Islamic Capital Markets: Products and Strategies

482 Pages·2011·2.49 MB·English

by  Michael Mahlknecht

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Islamic Capital Markets
i
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ForothertitlesintheWileyFinanceSeries
pleaseseewww.wiley.com/finance
ii
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Islamic Capital Markets
Products and Strategies
M. Kabir Hassan
Michael Mahlknecht
A John Wiley and Sons, Ltd., Publication
iii
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Thiseditionfirstpublished2011
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LibraryofCongressCataloging-in-PublicationData
Hassan,M.Kabir.
Islamiccapitalmarkets:productsandstrategies/M.KabirHassan,MichaelMahlknecht.
p.cm.—(Thewileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-68957-8
1.Banksandbanking—Islamiccountries.2.Capitalmarket—Islamiccountries.3.Finance—Islamiccountries.I.
Mahlknecht,Michael.II.Title.
HG3368.A6M362011
332(cid:1).0415091767—dc22
2010050394
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN978-0-470-68957-8(hardback),ISBN978-1-119-99137-3(ebk),
ISBN978-1-119-97081-1(ebk),ISBN978-1-119-97082-8(ebk)
Typesetin10/12ptTimesbyAptaraInc.,NewDelhi,India
PrintedinGreatBritainbyAntonyRoweLtd,Chippenham,Wiltshire
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Contents
AbouttheContributors xv
Preface xxv
PARTI GENERALCONCEPTSANDLEGALISSUES 1
1 RahnConceptsinSaudiArabia:FormalizationandaRegistrationand
PrioritizationSystem 3
MichaelJ.T.McMillen
1.1 Introduction 3
1.2 TheMortgageLaw 4
1.2.1 GeneralObservations 4
1.2.2 SpecificProvisions 6
1.3 Conclusion 13
Notes 13
2 TheShariahProcessinProductDevelopmentandApprovalinICM 23
AhceneLahsasnaandM.KabirHassan
2.1 Introduction 23
2.2 ProductDevelopment,FinancialEngineering,andInnovationin
IslamicFinance 23
2.2.1 PrinciplestobeConsideredinProductDevelopment,
Innovation,andFinancialEngineering 24
2.2.2 AreaofProductDevelopment,Innovation,andFinancialEngineering 25
2.2.3 FailureofInnovationandFinancialEngineering 25
2.3 TheShariahFrameworkinProductDevelopmentandApproval 26
2.3.1 SourcesofShariahLaw 26
2.3.2 MaqasidalShariah 31
2.3.3 LegalMaxims 33
2.3.4 RegulatorsandStandard-SettingOrganizations:Regulations,
Standards,andParametersforIslamicFinance(AAOIFI,IFSB,
andOthers:ShariahStandards,CorporateGovernance,and
PrudentialRegulations) 34
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vi Contents
2.4 TheTypesofProductinIslamicFinance 37
2.4.1 Shariah-BasedProducts 37
2.4.2 Shariah-CompliantProducts 39
2.5 ProcessofProductDevelopmentinShariah-BasedProducts 39
2.5.1 ExampleofProductDevelopmentinShariah-BasedProduct:
IjarahMuntahiahBittamlik(LeasingEndingwithOwnership) 40
2.6 ProcessofProductDevelopmentinShariah-CompliantProducts 41
2.7 TheFrameworkandProcessFlowofProductApprovalin
IslamicFinance 43
2.7.1 TheFlowoftheProcessofApprovaloftheNewProduct:
FromtheProductOwnertotheMarketPlace 43
2.7.2 MechanismforObtainingRulings 46
2.7.3 PositionoftheIFIwithRegardtotheResolutionsofSSBand
IFSBPrinciplesGoverningtheSSB 47
2.8 TheMethodologyUsedintheApprovalProcess 49
2.8.1 TheGeneralRulesandStandardsGoverningtheProduct
ApprovalinIslamicFinance 50
2.8.2 MethodologyandStandardsoffatawainIslamicFinance
PriortoIssuingafatwaandResolutions 50
2.8.3 MethodologyoffatawainIslamicFinanceinIssuingthe
IslamicRuling 50
2.8.4 MethodologyofPresentingfatawainIslamicFinance 51
2.8.5 MethodologyofEmpoweringthefatwainIslamicFinance 52
2.9 ProductApprovalinSecuritiesinIslamicCapitalMarkets 52
2.9.1 ShariahCriteriaforListedSecurities 53
2.9.2 PrimaryActivitiesCriteria 53
2.9.3 TheProductApprovalofSecuritiesinMixedCompanies 54
2.9.4 ImageasCriteriaforListedSecurities 56
2.9.5 QuantitativeandQualitativeApproachinScreeningProcess
inCapitalMarket 56
2.9.6 ImagewithBenchmark 57
2.9.7 ImagewithoutBenchmark 57
