Introduction to
Islamic financeStudium Generale
2019/11/22
Mehriban Ahmadova
Graduate School of Economics
Nagoya University

Introduction

2

Introduction• Ethical• Socially responsible• Sustainable3

Introduction

4

Introduction
religious teachings shape morality ofa substantial portion of the people
making business ethical decisions

5

Introduction• Introduce yourselves toyour neighbors• Name• School• Year• Country

6Introduction• Do you care about the ethical behavior of the companies,
the products of which you buy?

7

Introduction
Global Consumer Pulse Research• Consumers (under 30), across allgenerations, care about what retailers sayand how they act• Gen Z and Millennial generations• More than six in ten younger consumers

8Religion & Business• Religion influence morality of the majority• Business ethical decisions are shaped by morality

Business is secularized (separate from religion)• Why do you think is that?

9

Religion & Business• Catholic• Protestant• Jewish• Islamic• Hinduism• Buddhism

10Religion and Business• Max Weber• Protestant Ethic and the Spirit of Capitalism• Protestant Christianity• Development of modern capitalism

11Religion and Business• Religion & Business → Business ethics• Philosophy, social sciences and business• Emerged in 70s• Corporate Social Responsibility (CSR) reporting• What do you think is the purpose of the CSR reporting?

12Islam & Business• Have you heard the term “halal”
before?

13

Islam & BusinessHaram14Islam & Business• Sources• Qur’an• Sunna15

Principles

The God is the ultimate owner of all.

Islam &Business

Material pursuits must be balanced with anindividual’s spiritual needs.

An individual’s needs must be balanced withsociety’s needs.

Economic transactions should take place withina just, responsible, free-market economy.
16

Prohibitions

Interest, usury (riba)

Islam &Business

Uncertainty

Gambling

Prohibited products and industries
17

Time Value ofMoney"A dollar today is always
worth more than a dollar
tomorrow"

18

•
•
•
•

CheatingUnclear
Ambiguous
No informed decision possible

Unfair19

Too Risky• Game of chance• Wealth by chance• Addiction• Unexpected consequences• Exploitation

20

Haram21

Islamic banking

IslamicFinance &Banking

Over 300 Islamic banks aroundthe globe

Follow Sharia (Islamic law)22

Islamic Finance & Banking• Do you think anyone can use Islamic
financial services?

23

Only for Muslims*1/3 is a non-Muslim

Not profit orientedMyths!

Practiced only in Muslim countries
It is a new industry

24Interest-free banking

IslamicFinance &Banking
Profit and loss sharing

25How Do They Make Profit?
26

Profit-and-loss sharing contracts (mudaraba)
Partnership and joint stock ownership(musharaka)

CommonContracts

Installment (cost-plus) sale (murabaha)
Leasing (ijara)

Islamic forwards (salam, istisna)27

Profit-and-loss sharing contracts (mudaraba)
Two-tiered mudaraba&First-tier mudaraba

Mudaraba• Restricted• Unrestricted

28

Partnership and joint stock ownership (musharaka)
Permanent/constant&Diminishing

Musharaka

29Installment (cost-plus) sale (murabaha)• Need forfinancing• Interest-free• Real estate• Car• Household appliances30

Installment (cost-plus) sale (murabaha)
Conventional banking caseMortgage31Installment (cost-plus) sale (murabaha)
Islamic banking case

Murabaha• No interest allowed• Murabaha replaces loans• Murabaha aka cost-plus financing (profit markup instead of interest)32

Islamic forwards (salam, istisna)• Istisna is a sale contract of assets that need to be manufactured before thedelivery.
2. Signs the contract with request topurchase the asset

4. Bank delivers the assets uponcompletion
1. Identifies the asset to beacquired

3. Signs a parallel ististnawith the manufacturer
33

Islamic forwards (salam, istisna)• Salam is an Islamic contract in which full payment is made in advance for specificgoods (often agricultural products) to be delivered at a future date.

Wheat 1000 kg by December 31st34

Islamic forwards (salam, istisna)$170 per kg

Wheat 1.000 kg by December 31st

$175 per kg
Company A
Wheat 1.000 kg by December 31st35

Zakat• Zakat – obligatory annual tax paid by individuals and businesses.
• Calculation of zakat by individuals: 2.5% of unused the whole lunar calendar year
wealth ≥ 84.8gr of gold (nisab)
Beginning of the year
~ $2.500 (savings)
End of the year
~ $4.000 (84.8gr of gold = $3.489.52)
Zakat payment~ $4.000*2.5%=$10036

ShariaSupervisoryBoard• Sharia Scholars• At least 3 members• Overview bank’s activities• Opinion in annual reports• Purify income37

Sukuk (Bonds)• Islamic financial certificate, equivalent to bond.
Sukuk

BondAsset ownership

Debt obligations

ProfitInterest• Case of Dana Gas• Conflicting rulings by UK and UAE courts

38

Criticism• Standardization issues• Emphasis on the form (vs substance)• CSR Reporting39CSR: Islamic Perspective• Corporate Social Responsibility• Unity of God• Stewardship• Holism40

41