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Islamic Financing For Dummies^®

Visit www.dummies.com/cheatsheet/islamicfinance to view this book's cheat sheet.

Table of Contents

About This Book

Conventions Used in This Book

What You’re Not to Read

Foolish Assumptions

How This Book Is Organized

Part I: The Basics of Islamic Finance

Part II: Introducing Islamic Commercial Law

Part III: Eyeing Islamic Banking Operations

Part IV: Islamic Investment Markets: Equity and Bonds

Part V: Reporting, Corporate Governance, and Supervision

Part VI: Islamic Insurance: Takaful

Part VII: The Part of Tens

Icons Used in This Book

Where to Go from Here

Part I: The Basics of Islamic Finance

Chapter 1: Easing into Islamic Finance

Defining the Concepts and Principles of Islamic Finance

Searching for balance

Believing that Allah is the owner of all wealth

Promoting a responsible free-market economy

Citing key principles that Islamic firms follow

Identifying Types of Islamic Financial Products

Products based on equity participation (profit and loss sharing)

Products based on investment financing (sale and lease contracts)

Products for social development

Islamic funds

An alternative to bonds: Sukuk

Islamic insurance

Introducing Islamic Financial Institutions

Realizing Why Islamic Finance Is in Demand — and Growing

Chapter 2: Getting to Know Islam and the Role of Sharia

Introducing the People of Islam

A Brief History of the Islamic Religion

Revelations to the Prophet Muhammad (pbuh)

Migration to Medina

Compiling the Quran

Composing sunnah and hadith

Exploring the framework of sharia

The Core Beliefs of Islam

The Pillars of Islam

Adhering to a Code of Conduct: Sharia

Being wary of radicalism

Respecting Muslim beliefs about the purpose of sharia

Considering the objectives of Islamic law

Noting the areas of life governed by sharia

Citing the sources of Islamic law

Chapter 3: The History of Islamic Finance

Looking Way Back: The Golden Age of Islam

The sixth century: Pioneering venture capital (mudaraba)

The seventh through ninth centuries: Developing commercial instruments

The 11th century: Applying the mudaraba concept in Europe

The 13th century: Slowing the progress of Islamic finance

Recognizing Developments in Early 20th-Century Thought

Writing the future: Muslim economists in the 1900s

Getting the ball rolling: The Mit Ghamr Savings Bank and Tabung Haji

Moving into the Modern Industry

Establishing the Islamic Development Bank

Opening other Islamic banks

Creating additional industry sectors

Setting accounting and auditing standards with the AAOIFI

Using Islamic banking concepts in the West

Introducing international Islamic indexes

Setting up the Islamic Financial Services Board

Chapter 4: Touring the Islamic Finance Industry

Looking at Current Islamic Financial Institutions

Islamic banks

Islamic investment fund operators

Islamic indexes for benchmarking the industry

Islamic bond (sukuk) issuers

Islamic insurance (takaful) providers

Accounting standards

Considering the Impact of the Global Credit Crises

Gazing into the Crystal Ball of Islamic Finance

Studying recent growth

Anticipating worldwide expansion

Eyeing Industry Challenges

Dealing with regulatory and tax issues

Help wanted: Finding trained and skilled Islamic bankers

Satisfying sharia scholars: The search for compliant products

Educating clients and crossing the language barrier

Part II: Introducing Islamic Commercial Law

Chapter 5: Adhering to Islamic Commercial Ethics

Considering the Role of Business Ethics

A Quick Primer on Islamic Values

Promoting justice and benevolence

Being stewards of the earth

Moderating consumption

Developing positive characteristics

Helping and caring for others

Connecting Islamic Values to the World of Commerce

Honoring Islam while supporting material pursuits

Insisting on sincere salesmanship

Advertising in socially responsible ways

Searching for ethical market mechanisms

Seeking a just relationship with employees

Respecting sharia prohibitions

Chapter 6: Focusing on Contracts

Starting with Sharia Compliance

Citing the Sources of Sharia and Islamic Commercial Contracts

Consensus among Islamic scholars: Ijma

Analogy: Qiyas

Minor sources

Introducing Islamic Contract Law

Understanding the unilateral promise (wa’d)

Recognizing a bilateral promise (muwaada)

Entering a contract (’aqd)

Classifying Contracts

Effect of the contract

Use of the contract

Part III: Eyeing Islamic Banking Operations

Chapter 7: Contrasting Conventional and Islamic Commercial Banking

Reviewing the Functions of Commercial Banks

Exploring primary functions

Delving into secondary functions

Studying the Structure of a Commercial Bank

Stockholders

Board of directors

Audit committee

Chief executive officer (CEO)

