Islamic Finance

1
Islamic Finance

• Nigel Denison
• Bank of London and The Middle East plc

2
Introduction

• Modern History of Islamic Finance
• Basic Principles and Prohibitions
• Products
• Future of Islamic Finance

3
Modern History of Islamic Finance

• 1963 Mit Ghamr Egypt, based on profit sharing
  and concepts of mutual credit union
• 1975 Islamic Development Bank
• 1975 1990 Replication of commercial banking
• 1980 onwards Expansion of product ranges
• 2000 onwards Rapid expansion of the market

4
Shariaa Law

• Framework of ethical principles
• Quran Text of God
• Sunnah Words or acts of the prophet
• Ijma Consensus
• Qiyas Analogy or case law
• Ijtihad Interpretation
• Important choice of business style
• Underlying Concepts
• Wealth Creation
• Charitable Distribution
• Asset and Enterprise Bias
• Risk and profit sharing

5
Prohibitions

• Riba or Usury
• Excess compensation from pre-agreed interest
• Excess compensation without consideration
• Gharar or Uncertainty
• To unknowingly expose oneself or ones property
  to jeopardy
• Occurs in transactions which are not to the
  benefit to one of the parties
• Deceit
• Maysir or Gambling
• Games of chance
• Does not apply to risks taken in life or business
  activities

6
Infrastructure Banks

• Windows
• Branches
• Subsidiaries
• Shariaa based banks

7
Products

• Mudaraba
• Partnership contract, only 1 party providing
  capital
• Often used for clients depositing money with the
  bank
• Musharaka
• Partnership contract, all parties providing
  capital and expertise
• Often used for investment in businesses or
  mortgage contracts
• Murabaha
• Deferred payment or credit installment sale
• Often used for the purchase of goods on credit or
  interbank liquidity
• Ijara
• Financial or Operating Lease
• Sukuk
• Islamic Bond

8
The Future

• The City as an Islamic Finance hub
• Other European initiatives
• UK Government Sukuk
• Growth expectations
• Future challenges

9
Questions
10
Appendix Terminology
11
Terminology