Islamic Finance: Law, Economics, and Practice

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Cambridge University Press, Jul 3, 2006 - Business & Economics
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This book provides an overview of the practice of Islamic finance and the historical roots that define its modes of operation. The focus of the book is analytical and forward-looking. It shows that Islamic finance exists mainly as a form of rent-seeking legal-arbitrage. In every aspect of finance - from personal loans to investment banking, and from market structure to corporate governance - Islamic finance aims to replicate in Islamic forms the substantive functions of contemporary financial instruments, markets, and institutions. By attempting to replicate the substance of contemporary financial practice using pre-modern contract forms, Islamic finance has arguably failed to serve the objectives of Islamic law. This book proposes refocusing Islamic finance on substance rather than form. This approach would entail abandoning the paradigm of 'Islamization' of every financial practice. It would also entail reorienting the brand-name of Islamic finance to emphasize issues of community banking, micro-finance, and socially responsible investment.
 

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Contents

Introduction
1
Finance without Interest?
2
11 Distinguishing Features of Islamic Finance
7
ProhibitionDriven Finance
8
Jurists Sharia Boards and Innovation
11
Lawyers and Regulatory Arbitrage
13
12 Islamic Transactions Law as Common Law
15
Precedents Analogies and Nominate Contracts
17
Receivable Securitization and Sale of Debt
104
A Paradox
106
63 AssetBacked Leasing Bonds Sukuk
107
CreditRating Issues
108
Reward Pledges and Gifts Revisited
110
64 Usufruct Sukuk
113
65 Sukuk AlSalam
114
Partnerships and Equity Investment
117

Tradeoff between Efficiency and Legitimacy
20
13 Limits and Dangers of Sharia Arbitrage
21
Risk of Mispricing
22
Legal and Regulatory Risks
23
Jurisprudence and Arbitrage
26
21 Islamic Law and Jurisprudence
27
Juristic Inference Ijtihad and Benefit Analysis
28
22 From Classical to Contemporary Jurisprudence
30
Jurisprudence Revival and Codification
31
Institution of Fatwa and Islamic Finance
32
23 Arbitraging Classical Jurisprudence
35
ShariaArbitraging Classical Property Law
36
Arbitraging Classical Contract Conditions
42
Arbitrage Ruses and Islamic Finance
44
Two Major Prohibitions Riba and Gharar
46
31 The Prohibition of Riba
49
Economic Substance of the Prohibition of Riba
52
32 The Prohibition of Gharar
58
Definition of Gharar
59
Economic Substance of Prohibition
60
Insurance and Derivatives
61
33 Bundled vs Unbundled Credit and Risk
62
SaleBased Islamic Finance
64
41 Basic Rules for Sales
65
Murabaha Tawliya Wadia
67
Currency Exchange Sarf
68
42 SameItem SaleRepurchase Ina
70
Custody Sale Bay Aluhda and Sukuk Alijara
73
InterestRate Benchmarks
74
Opportunity Cost for Conventional Fund Providers
75
Viability of Islamic Benchmark Alternatives
77
DerivativeLike Sales Salam Istisna and Urbun
81
Parallel Salam
83
Conventional and Synthesized Forwards
86
53 DownPayment Sale Urbun
91
Urbun as Call Option
92
Leasing Securitization and Sukuk
97
FlexibleRate Financing
100
62 AssetBacked Securities
102
Theoretical Workhorse of Islamic Finance
120
Valid and Defective Silent Partnerships
122
72 CommonStock Ownership
123
Islamic Screens and Their Shortcomings
125
Cleansing Returns
133
Positive Screens and the Islamic Brand Name
134
Islamic Financial Institutions
135
81 Banking and Islamic Banking
137
TwoTier Silent Partnership
138
This is the text of the fatwa
141
Trust and Guaranty
144
82 Insurance and Takaful
147
83 Two Sides of the Two Debates
151
Sharia Arbitrage vs Islamic Prudential Regulation
152
84 Generic Agency Characterization of Financial Institutions
153
Governance and Regulatory Solutions in Mutuality
162
91 RentSeeking Sharia Arbitrage and Absence of Mutuality
163
Potential for Mutuality in Islamic Banking
166
Need for Mutuality in Takaful
170
92 A Call for Mutuality in Banking and Insurance
171
Mutuality in Banking
172
Mutuality in Insurance
173
Beyond Sharia Arbitrage
175
101 Sharia Arbitrage and Criminal Finance
176
102 Sharia Arbitrage at the Limit
177
Benchmarking ad Absurdum
178
HedgeFund Instruments ShariaArbitrage Style
180
103 SelfDestructiveness of Sharia Arbitrage
181
Declining ShariaArbitrage Profit Margins
182
Dilution of the Islamic Brand Name
183
104 Toward a New Islamic Finance Identity
184
Privatization Sukuk
185
MosqueBased Network of Financial Mutuals
186
Positive Screens Ethical Investment
188
Conclusion
190
Notes
193
Bibliography
213
Index
219
Copyright

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Common terms and phrases

Popular passages

Page 213 - The Capital Structure of Islamic Banks under the Contractual Obligation of Profit Sharing.
Page 213 - Allen, F., and D. Gale. (2000). Comparing Financial Systems (MIT Press, Cambridge, MA). Al-Misri, RY (1997). Bay' Al-Taqsit: Ta'lil Fiqhi walqtisadi (Dar Al-Qalam, Damascus).

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About the author (2006)

Mahmoud A. El-Gamal is Professor of Economics and Statistics at Rice University, where he holds the endowed Chair in Islamic Economics, Finance, and Management. Professor El-Gamal has also served in the Middle East Department of the International Monetary Fund (1995–6), and was the first Scholar in Residence on Islamic Finance at the U.S. Department of the Treasury in 2004. He has published extensively in the areas of econometrics, finance, experimental economics, and Islamic law and finance.

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