Islamic finance’s phenomenal growth owes to the Shariah compliant nature of its financial instruments. Shariah forbids the charging of interest (Riba) and instead promulgates risk-sharing and trade-based modes of financing. The Islamic financial industry has been subject to both critique and admiration. Critics argue that Islamic instruments (bearing debt-based structures) differ from their conventional counterparts only in legal lexicon and not in economic impact. The admirers argue that such instruments, irrespective of wider economic implications, rigorously comply with ‘juristically sound’ Islamic principles.
This book aims to reconcile the above dispute. It argues that the financial impact of instruments is a consequence of the way they are priced and structured. The similarity in pricing and structures is an outcome not of the underlying Islamic financial modes but of the competitive environment in which Islamic instruments compete. Even risk-sharing and trade-based Islamic structures, if implemented in such an environment, would have a financial impact similar to that of conventional instruments.
This book has a wider appeal for both academic and non-academic audiences. It can complement undergraduate and graduate courses as an additional reading on the intricacies of Islamic financial instruments and markets. For PhD students, it would help identify future research areas. To non-academics, it offers a deeper understanding regarding the working of the Islamic finance industry.
Acknowledgments; Preface; Chapter 1: Introduction; Chapter 2: The Paradox of Risk Sharing; 2.1 Introduction; 2.2 Islamic Instruments; 2.3 The Dominance of Debt Based Contracts; 2.4 Concluding Remarks; Chapter 3: Freedom From Interest; 3.1 Introduction; 3.2 Islamic Instrument Structures; 3.3 Convergence of Conventional and Islamic Banking Rates; 3.4 Concluding Remarks; Chapter 4: Financial Crisis and Islamic Finance; 4.1 Introduction; 4.2 Islamic Banking, Financial Intermediation, and Risk Sharing; 4.3 Implications During Financial Crisis; 4.4 Concluding Remarks; Chapter 5: The Little Difference Between Sukuk and Bonds; 5.1 Introduction; 5.2 Sukuk Structures; 5.3 Determinants of Credit Ratings of Islamic Bonds; 5.4 Concluding Remarks; Chapter 6: Issuer’s Choice of Islamic Bond Type; 6.1 Introduction; 6.2 Islamic Bond Structures; 6.3 Theories of Capital Structure; 6.4 Implications for Islamic Financing Choices; 6.5 Concluding Remarks; Chapter 7: Risk in Risk Sharing Sukuk; 7.1 Introduction; 7.2 Credit Risk in Risk Sharing Bonds; 7.3 Structural Credit Risk Models; 7.4 Concluding Remarks; Chapter 8: The Challenge of Shariah Compliance; 8.1 Introduction; 8.2 The Complexity of Shariah Compliant Structures; 8.3 The Agency Problem in Islamic Banks; 8.4 The Shariah Certification Dilemma; 8.5 The Role of the Regulator and Shariah Conscious Investor; 8.6 Concluding Remarks; Chapter 9: Replicating Conventional Finance; 9.1 Introduction; 9.2 Instrument Structures; 9.3 Behavioral Explanations; 9.4 Implications for Investor Preferences; 9.5 Concluding Remarks; Chapter 10: Can Islamic Banks Have Their Own Benchmark?; 10.1 Introduction; 10.2 Islamic Interbank Benchmark Rate (IIBR); 10.3 IIBR-LIBOR Benchmark Rates and Convergence; 10.4 Determinants of the ‘Piety Premium’; 10.5 Empirical Analysis; 10.6 Conclusion; Chapter 11: Islamic Versus Conventional Equities; 11.1 Introduction; 11.2 The Structure of Islamic Equities; 11.3 Diversification Benefits; 11.4 The Performance of Islamic Equities; 11.5 A Theoretical and Empirical Perspective; 11.6 Concluding Remarks; Chapter 12: Charity in Islamic Banks – A Distinguishing Feature?; 12.1 Introduction; 12.2 Penalty Versus Charity; 12.3 The Size of the Charity Pie; 12.4 Charity Contribution Versus Asset Size; 12.5 Social Distribution of Charity; 12.6 Concluding Remarks; Chapter 13: Rethinking Islamic Finance: The Limits of Our Understanding; 13.1 Introduction; 13.2 Pillars of Islamic Economics; 13.3 Barriers to Understanding Islamic Finance; 13.4 Concluding Remarks; Chapter 14: Rethinking Islamic Finance: An Ethical Perspective; 14.1 Introduction; 14.2 Rethinking Islamic Finance – An Ethical Framework; 14.3 Integrative Social Contract Theory; 14.4 Rethinking Islamic Finance Through ISCT; 14.5 Way Forward; 14.6 Concluding Remarks; Chapter 15: Conclusion; Bibliography; Index
There is an increasing need for western politicians, financiers, bankers, and indeed the western business community in general to have access to high quality and authoritative texts on Islamic financial and business practices. Drawing on expertise from across the Islamic world, this new series will provide carefully chosen and focused monographs and collections, each authored/edited by an expert in their respective field all over the world.
The series will be pitched at a level to appeal to middle and senior management in both the western and the Islamic business communities. For the manager with a western background the series will provide detailed and up-to-date briefings on important topics; for the academics, postgraduates, business communities, manager with western and an Islamic background the series will provide a guide to best practice in business in Islamic communities around the world, including Muslim minorities in the west and majorities in the rest of the world.