Chartered Institute of Arbitration (CIArb)

Islamic Finance and Banking Practices

Reconciling Tradition and Modernity
Kingdom of Bahrain, 31 October 2016

Mohammad Majd Bakir

Senior Manager
Accounting and Governance Standards Development
AAOIFI

An Overview of the
Islamic Economics and
Islamic Finance
31 October 2016

Islamic Theory of Economics

Officially, no generally accepted theory of economics
does exist. Though it is there (like a hidden gem).
There exists a collection of maxims, rules, and
propositions that are idiosyncratic, and provide for a
workable framework for Islamic economics.
The framework is derived from Shariah sources, primary
and secondary.
The framework for a distinct Islamic economics is not
isolated from other disciplines [it is broader than
conventional economics].

MMB, AAOIFI, 31 October 2016

Islamic Theory of Economics

Islamic economics has its own defining propositions:
Rationality: preservation and productive deployment
of Mal (wealth) []
Ceteris paribus: Islamic economists pioneered the
proposition other factors being held constant (
) )
Relative Rarity:
Common resources vs. economic resources.
Limited resources vs. unlimited needs (economic problem).
frugality and prudence are called for in state of abundance,
let alone rarity.

Maximization: utilization, profit, yield, etc. Social and

economic impact is considered.

MMB, AAOIFI, 31 October 2016

Islamic Theory of Economics

Economic teachings of Islam:
Prohibition of harmful practices (Riba, Gharar, Maysir, etc.)
Dynamic potential of Zakah and charity.
Concept of property.
Promotion of economic activities (idle funds are
considered harmful to individuals and the society at large).
Role of state (Bait al-Mal, Dawawin, Hisbah, etc.)
Economic development and well-being (public finances,
Waqf, etc.).
Islamic economics is an integral part of the broader social
system.
Islamic economics is embedded with ethical norms/values
(e.g., benevolence, justice, sacrifice, altruism, etc).

MMB, AAOIFI, 31 October 2016

Islamic Theory of Economics

Principles of Islamic Economics :
Dual ownership (private and public).
Restricted economic freedom.
Social solidarity and balance.
Adherence to Shariah rules and guidelines:
Rule of permissibility and impermissibility
Rule of vicegerency ()
The Rule of state intervention.

MMB, AAOIFI, 31 October 2016

Maqasid al-Shariah: Framework for Distribution of

Wealth
Shariah involves striking a balance between the interest
of individuals and the society.
Shariah ordains that wealth must not be confined to
and circulated among the rich. Hence, it imposes Zakah,
a religious duty on capable and liable Muslims.
It also encourages other means of wealth circulation:
Waqf, social solidarity, charity, etc.
Shariah promotes productive activities, ensuring
economic expansion and wide-reaching benefits to all
economic units and societys stakeholders.

MMB, AAOIFI, 31 October 2016

Assets Under Shariah

Assets include anything that generates value, usufruct,
or positive cash flows, now or in the future, alone or
jointly with other assets. An asset must be Mal
Mutaqawwim.
Assets exclude money and measures of value and
means of payment, and Mal Ghair Mutaqawwim.
Concept of Mutaqawwim: a Shariah-compliant asset is
one:
That is valuable in the sense that it has value (market
value, fair value, etc.).
That is free from prohibitions.

MMB, AAOIFI, 31 October 2016

Assets Under Shariah

Intangible assets: assets that have no physical form.
Examples: patents, goodwill, usufruct, financial rights.
Intangible assets have value and are deemed a source of
wealth, and can generate benefits.
According to majority of Fuqaha, intangible assets are
Mal, and hence they belong to the broader category of
assets.
Tradability of intangible assets: assets established
initially as legitimate rights (haqq al-khuluw), and
easement rights (haqq al-irtifaq) can be traded and
exchanged.

MMB, AAOIFI, 31 October 2016

Assets Under Shariah

However, rights such as Haqq al-Shufaa (preemption) is not tradable.
AAOIFI adopted the stance that the sale of rights in
the form of options is impermissible.
Non-tradable rights, however, can be disposed of in
many ways: exchange contracts, donation, rebates,
partnerships, assignment of rights.
Trading of receivables is a sale of debt, which
Shariah prohibits.

MMB, AAOIFI, 31 October 2016

Trade and Investment Under Shariah

Trade and investment are the foundation of
economic activities in the society.
Islam expressly encourages trade and investment.
Shariah maxim: Ibahah Asliyah; all business activities
are permissible unless turned out to be otherwise
(due to a specific prohibition).
Shariah regulates such activities in line with the rules
of permissibility and impermissibility.
A great deal of such activities are governed by Urf
(customary practices). This is a typical stance as to
Muamalat (business activities and dealings).

MMB, AAOIFI, 31 October 2016

Financing Economic Activities Under Shariah

Specific Modes of financing:
Debt-based: Murabahah and deferred payment sales.
Forward sales: Salam and Istisnaa.
Partnerships: Musharakah, Mudharabah, Muzaraah
(agriculture), etc.
Usufruct transfer: Ijarah, IMT, Muqawalah .
Sukuk.
Qardh Hasan.
Modes of financing are very flexible and can be used in
many contexts (financing trade, acquisition of assets,
lease of assets, agriculture, industry, construction, etc.)

MMB, AAOIFI, 31 October 2016

Financing Economic Activities Under Shariah

Trade

Murabahah

Industry/
construction

Agriculture

Financing assets

Musharakah

Mudharabah

Muzara'ah/
Mugharasah

Ijarah

Salam

Istisna'a
Sukuk

MMB, AAOIFI, 31 October 2016

Islamic Economic Precepts Relevancy in Global

Markets
Islamic finance accounts for 1% or slightly more of global
finance.
However, its share and growth rates are rapidly increasing
(expanding base and more markets).
A standalone asset class.
Integration with the broader financial system is
unavoidable in certain areas.
Appeal to Non-Muslim investors:
Better rates of return.
Idiosyncratic types of products.
Cautiously and prudently managed risks.
Diversification and risk considerations.

MMB, AAOIFI, 31 October 2016

Are Islamic financial institutions immune to

global financial crises?
Not across the board. But to some extent they
managed to withstand the latest crisis.
Factors contributing to this fact:
Business model.
Focus on real economic transactions.
Lower leverage.
Credit and asset growth.
Vigilant calculation of some types of risks.
Better levels of capital adequacy.

MMB, AAOIFI, 31 October 2016

Are Islamic financial institutions immune to

global financial crises?
The latest crisis revealed an opportunity for IFIs
along with challenges. The way forward involves
a number of actions:
Improvement of liquidity management.
Harmonization and standardization to unleash
potential of sustainable growth.
Continuous upgrading of supervisory and legal
infrastructure.

MMB, AAOIFI, 31 October 2016

Thank You
Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI)
+973 1737 5418
Kingdom of Bahrain
mbakir@aaoifi.com
www.aaoifi.com

MMB, AAOIFI, 31 October 2016