The Islamic Financial System:
A Critical Analysis and Suggestions for Improving its Efficiency
Tamer, S., "The Islamic Financial System: A Critical Analysis and Suggestions for Improving its Efficiency", in "EuropeanUniversity Studies:
Economics and Management", Vol.3119, Peter Lang, Frankfurt a.M. et al., 2005, 188pp, ISBN 3-631-53019-6.
This is basically my doctoral dissertation which I have written at the University of Vienna (Austria) under the supervision of Univ.-Prof.Dr. O.A.
Altenburger (Department of Financial Accounting and External Auditing) and Univ.-Prof.Dr. J. Finsinger (Department of Financial Services).
You can browse for the title at where you can find an abstract as well, I have also attached a table of contents so that you can figure out what my study is about.
I will present a part of this work also at the Global Finance Conference at TrinityCollegeDublin at the end of June. It would be a pleasure to meet you there.
1 INTRODUCTION...... 7
1.1 OVERVIEW OF THE ISSUES...... 7
1.2 ELEMENTARY ISLAMIC FINANCIAL INSTRUMENTS ...... 9
1.3 CRITICAL REVIEW OF EARLIER LITERATURE ...... 11
1.4 OBJECTIVES OF THE STUDY...... 15
1.5 PLAN OF THE STUDY...... 16
2 THE SOURCES OF ISLAMIC JURISPRUDENCE AND THE
APPLICATION OF ISLAMIC LAW...... 19
2.1 PRELIMINARY REMARKS...... 19
2.2 PRIMARY SOURCES OF ISLAMIC JURISPRUDENCE ...... 19
2.2.1 The Qur’an...... 19
2.2.2 Sunnah and Hadith ...... 21
2.3 SECONDARY AND TERTIARY SOURCES OF ISLAMIC JURISPRUDENCE ...... 22
2.3.1 Ijma ...... 22
2.3.2 Qiyas and Ijtihad ...... 22
2.4 THE MAIN ISLAMIC DOCTRINES AND LAWSCHOOLS...... 23
2.5 MODERN ISLAMIC LEGAL INSTITUTIONS AND INNOVATIONS IN ISLAMIC
JURISPRUDENCE...... 28
2.6 CONCLUDING REMARKS...... 30
3 THE PROHIBITION OF RIBA (UNLAWFUL GAIN) ...... 33
3.1 RIBA IN THE QUR’AN AND THE SUNNAH ...... 33
3.2 RIBA IN ISLAMIC JURISPRUDENCE...... 37
3.3 ANALYSIS OF THE AL-AZHAR FATWAS ON RIBA ...... 41
3.4 USURY AND INTEREST IN OTHER RELIGIONS AND CULTURES ...... 49
3.5 CONCLUDING REMARKS...... 53
4 THE ISLAMIC ECONOMIC SYSTEM...... 55
4.1 OBJECTIVES OF THE ISLAMIC ECONOMIC SYSTEM...... 55
4.2 MORAL PHILOSOPHY OF THE ISLAMIC ECONOMIC SYSTEM...... 56
4.3 THE MOBILIZATION OF SAVINGS IN THE ISLAMIC ECONOMIC SYSTEM ...... 59
4.4 THE ALLOCATION OF FUNDS IN THE ISLAMIC ECONOMIC SYSTEM ...... 61
4.5 THE ROLE OF SOCIAL SERVICES IN THE ISLAMIC ECONOMIC SYSTEM ...... 63
4.5.1 Qard Al-Hassan (Benevolent Loan) ...... 63
4.5.2 Zakah (Islamic Tax) ...... 64
4.6 EVOLUTION OF ISLAMIC BANKING...... 65
4.7 FACTORS INFLUENCING THE EVOLUTION OF ISLAMIC BANKING...... 66
4.7.1 The Role of Oil Wealth in the Evolution of Islamic Banking...... 66
4.7.2 The Role of Political Interest in the Evolution of Islamic Banking ...... 69
4.8 CONCLUDING REMARKS...... 72
5 CRITICAL ANALYSIS OF ISLAMIC FINANCIAL INSTRUMENTS..... 75
5.1 ISLAMIC BANK ACCOUNTS...... 75
5.2 EQUITY-LIKE FINANCIAL INSTRUMENTS...... 77
5.2.1 Profit and Loss-Sharing as Favoured Islamic Finance Concept ...... 77
5.2.2 Mudaraba Finance (Silent Partnership) ...... 78
5.2.2.1 The Mudaraba Contract in Theory ...... 78
5.2.2.2 Mudaraba in Islamic Banking Practice...... 80
5.2.3 Musharaka Finance (Partnership Finance) ...... 82
5.2.3.1 The Musharaka Contract in Theory...... 82
5.2.3.2 Musharaka in Islamic Banking Practice ...... 85
5.3 NON-EQUITY FINANCIAL INSTRUMENTS...... 87
