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Modern Islamic Banking: Products and Processes in Practice


A Complete, Detailed Guide to Modern Islamic Banking Fundamentals

Modern Islamic Banking provides a comprehensive, up-to-the-minute guide to the products, processes and legal doctrines underlying the expanding Islamic banking system.

The conventional financial system focuses primarily on the economic and financial aspects of transactions, whereas the Islamic system places equal importance on the ethical, moral, social and religious characteristics to enhance equality and fairness. This authoritative guide fully clarifies the ins and outs of this emergent form of ethical investing and lending, where loans must be interest-free. In just thirty years, Islamic banking has gone from purely local operations to an alternative finance system of products and services for the international community, and after successfully weathering the banking crisis as a result of its unconventional paradigm, more non-Muslim investors are seeking its products to gain a competitive edge. In an engaging, conversational style, this streamlined resource quickly brings you up to speed on Islamic banking by guiding through:

  • The long-standing principles of Islamic banking and finance grounded in the profit and loss sharing principles outlined in the Code of Hammurabi
  • The products, vocabulary and key concepts of the field, including profit and loss sharing, justness in exchange, transparency and the prohibition of usury
  • The applications in such financial contexts as asset management, treasury, risk management, venture capital, SME finance, micro-finance and taxation
  • The regulatory frameworks and valuation of Islamic banks, including the vital components of a good valuation model and how to use one to place a reasonable value on a firm as well as a bank

For everything you need to know and how it applies to your current practices, turn to Modern Islamic Banking.

NATALIE SCHOON is a principal consultant with Formabb, which provides advisory services and training for financial institutions in Islamic finance, treasury, risk management and rules and regulations. She is on the board of advisors of Noriba Investing, which manages Halal investment portfolios for its clients, and is a visiting fellow at the ICMA Centre in Reading. She is also an accredited trainer for the Islamic Finance Qualification offered by the Chartered Institute of Securities and Investments.

List of Figures xi

List of Tables xiii

Acknowledgements xv

About the Author xvii

Introduction xix

CHAPTER 1 Historical Developments 1

1.1 The History of Finance 1

1.2 The History of Islamic Finance 5

CHAPTER 2 Economic Principles 7

2.1 Early Economic Thought 7

2.2 The Prohibition of Interest 9

2.3 Modern Economics and Banking 36

2.4 Islamic Ethics 38

2.5 Contracts and Prohibitions 40

2.6 Sharia’a and Prohibitions 43

CHAPTER 3 Islamic Finance Products Explained 51

3.1 Definitions 51

3.2 The Asset 52

3.3 Transaction Types 53

3.4 Bond-Like Instruments 63

CHAPTER 4 Distribution of Islamic Products 73

4.1 Distribution Channels and Sharia’a Compliance 73

4.2 Sharia’a Compliant versus Sharia’a Based 74

4.3 Competition or Opportunity 75

CHAPTER 5 Application of Islamic Products in Retail Finance 77

5.1 Current Accounts 77

5.2 Credit Cards 78

5.3 Deposit Accounts 79

5.4 Funds 83

5.5 Mortgage Products 84

5.6 Personal Loans 85

5.7 Transfers 87

CHAPTER 6 Application of Islamic Products in Treasury 89

6.1 Interbank Liquidity 89

6.2 Hedging 94

6.3 Combination of Transaction Types 98

6.4 Asset-Based Securities 99

6.5 Syndication 99

CHAPTER 7 Application of Islamic Products in Corporate Finance 101

7.1 Trade Finance 101

7.2 Project Finance 103

7.3 Property Finance 108

7.4 Leasing 113

CHAPTER 8 Application of Islamic Products to Private Equity 115

CHAPTER 9 The Role of the London Metal Exchange 117

9.1 The London Metal Exchange 117

9.2 Warrants 118

9.3 LME Base Metals 119

CHAPTER 10 Asset Management 121

10.1 Selection of Sharia’a compliant investments 122

10.2 Types of Funds 124

CHAPTER 11 Risks in Islamic Banks 125

CHAPTER 12 Governance 129

12.1 Roles 130

12.2 Social Responsibilities 132

12.3 Structures and Variations of Sharia’a Supervisory Boards 133

12.4 Serving on Multiple Boards 133

CHAPTER 13 The Islamic Financial Infrastructure 135

13.1 Regulatory Institutions 135

13.2 Socially Responsible Investments and Micro-finance 137

13.3 The Case for LIBOR 139

CHAPTER 14 Capital Adequacy Concerns 141

14.1 Challenges within the Basel Capital Adequacy Framework 141

14.2 IFSB Capital Adequacy Standards 142

14.3 Capital Adequacy for Islamic Banks around the World 148

14.4 Expected Future Developments in Capital Adequacy 149

CHAPTER 15 How to Value a Bank 151

15.1 The Components 152

15.2 The Models 153

15.3 The Special Case of Banks 154

15.4 The Special Case of Islamic Banks 154

15.5 Can a Bank be Valued? 155

CHAPTER 16 The Future 157