Islamic Finance Midterm Prep Flashcards
Riba
interest or usury (literally, “increase/addition”)
Most Islamic banks would agree in theory with a number of basic principles, one being that interest-based lending (generally considered to be riba) should be replaced by Islamic financing contracts based on equity, sale or leasing (p 8).
Halal
Religiously permissible activities. The opposite of hilal is haram (pp 7, 8).
Gharar
deception, hazard, speculation, uncertainty, risk (literally, “peril/hazard”)
asymmetrical information – tendency of merchants to take advantage of the buyers
Transactions involving gharar should be avoided as transactions must be clear and transparent as well as fulfill social and developmental goals (p 8).
Fiqh
principles of jurisprudence
fiqh is the human understanding of sharia
For the traditionalists, the words of the Koran and the Hadith, as well as classical fiqh, are sacred, and the interpretive leeway must be limited (p 19). In other words, everything else should be frowned upon.
Jahiliyah
Age of ignorance, another before Islam - It was a free for all, wealth was often taken as the result of raids (tribal universe) wealth appropriated by attackers
‘ARBUN
like a down-payment
MASLAHA
(public interest – looking at innovations through the lens of public interest – if its good for the public interest then there is nothing wrong with it
DARURA
DARURA (law of necessity) -
example: Islamic revolution in Iran – what to do with wealth of shah – if we want Islamic revolution to survive then that will supersede confiscation of shah’s wealth. ALSO - this concept allows Muslims to deviate from Sharia’ah when necessary - like eating haram foods while traveling (if nothing acceptable is offered). Also applied to “innovation” in Islamic finance products, making them into working financial products, etc.
QARD HASAN
“Good loan” interest free
Zero-interest loan often for non-business AND charity cases. Widows, etc.
Riba al-Jahiliya
doubling principle in exchange for more time
Riba el-fadl
paying back more than you borrow (unlawful excess)
Riba al-nasia
delaying the completion of the exchange (time value of money is accepted and understood – by withholding money for a while you are taking advantage of the lender)
QIYAS
(reasoning by analogy) – how certain innovations were dealt with – central to how problem was framed – beginning of intellectual process
IJMAA
(consensus) – when community of scholars gets together then get to a consensus view – different approaches to this: can have a majority vote
Riba Al-jahiliyah
practice of doubling principle when payment not received, but after a few rounds of increases it would end in enslavement of the borrower (or member of borrower family)
‘Ahb
fulfillment of all pledges
Shurut
stipulations in a contract, not everything put in a contract is seen as acceptable (when a sale is certain, stipulations can’t go into the contract, plus can’t have 2 bargains)
Al Wadiah
deposits, more like safe-keeping, leaving valuables for safe keeping with other merchant (safe-box)
Muslim Pilgrims Savings Corp
early Islamic finance experiments, in Malaysia since 1963
The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in 1963 to help people save for performing hajj
Mit Ghamr (Egypt)
early Islamic finance experiments. a financial institution based on profit sharing where people can create savings and can take interest free loans
Function as saving investment institutions who invest mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors
Pan Islamism
movement initiated by Saudi Arabia (King Faisal) to Islamize (sp) everything - leading to the gulf model of Islamic Finance and the 1st stage (different from the Malaysia model)
Pan-Islamism is a political movement advocating the unity of Muslims under one Islamic state – often a Caliphate[1] – or an international organization similar to a European Union with Islamic principles.
1973 Arab-Israeli War (timeline big event)
subgroups of OPEC meet and agree on 1st increase of oil pricing, suddenly Islamic nations flushed with money, OPEC also enacted a oil embargo on Israel supporting countries
Islamic Development Bank (IDB)
functioning 1975, like an Islamic World Bank -The purpose of the bank is to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly.
