Contracts and Deals in Islamic Finance – A User′s Guide to Cash Flows, Balance Sheets, and Capital Structures

Foreword xv
<p>Preface xvii</p>
<p>Acknowledgments xxi</p>
<p>Product Offerings xxiii</p>
<p>Introduction 1</p>
<p>CHAPTER 1 The Islamic Finance Space 5</p>
<p>Modern Phase of Islamic Finance 8</p>
<p>CHAPTER 2 Bai al Inah 13</p>
<p>Definitions of Bai al Inah 13</p>
<p>Bai al Inah Process Flow 15</p>
<p>Legal Issues with Bai al Inah 17</p>
<p>Bai al Inah as a Financial Product 19</p>
<p>Transfer of Ownership 20</p>
<p>Documentation Involved 21</p>
<p>Resolutions on Bai al Inah 21</p>
<p>Conclusion 22</p>
<p>CHAPTER 3 Murabahah, Bai Mu ajjal, and Bai Bithman Ajil 23</p>
<p>Murabahah Sale/Credit Sale/Credit 25</p>
<p>Enhancements to Murabahah 26</p>
<p>Murabahah Working Capital 28</p>
<p>Credit–Based Sale/Markup or Riba 28</p>
<p>Bonafide Murabahah/True Sale 29</p>
<p>Trading House Model 31</p>
<p>Financial Services Division of a Manufacturer or Retailer 32</p>
<p>Bai Bithman Ajil 32</p>
<p>BBA with Inah 32</p>
<p>Conclusion 34</p>
<p>CHAPTER 4 Tawarruq 35</p>
<p>Issue of Price Fixing 37</p>
<p>Transfer of Title 38</p>
<p>Payment of Sales Tax 39</p>
<p>Applications of Tawarruq in Banking Products 40</p>
<p>Real Economic Activity 43</p>
<p>Conclusion 44</p>
<p>CHAPTER 5 Deferred Payment Sale or Credit Sale 45</p>
<p>Accounting Entries for Murabahah by Purchase Orderer 47</p>
<p>Accounting Entries for a Bai al Inah Contract 48</p>
<p>Pricing of Deferred Sales under Murabahah, BBA, Inah, and Tawarruq 49</p>
<p>Risk Treatment of Deferred Payment Sales 53</p>
<p>Fixed Income Portfolio 57</p>
<p>Conclusion 58</p>
<p>CHAPTER 6 Bai Al Wafa 59</p>
<p>Financial Assets as Subject of Sale 60</p>
<p>Bai Al Wafa and Sale of Equities 60</p>
<p>Bai Al Wafa and Sale of Sukuk 60</p>
<p>Conclusion 61</p>
<p>CHAPTER 7 Salaam and Istisna: Deferred Delivery Sale 63</p>
<p>Salaam 63</p>
<p>Istisna 68</p>
<p>Conclusion 70</p>
<p>CHAPTER 8 Bai al Sarf 75</p>
<p>Basic Rulings on Bai al Sarf 75</p>
<p>Conclusion 77</p>
<p>CHAPTER 9 Bai al Dayn 79</p>
<p>Purchase Price, Rental Payments, Receivables, and Debt 80</p>
<p>Rental Payments Due in an Ijara Contract 81</p>
<p>Financial Products 81</p>
<p>Sale of Equity 82</p>
<p>Conclusion 83</p>
<p>CHAPTER 10 Bai al Urbun 85</p>
<p>Conclusion 89</p>
<p>CHAPTER 11 Ijarah and Its Variants 91</p>
<p>Normal Ijarah 92</p>
<p>Accounting Entries for Ijarah Contract 93</p>
<p>Ijarah Muntahiya Bi Tamleek 95</p>
<p>Al Ijarah Thumma al Bai (AITAB) 95</p>
<p>Sale and Leaseback 96</p>
<p>Conclusion 97</p>
<p>CHAPTER 12 Wadiah 99</p>
<p>Forms of Wadiah 100</p>
<p>Enhancements to Wadiah 100</p>
<p>Money Creation 104</p>
<p>Conclusion 108</p>
<p>CHAPTER 13 Qard 111</p>
<p>Applications of the Contract of Qard 112</p>
<p>Qard as a Deposit Instrument 113</p>
<p>Recording of Qard 113</p>
<p>Conclusion 114</p>
<p>CHAPTER 14 Mudharabah 115</p>
<p>Simple Application of Mudharabah 117</p>
<p>Perpetual Mudharabah 118</p>
<p>Re–Mudharabah 118</p>
<p>Restricted Mudharabah and Unrestricted Mudharabah 118</p>
<p>Mudharabah as a Deposit 120</p>
<p>Mudharabah as a Fund 121</p>
<p>Interbank Mudharabah Placements 122</p>
<p>Indicative Rate of Return 122</p>
<p>Profit Sharing Ratio 123</p>
<p>Importance of Disclosure and Accounting Treatments 123</p>
<p>Mudharabah as an Asset Product 124</p>
<p>Accounting Treatment of Mudharabah Transactions 126</p>
<p>Conclusion 126</p>
<p>CHAPTER 15 Musharakah 129</p>
<p>Musharakah and Banking 130</p>
<p>Mushrakah as Asset Product 132</p>