Operational-level management

Business segments

Differentiating between Conventional and Islamic Commercial Banks

The oversight of a sharia board

Concepts of money and the basis of transactions

Relationships with clients or customers

Investments in the bank

Chapter 8: Charting the Relationship between Conventional and Islamic Banks

Understanding the Nature of Individual Banks’ Cooperation

Connecting across borders

Issuing letters of credit

Representing each other (for a commission)

Offering sharia-compliant windows at conventional banks

Exchanging funds

Banking on Financial Industry Common Ground

Transferring information

Developing human resources

Providing technical assistance

Observing Regulations of Central Banks

Focusing on primary functions of central banks

Seeing how Islamic banks fit into national banking systems

Chapter 9: Tracing the Sources and Uses of Funds in Islamic Banks

Discovering the Sources of Bank Funds

Capitalizing on bank capital: Money in hand

Focusing on borrowed funds

Working with Debt Instruments

Borrowing Funds from Other Banks

Attracting Deposits

Checking into current accounts

Surveying savings accounts

Eyeing investment accounts

Realizing How an Islamic Bank Uses Funds

Keeping some cash

Purchasing fixed assets

Funding financial instruments

Serving the community

Chapter 10: Familiarizing Yourself with Islamic Financial Instruments

Discovering What Islamic Financial Products Are Available

Examining Equity Financing Products

Sharing the profit and loss with venture capital (mudaraba)

Supporting joint ventures (musharaka)

Figuring Out Asset-Based Financing Instruments

Making purchases with cost plus profit (murabaha) contracts

Reverse murabaha (tawarruq)

Leasing or renting (ijara)

Financing construction projects or purchase orders (istisna)

Talking about Trade Financing Instruments

Deferred payment sale (bay al-muajil)

Purchase with deferred delivery (salam)

Part IV: Islamic Investment Markets: Equity and Bonds

Chapter 11: Introducing the Islamic Capital Market

Eyeing the Origins of the Islamic Capital Market

Pioneering Islamic investment funds

Opening the door for Islamic bonds (sukuk)

Meeting demand for additional market instruments

Adhering to Criteria for Islamic Investments

Fleeing from forbidden industries

Forgetting about financial market trading

Respecting Investors’ Objectives

Searching for safety

Hoping for worthwhile returns

Seeking capital gains

Maintaining liquidity

Shopping at the Islamic Capital Market

NASDAQ Dubai

Bursa Malaysia

London Stock Exchange

Labuan International Financial Exchange

Luxembourg Stock Exchange

Tadawul (the Saudi Arabian stock exchange)

Tapping into the Islamic Equity Market

Managing Islamic equity funds

Weighing pros and cons of investing in Islamic equities

Going international with Islamic indexes

Understanding the Islamic unit trust and mutual funds market

Investing in Islamic exchange- traded funds (IETFs)

Diversifying with the Sukuk (Islamic Bond) Market

Developing the Islamic Derivative Market

Tracking Industry Trends for Islamic Funds

Promoting International Islamic Capital Markets

International Islamic Financial Market

Malaysia International Islamic Financial Center

Chapter 12: Managing Assets in Islamic Investments

Considering the Contracts That Support Sharia-Compliant Funds

Mudaraba funds

Ijara (leasing) funds

Murabaha (cost plus) funds

Seeing Commodity and Equity Funds in Action

Commodity funds

Equity funds

Screening Stocks for Islamic Investments

Avoiding prohibited industries

Passing the financial test

Purifying a Fund of Noncompliance

Conducting screening reviews

Taking action on noncompliance

Benchmarking the Performance of Islamic Funds: Islamic Indexes

Dow Jones Islamic Market (DJIM) indexes

S and P Shariah indexes

FTSE Bursa Malaysia Hijrah Shariah Index

MSCI Global Islamic Indices

Developing New Methods for Managing Market Risk

Identifying the issues

Creating products that mitigate market risk

Chapter 13: Investing in Islamic Bonds: Sukuk

Defining Sukuk

Reviewing how conventional bonds work

Realizing how sukuk differ

Putting bonds and sukuk side-by-side

(Usually) Trading Sukuk Like Conventional Bonds

Earning Credit Quality Ratings

Walking through the Process of Issuing Sukuk

Identifying the parties involved

Setting up the sukuk’s general structure

Creating the SPV for acquiring assets

Insuring sukuk purchases

Listing Types of Sukuk

Sukuk al mudaraba (sukuk based on equity partnership)

Sukuk al murabaha (cost plus or deferred payment sukuk)

Sukuk al-salam (deferred delivery purchase sukuk)

Sukuk al-ijara (lease-based sukuk)