2.9.8 FundamentalsofShariahAssessmentonImageAnalysis 57
2.9.9 RelationshipofImageandPrincipleofShariah 57
2.10 ApplyingtheShariahAdvisoryCouncilMethodology 60
2.10.1 Case1:WawasanHolding 60
2.10.2 Case2:GemadaBerhad 61
2.11 OtherMethodologyofShariahScreeningProcessforSecurities 62
2.11.1 FTSEShariahIndexScreeningMethodology 62
2.11.2 YasaarShariahIndexScreeningMethodology 63
2.11.3 DJIMShariahScreeningProcess 63
2.12 Conclusion 67
Notes 67
3 IntegrationofSocialResponsibilityinFinancialCommunities 69
SaydFarookandRafi-UddinShikoh
3.1 Introduction 69
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Contents vii
3.2 TheConflictingIdeologueswithinIslamicFinance 70
3.3 CoreMotivationsofConventionalBusinessModelsandTheirSocial
ResponsibilityMandates 71
3.4 Islam,Business,andSocialResponsibility 73
3.4.1 “Taqwa-Centricity”(GodConsciousness)andHumanBeings
asVicegerentsonEarth 73
3.4.2 PrimaryResponsibilities:ToEducateandEstablishJustice 74
3.4.3 Ability-BasedFocus 75
3.4.4 Individualvs.InstitutionalResponsibility 75
3.4.5 ExistingParadigmsofSocialResponsibilityDiscourseinIslam 76
3.5 CaseforBroaderSocialResponsibilityMandate 76
3.5.1 IFIs’SpecialObligation 77
3.5.2 ReligiousandFinancialObligations 78
3.5.3 NewRealities 78
3.5.4 DifferentfromCharities 79
3.6 CurrentChallengesandRecommendedApproachtoIslamic
SocialResponsibility 79
3.6.1 RegularizeaFrameworkofMandatoryandRecommended
SocialResponsibilities 79
3.6.2 MandatoryFormsofSocialResponsibility 80
3.6.3 RecommendedForms 81
3.7 DisclosureasaMeansofAccountability 84
3.8 LessonsfromCurrentSociallyResponsibleBusinessPractices 85
3.8.1 KeyLessonsfromCurrentPractices 85
3.9 ConcludingThoughts 86
Notes 86
References 88
FurtherReading 89
4 TheDisputeResolutionFrameworkfortheIslamicCapitalMarket
inMalaysia:LegalObstaclesandOptions 91
UmarA.OseniandM.KabirHassan
4.1 Introduction 91
4.2 TheLegalFrameworkoftheIslamicCapitalMarketinMalaysia 92
4.2.1 RelevantLegislationsRegulatingICMinMalaysia 92
4.2.2 GuidelinesandPracticeNotes 95
4.3 TheNatureofDisputesAmongMarketPlayers 96
4.4 ConstraintsandConcernsOvertheCurrentLegalFramework 97
4.4.1 JurisdictionoftheHighCourtvsShariahCourtofAppeal 97
4.4.2 ShariahDisputeResolutionintheMalaysianICM 98
4.4.3 InadequacyoftheExistingLegalReforms 101
4.5 DisputeResolutionModelsfortheCapitalMarkets 102
4.5.1 TheSaudiArabianModel 102
4.5.2 UnitedArabEmiratesDisputeResolutionFrameworkforthe
CapitalMarket 104
4.5.3 AHybridModelfortheMalaysianIslamicCapitalMarket 105
4.6 Conclusion 106
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viii Contents
CaseStudies 107
Notes 113
References 113
5 TheSmallWorldofIslamicFinance:HowGoodGovernancecanAssist
inTakingtheIslamicFinanceIndustrytotheNextLevel 115
MuratU¨nal
5.1 Introduction 115
5.2 ShariahScholarsintheGCC–ANetworkAnalyticPerspective 116
5.3 GoodGovernance-RelatedPoints 118
5.4 Summary 123
References 124
6 TheAlphaandOmegaofAbrahamicFinance 125
MuftiTalhaAhmadAzamiandShahzadSiddiqui
6.1 Introduction 125
6.2 JewishFunds 126
6.3 CatholicFunds 127
6.4 SociallyResponsibleInvesting(SRI)Funds 127
6.5 IslamicFundsRedux 128
6.6 Alpha:QuantitativeResultsofAbrahamicFunds 132
6.7 AmanaandtheBenchmarks 135
6.8 Conclusion 136
Appendix:TheAbrahamicFamilyTree 137
Notes 137
References 142
PARTII GLOBALISLAMICCAPITALMARKETTRENDS 145
7 IslamicDerivatives:Past,Present,andFuture 147
PriyaUberoiandAliRodKhadem
7.1 Introduction 147
7.2 FormalShariahObjectionsandSolutions 148
7.2.1 ForwardsandFutures 148
7.2.2 Options 149
7.2.3 SwapsandCurrencyTransactions 151
7.3 SubstantiveShariahObjectionsandResolutions 153
7.3.1 Existence,Ownership,Possession 154
7.3.2 Speculation,gharar,andmaysir 155
7.3.3 TradingObligationforObligation 158
7.4 IslamicSwapsandCurrencyTransactions 158
7.4.1 Cross-currencySwap 158
7.4.2 ProfitRateSwap 161
7.4.3 FXOption 163
7.4.4 TotalReturnSwap 164