objective 2

Key Terms 2

1.1 The Roots: The Economy, Real and Financial Sectors, Risk and Islamic Finance 2

1.2 Uncertainty and Risk 3

1.3 Why Is There Uncertainty and Risk? 4

1.4 Types of Risk 5

1.5 Risk in the Real Sector and in the Financial Sector 5

1.6 Financial System of Capitalism: The Foundations 6

1.7 Smith and Arrow 7

1.8 Smith and Ethical Rules 8

1.9 An Arrow-Debreu Economy 9

1.10 What Happened to the Smith-Arrow Risk-Sharing Ideal? 10

1.11 Can Economics Explain a Positive Predetermined Rate of Interest? 11

1.12 Islamic Finance: The Foundations 13

1.13 Islamic Rules Governing Exchange 15

1.14 Islamic Financial Markets and Instruments 20

1.15 Islamic Finance Industry at Present 22

1.16 What Does the “Paper Economy” Look Like Today, Some Five Years After the Crisis? 23

Summary 24

Questions and Problems 25

References and Further Reading 26

CHAPTER 2 The Capital Markets 37

Introduction and Overview 37

Chapter Topics 37

Chapter Objective 37

Key Terms 38

2.1 Introduction 38

2.2 Key Trends in Capital Market Development 41

2.3 Stock Exchanges of the Islamic World 45

2.4 The Debt Markets 50

2.5 The Money Markets 53

2.6 The Derivatives Market 53

2.7 Risks in Capital Markets 57

Summary 61

Questions and Problems 61

References and Further Reading 62

Websites 62

CHAPTER 3 Islamic Finance: Underlying Philosophy, Contracts, Instrument Design, and Requisites 63

