An Introduction to Islamic Finance
Tarek El Diwany
SOAS
15 November 2013
Purpose and Values
What is our purpose?
What is the correct measure of value?
To whom are we accountable?
What are the implications for business and finance?
Purpose and Values
“In 1987, in the midst of a bitter two-month strike in Mexico, Ford
Motor Company tore up its union contract, fired 3,400 workers, and
cut wages by 45 percent. When the workers rallied around dissident
labour leaders, gunmen hired by the official government-dominated
union shot workers at random in the factory.”
Source: Korten, D., When Corporations Rule the World, 2nd ed.
The Islamic Contractual Framework
Wealth Creation Wealth Transfer
For
personal gain
Trade
Investment partnership
Waged labour
Theft
Usury
Gambling
Not for
personal gain
Community work
Caring
Educating one’s family
Gift
Endowment
Interest-free loan
Some Shariah Rulings on Financial Transactions
Prohibitions based law
Underlying assets not in conflict with objectives of shariah
Theft
Usury (riba)
Uncertainty/deception (gharar)
Double deferment
Manipulation of uninformed market participants
Combination of contracts
Payment of wealth levy (zakah)
DEVELOPER HOME BUYER
£100,000 cash price
A Cash Sale
immediate
transfer of title
DEVELOPER HOME BUYER
£150,000 in instalments over 10 yrs.
Instalment Sale
immediate
transfer of title
DEVELOPER HOME BUYER
£150,000 in instalment
payments over 10 yrs.
Murābahah
immediate
transfer of title
FINANCE
COMPANY
£100,000 initial
promise
to buy
immediate
transfer of title
HOME BUYER
Ijārah
promises
to buy/sell
£50,000 in rentals +
final purchase at £100,000
transfer of title
at end of rental
DEVELOPER
FINANCE
COMPANY
£100,000 immediate
transfer of title
FINANCE
COMPANY
HOME BUYER
PARTNERSHIP
£80,000 £20,000
£100,000
Rent
Diminishing Partnership
DEVELOPER
Economic Perspectives on Interest
Interest as the price of money
Interest as a rent on money
“Interesse”
Damnum emergens, lucrum cessans
Abstinence
Waiting
Opportunity cost
Time preference
100 (invested)
2 (insurance premium)
7 (sale of profit)
100 (repayment)
Financier Businessman
The Triple Contract
A Short History of Commercial Banking
A Short History of Commercial Banking
Cheques and Accounts
BANK
PERSON A PERSON B
cash £10 £ 10 equity
BANK
PERSON A PERSON B
£100 money
cash £10
loan £ 100
£ 10 equity
Cheques and Accounts
BANK
PERSON A PERSON B
£60 money
cash £10
loan £ 60
£ 10 equity
Cheques and Accounts
UK Home Prices and Lending (% annual change)
-20
-10
0
10
20
30
40
50
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
% annual change
house price change
adjusted net change in lending
Turkey CPI and M2 (% annual change)
0
50
100
150
200
250
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
% annual c
hange
m2 change %
cpi change %
Leverage
1. Start with £100 of your own capital
2. Borrow £900 for one year at 10% interest
3. Buy property for £1000
4. After one year sell property for £1100
5. Repay loan at £990
6. By what % did the property price rise?
7. What was your % rate of profit?
Rokakis on Lending
According to Jim Rokakis, the County Treasurer for Cleveland's
Cuyahoga County, "Wall Street strategies that made the cycle of no-
money-down, no-questions-asked lending possible have sucked the
life out of my city".
BBC, 5 November 2007
(http://newsvote.bbc.co.uk/1/hi/business/7070935.stm)
A “Bradbury” Treasury Note
Edison on Usury
“If our nation can issue a dollar bond, it can issue a dollar bill. The
element that makes the bond good makes the bill good … It is absurd
to say that our country can issue $30,000,000 in bonds and not
$30,000,000 in currency. Both are promises to pay; but one promise
fattens the usurer, and the other helps the people.
Thomas Edison, quoted in The New York Times, December 6, 1921
Sources: a Gold As A Store of Value, World Gold Council,
Research Study No. 22, November 1998; b Economist 1995
Purchasing power index Av. Annual change
Gold a + 0.16%
£ b - 4.06%
Purchasing Power of Gold Versus £ Sterling
Cost of Bank Bail-outs as % of GNP
Sources: B. Lietaer from The Economist 27/9/2008, Working Papers no.1620 World Bank 1996
Country % of initial GNP
Sweden 1992-96 3.6
Spain 1977-85 16.8
Venezuela 1994-5 18
Mexico 1994 19.3
Japan 1997 24
Chile 1981-83 41.2
Thailand 1997-2000 45
Malaysia 1997-2000 45
Argentina 1980-82 55.3
South Korea 1997-2000 60
Global financial crisis 2007 – 2013 ?