<p>Pooling of Assets in Mushrakah 132</p>
<p>Mushrakah Mutanaqisah 133</p>
<p>Conclusion 138</p>
<p>CHAPTER 16 Hibah 139</p>
<p>Forms of Hibah 139</p>
<p>Restrictions on Hibah 140</p>
<p>Applications of Hibah in Banking 140</p>
<p>Enhancements to Hibah 142</p>
<p>Conclusion 143</p>
<p>CHAPTER 17 Kafalah 145</p>
<p>Who Can Be a Guarantor? 147</p>
<p>Products Based on Kafalah 148</p>
<p>Back–to–Back Guarantees 148</p>
<p>Conclusion 149</p>
<p>CHAPTER 18 Wakalah, Hawalah, Ibra, and Rahn 151</p>
<p>Wakalah 151</p>
<p>Hawalah 153</p>
<p>Ibra 156</p>
<p>Rahn 159</p>
<p>Conclusion 161</p>
<p>CHAPTER 19 Shariah: Sources, Interpretation, and Implementation 163</p>
<p>Modern–Day Ijtihad 165</p>
<p>Whose Shariah Is It, Anyway? 167</p>
<p>Conclusion 171</p>
<p>CHAPTER 20 Islamic Asset Management and Shariah Screening 173</p>
<p>Capital Markets 177</p>
<p>IPO Stage 177</p>
<p>Market Integrity 180</p>
<p>Market Regulation 183</p>
<p>Valuations 187</p>
<p>Zero Sum Game 188</p>
<p>The Role of Capital Markets in the Sphere of Islamic Finance 189</p>
<p>Farmer Sukuk or Equity Notes 189</p>
<p>Conclusion 190</p>
<p>CHAPTER 21 Pricing, Income Distribution, and Risk Sharing in Islamic Banks 191</p>
<p>Pricing of Islamic Financial Products 191</p>
<p>Price versus Shariah 194</p>
<p>Benchmark for Pricing 195</p>
<p>Criticism on Pricing Models 195</p>
<p>Profit Equalization Reserve 196</p>
<p>Income Distribution 199</p>
<p>Risk Sharing in Islamic Banks 208</p>
<p>Conclusion 208</p>
<p>CHAPTER 22 Sukuk and Rights of Sukuk Holders 209</p>
<p>Rights of Lenders in Debt Financing 210</p>
<p>Rights of Equity Holders 212</p>
<p>Rights of Bondholders 214</p>
<p>Use of Subsidiary Companies and Special–Purpose Vehicles 216</p>
<p>How Sukuk Financing Could Work? 221</p>
<p>Sale and Leaseback 223</p>
<p>The Role of the SPV 227</p>
<p>Other Sukuk Structures 228</p>
<p>Istisna Sukuk 228</p>
<p>Simple Sukuk 229</p>
<p>Conclusion 233</p>
<p>CHAPTER 23 Risk Management for Islamic Banks 235</p>
<p>Credit Risk 235</p>
<p>Market Risk 257</p>
<p>Liquidity Risk 269</p>
<p>Profit–Sharing Investment Account 269</p>
<p>Conclusion 273</p>
<p>References 273</p>
<p>CHAPTER 24 Asset/Liability Management for Islamic Banks 275</p>
<p>Gap Limit 279</p>
<p>Spot Rates and Forward Rates 279</p>
<p>Funding Scenarios 281</p>
<p>Short–Term and Long–Term Rates 281</p>
<p>Time Value of Money 288</p>
<p>Conclusion 290</p>
<p>CHAPTER 25 Takaful 291</p>
<p>Contract of Agency 291</p>
<p>Shariah Issues with Insurance 292</p>
<p>Contract of Tabarru 293</p>
<p>Product Menu 295</p>
<p>General Takaful Business Model 300</p>
<p>Concepts Related to Takaful 300</p>
<p>The Rights of the Fund over the Participant and the Rights of the Participant over the Fund 302</p>
<p>Pricing General Takaful Plans 304</p>
<p>Observations of General Takaful 310</p>
<p>Family Takaful 311</p>
<p>Basic Accounting Entries for Takaful 314</p>
<p>Takaful Operator Models 315</p>
<p>Distribution of Underwriting Surplus 316</p>
<p>Conclusion 317</p>
<p>CHAPTER 26 Pricing of Takaful Policies and Retakaful 319</p>
<p>Case Study 1: Corporate Medical Takaful Plan under General Takaful 319</p>
<p>Case Study 2: Corporate Medical Takaful Plan under General Takaful 322</p>
<p>Case Study 3: Corporate Family Takaful Plan 323</p>
<p>Detailed Mortality Table for Life Takaful 325</p>
<p>Mortality Tables and Probability Calculations 327</p>
<p>Risk Profiling 331</p>
<p>Conclusion 336</p>
<p>Afterword 337</p>
<p>About the Authors 341</p>
<p>Bibliography 343</p>
<p>Index 347</p>