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Islamic Finance: Making a Difference?

Explore the differences between Islamic finance and conventional finance, and discover its potential contribution to socially responsible investment. Learn about the bans on interest, uncertainty, deception, and gambling in Islamic finance. Discover various forms of Islamic finance such as profit-and-loss sharing, murabaha, ijara, and sukuk. Investigate the principles underlying the ethics of Islamic finance, including fair remuneration of labor and redistribution of wealth. Delve into the screening criteria used by the Sharia Supervisory Board of Dow Jones Islamic Index.

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Islamic Finance: Making a Difference?

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  1. TBLI Conference November 13th, 2009 Islamic Finance: Does It Make a Difference? Hans Visser Professor Emeritus, VU University Amsterdam

  2. subjects • What makes Islamic finance differ from conventional finance? • What can it contribute to Socially Responsible Investment?

  3. Islamic finance has to observe bans on: - riba = interest • gharar = avoidable uncertainty, deception and delusion • maysir = gambling, speculation • haram goods and services

  4. Gharar In order to avoid gharar, sales contract must • - make sure that both the subject and price of the sale exist, and that parties are able to deliver; • - specify the characteristics and the amounts of the counter-values; • - define the quantity, quality and date of delivery.

  5. forms of Islamic finance - profit-and-loss sharing arrangements - murabaha = mark-up sale, usually including a credit sale, bai’muajjal - ijara = lease sukuk = Islamic certificates or bonds often: sale - lease-back or headlease- sublease; asset-based but often not asset- backed

  6. hiyal = legal stratagems (sing. hila) • bai inah = repurchase by the seller (Malaysia); sale against deferred payment to client, repurchase by bank against immediate payment • tawarruq = monetisation = sale by bank against deferred payment, resale on basic materials exchange against immediate payment makruh = undesirable, but not forbidden (Ibn Taymiyya, 1263-1328)

  7. principles underlying the ethics of Islamic finance - tawheed (oneness of God) and brotherhood - fair remuneration of labour - redistribution of private wealth sources: • Chapra, M. Umer, 2000, ‘Is it necessary to have Islamic economics?, Journal of Socio-Economics, vol. 29 no. 1. • Choudhury, Masudul Alam, 1986, Contributions to Islamic Economic Theory, Basingstoke and London: Macmillan.

  8. quard hasan assets liabilities quard hasan loans quard hasan accounts quard = loan hasan = benevolent

  9. screening criteria Sharia Supervisory Board of Dow Jones Islamic Index no • alcoholic drinks • pork-related products • entertainment: gambling, pornography, movies, music, hotels • tobacco • defence and weapons companies • riba: bonds, conventional financial services

  10. Maulana Maududi’s ascetism “Islam has closed all those outlets through which the greater portion of a man’s wealth is spent on his own luxuries and indulgences.” S. Abul A’la Maududi, Economic System of Islam, 4th edn, edited by Khurshid Ahmad, English translation by Riaz Husain, Lahore: Islamic Publications Ltd. 1999, p. 31.

  11. some research on Islamic funds Girard, Eric, and M. Kabir Hassan, 2006, Faith-Based Ethical Investing: The Case of Dow Jones Islamic Indexes, www.fma.org/SLC/Papers/Faith-BasedEthicalInvesting.pdf. Hakim, S. and Rashidian, M., 2004, How Costly is Investor’s Compliance to Sharia?,www.erf.org.eg/CMS/getFile.php?id=543.

  12. Islamic funds Andreas G. F. Hoepner, Hussain Gulzar Rammal and Michael Rezec, Islamic Mutual Funds' Financial Performance and Investment Style: Evidence from 20 Countries, paper School of Management, University of St. Andrews, 2009, http://ssrn.com/abstract=1475037.

  13. https://www.ing.com.my/IFBNET/2.0/ING.Application.Web/IFBDefault/fund_performance.aspxhttps://www.ing.com.my/IFBNET/2.0/ING.Application.Web/IFBDefault/fund_performance.aspx

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