Murabaha ** (more to add)
became bread and butter of Islamic finance, was once cost-plus financing (medieval Islamic contract) to becoming a sales-based transaction with an element of credit from the intermediary (modernized version)
Used as a stop gap/temporary activity as profit/loss sharing was initiated
Fair profit
difference with conventional banks; fair profit does not have a goal of maximizing profit since there are social/economic development concerns to consider, but Islamic banks are not charities
Ristan law
Countries don’t default, so countries are good candidates for loans
Duruaw
small business loan
Glass Steagall Act (United States)
1933-1999, meant to separate commercial and investment activities
Deregulation 1980 (United States)
Until 1980 banks could not decide on interest rates, then interest rates no longer the sole determinant of finance
Malays
Majority muslim group in Malaysia
Mahathir Mohammed
former prime minister of Malaysia who used rhetoric of Islamic principles to pursue an aggressive economic growth policy in the country in the 80s and 90s
1983 - introduced Islamic finance to Malaysia (as a way to promote Malays) - said that Malaysia going to have a dual system (conventional and islamic)
Bank Islam Malaysia Bihad (BIMB)
Islamic bank created during time of Mahathir Mohammed
Islamic bank ‘Windows’
A mechanism that allows conventional banks to have an Islamic finance window to do islamic transactions and to use Islamic products
Conditions:
- No co-mingling between conventional and islamic banks (so no mixing of funds)
- Activities must be supervised by shariah advisers
- Bank management must be committed to this arrangement
Bay’ al DAYN
sale of debt; used extensively in design of Malaysian bonds; controversial to gulf model followers
Bay’al INA
sale and repurchase of of an asset at a different price, used extensively in design of Malaysian bonds; controversial to gulf model followers
Fiqh - Shafii
school of jurisprudence – reaction to Hanafi, more focused on hadiths, scholarly consensus, and tracking the degree of truthness in Hadiths
dominant school of jurisprudence in Malaysia use to justify their model of Islamic finance
General Council of Islamic Banks and Financial Institutions
in Bahrain, serves as a trade institution promoting and lobbying for Islamic finance
IIRA
International Islamic Rating Agency
rating agency focusing on the shariah compliance element of islamic finance of banks (this is their speciality)
IFSB
Islamic Financial Services 2002
Coordinating bank supervision - all central banks of islamic countries are members
Signifiant role in unifying the rules and norms of islamic finance
International Islamic Financial Market
Creates treasury products for Islamic banks
like the Fed, injecting liquidity where needed
AAOIFI
The Accounting and Auditing Organization for Islamic Financial Institutions.
Created in 1991 in Bahrain.
Central challenge: reconciling global norms and specifics of Islamic finance
Goals:
- Standardization of accounting and auditing principles
- Adoption of uniform Shariah standards for the most popular contracts
- Lobbying of national regulators and international organizations.
Compulsory in Bahrain, voluntary elsewhere; benchmarking effect.
Basel III
Basel III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It was agreed upon in 2010–11. It seeks to protect banks from systemic risk; such as the financial collapse of 2008-09, that lead to a domino effect.
MUDARABA
( including RABB EL-MAAL & MUDARIB
(RABB EL-MAAL (financier) & MUDARIB (entrepreneur)
a partnership (instead of rich merchant lending money at interest, the merchant/financier is instead engaged and involved (which will give him some additional income since he is participating ** one contributes the money and the other the effort
International Association of Islamic Banks
Attempts at common standards and practices: (since 1977)
DMI
called the Faisal Group or Dar al Maal al Islami (founded in 1981 Geneva)
one of the first transnational groups comprised of a number of Islamic banks in different countries.
The Al-Baraka Group
Dallah Al-Baraka group founded in 1982 by Shaikh Saleh Abdullah Kamel
one of the first transnational groups comprised of a number of Islamic banks in different countries.