Sukuk al musharaka (joint venture sukuk)

Sukuk al istisna (Islamic project bond)

Innovative sukuk

Charting the Growth of Sukuk

Part V: Reporting, Corporate Governance, and Supervision

Chapter 14: Issuing Financial Statements

Getting a Financial Statement Refresher

Recognizing the most commonly issued statements

Spotting statement users

Issuing statements publicly and regularly

Focusing on statements for financial institutions

Walking through the Balance Sheet

Assets

Liabilities

Investigating the Income Statement

Income

Expenses

Tax/zakat

Noting Unique Financial Statements Used by Islamic Financial Institutions

Applying Specific Accounting Standards

Chapter 15: Considering Corporate Governance

Clarifying What Corporate Governance Looks Like

Appreciating the Role of Corporate Governance in Financial Institutions

Meeting the Stakeholders of Islamic Financial Institutions

Shaping Islamic Corporate Governance to Meet Specific Needs

Ensuring compliance through sharia governance

Recognizing why account holders care about corporate governance

Setting aside reserves to mitigate investment risk and equalize profit

Implementing Basic Elements of Good Governance in Islamic Finance

Striving for accountability and transparency

Managing risk

Developing internal control systems

Conducting audits

Following the Guiding Principles of IFSB

Chapter 16: Supervising Operations: The Sharia Board

Adapting the Sharia Board to a Rapidly Changing Industry

Finding its legs: The first two decades of the industry

Gaining confidence: The development of new products in the 1980s

Establishing key standards as the industry goes global

Who’s Who: Outlining the Structure of a Sharia Board

Holding a Seat: Sharia Board Membership

Listing the qualifications

Eyeing potential issues surrounding sharia board membership

Recognizing the Sharia Board’s Role

Assuring operational compliance

Reviewing new products

Performing other compliance- related functions

Considering Real-World Models of Sharia Corporate Governance

Chapter 17: Managing Risk in Islamic Financial Institutions

Realizing the Business Necessity of Risk Management

Knowing Where the Buck Stops: The How and Who of Risk Management

Seeing How Risk Management Is Different for Islamic Financial Firms

Sharing risk with stakeholders

Playing catch-up with the more established conventional system

Grappling with Generic Risks

Minimizing credit risk

Keeping market risk in check

Lessening liquidity risk

Managing operational risk

Rising above reputation risk

Dealing with Risks Unique to Islamic Finance

Examining equity investment risk

Coping with displaced commercial risk

Facing rate of return risk

Avoiding sharia noncompliance risk

Part VI: Islamic Insurance: Takaful

Chapter 18: Takaful: Exploring the Fundamentals of Islamic Insurance

Appreciating the Need for Takaful

Lacking certainty

Gambling with premiums

Collecting interest

Exploring Takaful

Grasping the principles behind takaful

Identifying the parties involved

Noting key features of takaful

Introducing takaful structures

Examining the Evolution of Takaful

Eyeing the Future Growth of the Takaful Industry

Chapter 19: Takaful and Retakaful Products, Structures, and Governance

Checking Out General Takaful Products

Individual general takaful products

Business general takaful products

Exploring Family Takaful Products

Applying participants’ contributions

Assisting policyholders

Exploring family takaful products

Understanding Takaful Structures

Wakala model: The principal-agent relationship

Mudaraba model: Partnership

Combination model: Principal-agent relationship and partnership

Getting Familiar with Retakaful (Reinsurance)

Gauging the necessity of retakaful

Seeing how retakaful works

Spotting some of the players in the retakaful industry

Noting the Role of the Sharia Board in Takaful Companies

Part VII: The Part of Tens

Chapter 20: Ten Reasons the West Should Pay Attention to Islamic Finance

Islamic and Conventional Finance Can Coexist

The Industry Is Poised for Growth

The Gulf Is Rich in Oil (and Cash)

The Muslim Population Is Large and Growing Quickly

Muslim Customers Want and Need Sharia-Compliant Products

Non-Muslim Investors Notice, Too

Socially Responsible Investing Is Thriving

Western Indexers and Rating Agencies Are in the Mix

London Is Leading the Charge

Globalization Is Here

Chapter 21: Ten Economic Benefits of Following Islamic Principles

Reducing Economic Disparity

Inviting More People into the Markets

Promoting Simplicity and Transparency

Connecting Financial Markets and Economic Activity

Linking Savings and Investment

Avoiding Economic Bubbles (And Bursts)

Spurring Economic Development

Encouraging Longer-Term Investment

Reducing the Impact of Harmful Products and Practices

Striving for Greater Stability

Appendix: Glossary

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Islamic Financing For Dummies^®