5.3.1 Murabaha (Mark-Up Trade Finance) ...... 87
5.3.1.1 Murabaha as Instrument for International Trade Finance ...... 87
5.3.1.2 Legal Obstacles in the Application of Murabaha ...... 89
5.3.1.3 Murabaha Profit Compared to Fixed Predetermined Investment
Return...... 95
5.3.2 Ijara (Lease Finance) ...... 98
5.4 EXTENT OF THE USE OF ISLAMIC FINANCIAL INSTRUMENTS ...... 99
5.5 REASONS FOR THE LACK OF PROFIT AND LOSS-SHARING INSTRUMENTS...... 102
5.6 CONCLUDING REMARKS...... 104
6 CRITICAL ANALYSIS OF MARKETABLE SECURITIES AND
TRADING TECHNIQUES...... 107
6.1 PRELIMINARY REMARKS...... 107
6.2 COMMON STOCK AND STOCK TRADING IN ISLAMIC FINANCE...... 108
6.3 PREFERRED STOCK IN ISLAMIC FINANCE ...... 111
6.4 BONDS IN ISLAMIC FINANCE ...... 112
6.5 GHARAR (EXCESSIVE UNCERTAINTY AND RISK-TAKING)...... 115
6.6 THE ISSUE OF SPECULATION IN SECURITIES MARKETS...... 117
6.6.1 Preventing Speculation in Islamic Securities Markets ...... 117
6.6.2 The Interaction of Speculators, Arbitrageurs and Hedgers in
Conventional Securities Markets ...... 119
6.7 FINANCIAL DERIVATIVES FROM A CONVENTIONAL FINANCIAL
POINT OF VIEW...... 121
6.7.1 Forwards and Futures in Conventional Finance ...... 121
6.7.2 Options and Warrants in Conventional Finance...... 124
6.8 FINANCIAL DERIVATIVES FROM AN ISLAMIC POINT OF VIEW ...... 125
6.8.1 Relevant Islamic Contracts with Derivative-like Character:
Bay’ Salam...... 125
6.8.2 Forwards and Futures from an Islamic Point of View ...... 127
6.8.3 Options and Warrants from an Islamic Point of View ...... 130
6.8.4 Contemporary Trading Techniques with Financial Derivatives
from an Islamic Point of View ...... 133
6.8.4.1 Margin Trading ...... 133
6.8.4.2 Short Selling ...... 134
6.8.4.3 Insider Trading...... 135
6.8.4.4 Hedging...... 136
6.8.5 Assessment of the Arguments Put Forward Against Financial
Derivatives ...... 138
6.9 CONCLUDING REMARKS...... 141
7 SUGGESTIONS FOR IMPROVING THE EFFICIENCY OF THE
ISLAMIC FINANCIAL SYSTEM...... 143
7.1 VENTURE CAPITAL-FINANCE AS MODEL FOR PROFIT AND LOSS-SHARING
INSTRUMENTS...... 143
7.1.1 Definition of the Main Characteristics of Venture Capital-Finance..... 143
7.1.2 Mudaraba and Venture Capital-Finance Compared ...... 144
7.1.3 Musharaka and Venture Capital-Finance Compared ...... 146
7.1.4 The Necessity of Management Rights in Profit and Loss-Sharing
Instruments...... 147
7.1.5 Possibilities of Utilizing Venture Capital-Finance in the Islamic Financial
System ...... 149
7.2 THE NECESSITY OF EFFICIENT REGULATION IN THE ISLAMIC FINANCIAL
SYSTEM ...... 150
7.3 THE NECESSITY OF AN INTEREST-BASED INTERBANK MARKET IN THE
ISLAMIC FINANCIAL SYSTEM ...... 152
7.4 RESTRUCTURING THE ISLAMIC FINANCIAL SYSTEM...... 154
7.5 CONCLUDING REMARKS...... 159
8 SUMMARY AND CONCLUSION ...... 161
9 APPENDIX...... 169
9.1 TRANSLATION OF QUR’AN VERSES CONTAINING THE TERM RIBA...... 169
9.2 THE SECOND AL-AZHAR ISLAMIC RESEARCH INSTITUTE FATWA
(DECEMBER 2002)...... 171
9.2.1 Antecedent of the Fatwa ...... 171
9.2.2 Text of the Fatwa ...... 173
10 INDEXES...... 175
10.1 TABLE OF FIGURES ...... 175
10.2 ARABIC-ENGLISH GLOSSARY...... 176
10.3 BIBLIOGRAPHY...... 180
10.3.1 Books...... 180
10.3.2 Journals, Articles and Newspapers ...... 183
10.3.3 References to Islamic Financial Institutions ...... 187
10.3.4 Contracts of Islamic Financial Instruments ...... 188
10.3.5 Religious Sources...... 188