IMMC (add definition)
Islamic Money Management Companies
add definition
FIBE (add definition)
Faisal Islamic Bank of Egypt (add definition)
IJTIHAD
Interpretation, independent reasoning – continuing to interpret Islam in presence of new circumstances
BUKHARI
– most famous collection of hadiths (most authoritative)
SAHIH
(true) if this accompanies Hadith then chain of transmission is deemed correct
For the hadith to be seen as correct has to be traced to a companion of the prophet (need a chain of transmission) – can have strong or weak hadiths (degree of truthness)
Fiqh - Hanafi
school of jurisprudence - more pragmatic and most influential interpretations
Fiqh - Maliki
school of jurisprudence – stricter focus on Medina tradition – days of the prophet
Fiqh - Hanbali
school of jurisprudence – strict Islamic puritanism (similar to Wahabism
The Rightly Guides Caliphs
Rulers after prophet died, all came out of merchant tradition (considered golden era of Islam) – all 4 involved in commerce
King Faisal
Saudi Arabia and Pan-Islamism movement, *need more
PSIA
profit sharing investment account
LIBOR
London Inter-Bank Offer Rate;
- pricing function in global interest reate system serves as benchmark for Islamic banks because Islamic banks (being only 2% of the market) are price takers
Istisnaa
Cost plus financing, commissioned financing
A contract of acquisition of goods by specification or order, where the price is paid in advance, or progressively in accordance with the progress of a job. For example, to purchase a yet to be constructed house, payments would be made to the builder according to the stage of work completed.
This type of financing, along with Salam, is used as a purchasing mechanism, and Murabahah and Bai Bithaman Ajil are for financing sales.
Salam
Cost plus financing, purchase/sale of item for deferred delivery
Alternative spellings = Al Salam, Bai al Salam, Bai Salam
Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be effected unless the goods are in existence at the time of the bargain. However, this type of sale is an exception, provided the goods are defined and the date of delivery is fixed. The objects of sale must be tangible goods that can be defined as to quantity, quality and workmanship.
This mode of financing is often applied in the agricultural sector, where the bank advances money for various inputs to receive a share in the crop, which it then sells.
Musawama
type of cost plus financing; commerce (bank like true merchant by bargaining/negotiating a sale). The bank doesnt have to say what it paid for the asset.
it refers to the selling of a commodity at an agreed upon price irrespective of the original purchase price. In other words, the seller is not required to disclose to the buyer what the cost price was. When the cost price is disclosed to a potential buyer, the sale is called murabaha.
Tawarroq
type of cost plus financing;
commodity murabaha
In personal financing, a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan.
IPO
Initial Public Offering - when companies go “public” on the stock market in the West. In terms if Islamic finance, they are companies that do not really produce anything, but the IPO makes money for the owners through “risk transferring.”
Maysir
game from the age of jahiliyya that was pure chance - explicitly forbidden by the Quran.
Waqf / Awqaf (plural)
religious endowment that cannot be change. Lack of flexibility in the Waqf led to stagnation in the Arab world.
Charitable Trust
Book: The Long Divergence
Book by Timor Kuran that argued that the lack of development in financial products such as the Waqf led to stagnation and decline in the Arab world, financially speaking.
Glass-Steagall Act
1933 American banking act that limited banks commercial baking activities. Banks could not set interest rates or establish branches across state lines in addition to strict marketing rules. Also, credit card fees were limited. Now most banks make $$ from credit card fees - these fees are also ok under Islamic finance as a work around to interest for credit cards. US Banks were allowed to stop following this act in 1980 and it was officially repealed in 1999.
Big Bang
1986 in England, this was the deregulation of the banking rules. Banks had a lot of latitude after this. Helped to start the era of big/global investment banks and financial institutions.
FICO
Credit score system started by guys in California. F stands for Faire and I for Isaac. Under this systems, you need debt to get good credit. Islamic financial systems are still adapting to this type of concept since debt is not common.
securitization
an asset (any asset) can be turned into financial documents to bought and sold - Murabaha can now be securitized, this is a big change in Islamic finance.
Price Maker vs. Price Taker
In terms if pricing issues for assets, this is a concept under Islamic Finance that says that you can make prices if you are creating some sort of new technology or product, but if an asset is already established, Islamic financial institutions can “take” what prices are established by Libor. Law of darura in effect here.