Introduction and Overview 63

Chapter Topics 63

Chapter Objective 63

Key Terms 64

3.1 Introduction 64

3.2 Underlying Themes and Fundamentals of Fiqh Mu’amalah 66

3.3 Requirements for Islamic Capital Market Instruments/Transactions 66

3.4 Shariah-Based Contracts for Financial Transactions 68

3.5 International Regulatory Institutions for Islamic Finance 77

Summary 79

Questions and Problems 80

References and Further Reading 80

Websites 81

CHAPTER 4 The Interbank Money Markets 83

Introduction and Overview 83

Chapter Topics 83

Chapter Objective 84

Key Terms 84

4.1 Introduction 84

4.2 Money Market--Components 87

4.3 Money Market Instruments 90

4.4 The Pricing of Money Market Instruments 93

4.5 Determining the Yield of a Money Market Instrument 95

4.6 Interest Rates, Yields, and Price of Money Market Instruments 95

4.7 Malaysia Money Market--Trading Performance 97

4.8 The Central Bank, Money Market, and Monetary Policy Operations 100

4.9 Commercial Banks and the Money Market 102

Summary 105

Questions and Problems 106

References and Further Reading 106

Websites 107

CHAPTER 5 The Islamic Interbank Money Market (IIMM) 109

Introduction and Overview 109

Chapter Topics 109

Chapter Objective 110

Key Terms 110

5.1 Introduction 110

5.2 The Islamic Interbank Money Market 112

5.3 Pricing the Mudarabah Interbank Investment Funds 113

5.4 The Islamic Interbank Cheque Clearing System (IICCS) 115

5.5 Islamic Money Market Instruments 115

5.6 Key Islamic Money Market Instruments 115

5.7 Pricing of Islamic Money Market Instruments 122

5.8 The Islamic Interbank Money Market and Issues of Risk 122

5.9 Trading Performance on IIMM 124

5.10 The Kuala Lumpur Islamic Reference Rate (KLIRR) 125

5.11 The Bursa Suq al Sila (BSaS) 128

5.12 The Commodity Murabahah 129

5.13 The Liquidity Management Centre (LMC) 131

Summary 133

Questions and Problems 134

References and Further Reading 135

Websites 135

CHAPTER 6 Bonds and Bond Markets 137

Introduction and Overview 137

Chapter Topics 137

Chapter Objective 138

Key Terms 138

6.1 Introduction 138

6.2 Bank Borrowing versus Bond Issuance 139

6.3 Debt versus Equity and Bond Features 141

6.4 Face Value and Par Value 142

6.5 The Pricing of Bonds 145

6.6 Bond Yields and Yield Curves 147

6.7 Yield Curve and Credit Spreads 148

6.8 What Constitutes a Yield? 149

6.9 Interest Rate Change, Bond Yields, and Duration 151

6.10 Risks Associated with Bonds 158

6.11 Types of Bonds 159

6.12 Bond Ratings 166

6.13 Ratings and Yield/Credit Spreads 167

Summary 168

Questions and Problems 168

References and Further Reading 169

CHAPTER 7 Sukuk and Sukuk Markets 171

Introduction and Overview 171

Chapter Topics 171

Chapter Objective 172

Key Terms 172

7.1 What Are Sukuk? 172

7.2 Sukuk Fundamentals 174

7.3 Underlying Islamic Contracts for Sukuk 176

7.4 Sukuk Structures 178

7.5 Sukuk Players 186

7.6 Risks Associated with Investing in Sukuk 187

7.7 Sukuk in Malaysia 191

7.8 Sukuk in Malaysia: Growth and Evolution 194

7.9 Underlying Asset and the Structuring of Sukuk 195

7.10 The Pricing of Sukuk 201

Summary 207

Questions and Problems 208

References and Further Reading 209

CHAPTER 8 Common Stocks and Equity Markets 211

Introduction and Overview 211

Chapter Topics 211

Chapter Objective 212

Key Terms 212

8.1 Introduction 213

8.2 The Evolution of Stocks 214

8.3 Why Companies Choose to List 217

8.4 Rights of Share Ownership 218

8.5 Equity Ownership and Shariah Compliance 219

8.6 The Valuation of Common Stocks 221

8.7 The Market Required Rate of Return 229

8.8 The Required Return and the Stock Price Dynamics 230

8.9 Dividend Growth and the Trade-off with Capital Gains 231

8.10 Stock Market Indices 235

8.11 Schools of Thought on Stock Price Behavior 236

Summary 243

Questions and Problems 244

References and Further Reading 245

CHAPTER 9 The Islamic Equities Market 247

Introduction and Overview 247

Chapter Topics 247

Chapter Objective 247

Key Terms 248

9.1 Introduction 248

9.2 Components of an Islamic Equities Market 249

9.3 The Screening of Stocks for Shariah Compliance 249

9.4 Components/Products of an Islamic Equities Market 254

9.5 Islamic Equity Indices 267

9.6 The Stock Exchanges of the Islamic World 269

Summary 272

Questions and Problems 273

References and Further Reading 274

Websites 274

CHAPTER 10 Derivative Instruments: Products and Applications 275

Introduction and Overview 275

Chapter Topics 275

Chapter Objective 276

Key Terms 276

10.1 Introduction 277

10.2 What Are Derivative Instruments? 277

10.3 Common Derivative Instruments 278

10.4 The Evolution of Derivative Instruments 279

10.5 Forward Contracts 280

10.6 The Need for Futures Contracts 280

10.7 The Need for Options 282

10.8 Options: Key Features and Trade-offs 283

10.9 Payoffs and Risk Profiles of Option Positions 284

10.10 Interest Rate Swaps (IRSs) 291

10.11 The Main Players in Derivative Markets 294

10.12 Commodities versus Financial Derivatives 295

10.13 Derivative Markets and the Role of the Clearinghouse 296

10.14 Applications: Using Derivatives to Manage Risk 297

10.15 What Derivative to Use? 303

10.16 Overview of Global Derivatives Trading 303

Summary 308

Questions and Problems 309

References and Further Reading 310

Websites 311

CHAPTER 11 Shariah-Compliant Derivative Instruments 313

Introduction and Overview 313

Chapter Topics 313

Chapter Objective 314

Key Terms 314

11.1 Introduction 314

11.2 Necessary Features for Islamic Financial Instruments 315

11.3 Islamic Finance Instruments with Features of Derivative Instruments 315

11.4 The Islamic Profit Rate Swap (IPRS) 321

11.5 How Is the IFI Hedged? 323

11.6 Sukuk with Embedded Options 323

11.7 Contemporary Derivative Instruments--How Shariah Compliant Are They? 324

11.8 Shariah-Compliant Instruments for Managing Exchange Rate Risk 328

Summary 329

Questions and Problems 330

References and Further Reading 331

Website 331

CHAPTER 12 Exchange Rates and the Foreign Exchange Market 333

Introduction and Overview 333

Chapter Topics 333

Chapter Objective 334

Key Terms 334

12.1 Introduction 334

12.2 What Is an Exchange Rate? 335

12.3 Exchange Rate Risk 337

12.4 The Foreign Exchange Market 341

12.5 Foreign Exchange Market Players 345

12.6 Spot and Forward Markets 347

12.7 Bid-Ask Spreads 348

12.8 Cross Rates 349

12.9 The Forward Market for Exchange Rates 350

12.10 Forward versus Spot Rates 350

12.11 Forward Market Players 351

12.12 Nominal versus Real Exchange Rates 355

12.13 Shariah-Compliant Techniques for Managing Currency Exposure 356

Summary 360

Questions and Problems 361

References and Further Reading 363

Websites 363

CHAPTER 13 Capital Markets and Government Policy 365

Introduction and Overview 365

Chapter Topics 365

Chapter Objective 365

Key Terms 366

13.1 Risk Sharing 366

13.2 Islamic Finance and Risk Sharing: Role of Public Policy 377

Questions and Problems 391

References and Further Reading 392

Index 403