Imane Karich – Consultante

BELSIF – Islamic Banking & Investing Seminar29 October 2008

ISLAMIC VISION of BANKING & INVESTING

Table of Content

Islamic Finance – Theory & Concepts

Description of the main islamic financial instruments

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Islamic Finance – Myths & Realities

Islamic Finance IS NOT a RELIGIOUS system; a simple « Interest-Free » system; a discriminatory system restricted to Muslim People

Islamic Finance IS: a SYSTEM based on religious ETHICAL principles; an Open system and a real alternative to conventional

finance.

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BASIC PRINCIPLES

Islamic Finance is part of the Islamic Economic System, part of the Chari’a System

Islamic Economy is a Normative system supported by moral and ethical values and guidelines of the Islamic Law;

Islamic Finance tends to establish financial equity and preventing injustice in business deals

General Basis Rule of the Economic Islamic System:CORAN - Sourate Al Baqarah - Verse 275 – 1st part:

« God has allowed Trading…. »

Fundamental principle of trading system: exchange of real goods Incentive for Participation and Risk Taking:

Principle of Profit & Loss sharing No transfer of risk with the capital

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And the Exception…

In the light of the search of Equity and Justice

Verse 275 - 2nd Part:…and has forbidden interest »

Avoid Injustice and unjustified wealth creation;

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Roles of Money and Definition of Riba

Difference between Usury & Interest ? > Notion and role of Money:

Unity of Measure; Mean of exchange Reserve of Value

Conclusion: no difference between « reasonable » interest and usury

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Gharar

Fuzziness – Ignorance – Uncertainty in the contractual terms – ex:

Contingency of exchange results, Absence of the good during the exchange, …

≠ Risk taking inherent to trading; Less strict than the interdiction of Riba.

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Islamic Banking system

Same role as the conventional banking system: Financial intermediary between investors and

entreprenors To improve the efficiency and the liquidity of financial

resources exchange;

The main difference is situated in the risk taking owner : is not transfered with the capital but remains with the property right of the financial resources.

The Bank becomes a privileged partner in Business transactions.

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Islamic Bank – Basic functioning

Islamic Bank

Contract Mudharaba (or Wakalah)

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BANQUE

MUDHARIB

RABB

al

MAL

Clients Investissors/depositors

Clients Entrepreneurs/Debitors

Funds mobilisationFunds User

Islamic Vision on Investment

Investment in the sources of Islam: Thesaurisation Zakat Financial Risk Speculation

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Thesaurisation: Authorised sparing:

Balance and Equilibrium; With a clear objective;

= wealth accumumation without spending or investment objectives on a medium/long term

Zakat: Progressive seizure of the non used wealth;

Islamic Vision on Investment

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Notion of Financial Risk: Pure Risk vs Financial Risk; Commercial Risk vs Speculative Risk; Profit & Loss Risk; Objective Risk;

Speculation: Bet on a future event on an aleatory and

subjective way; Without rational fundements; Voluntary excessive risk;

Islamic Vision on Investment

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Investment Universe

Limited investment universe No Alcohol, entertainment, banking, gambling arms…

activities + other specific rules applied to mutual funds (see

later)

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Description of main Financial Instruments

Based on Islamic Commercial Law and on traditional commercial contracts;

Different categories of contracts:

Participation contracts (PLS based); Musharaka and Mudharab

Financing contracts (debt based) Murabaha and Ijara

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MUSHARAKA

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Project Financing

MUDHARABA

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Project Financing

Mortgage Financing

MURABAHA

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Property right

Property rights

Mortgage Financing

IJARA

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Titre de propriété

Contrat de vente

Titre de propriété

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Mortgage Financing

Musharaka Mutanaqissa

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Titre de propriété

Titre de propriété

Islamic Investment in Practice

When investing, two aspects are important: The Nature of the instrument/transaction The Nature of the Issuer

Nature of Instrument : islamic view on conventional financial products and derivatives

Bonds > Riba Derivatives > Gharar

Nature of the Issuer : investment universe > screening norms Innovation for developing own financial vehicles

Equity Mutual Funds Sukuk Arbun Wahd

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Islamic Investment in Practice

EQUITY Investment: Nature of the instrument : Equity investment

is fully acceptable (« Mudharaba ») Nature of the issuer : screening norms Mutual Funds – one of the most successful

investment vehicle Apparition of « Islamic Indexes » - DJIM

Definition of Screening Norms

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Islamic Investment in Practice

Screening Norms:1. Business of the Issuer Company (core and secondary activities):

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Islamic Investment in Practice

Screening Norms:2. Financial Structure of the Issuer Company:

a) Interest Earnings:

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Islamic Investment in Practice

Screening Norms:2. Financial Structure of the Issuer Company:

b) Debt Ratio:

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Islamic Investment in Practice Screening Norms:2. Financial Structure of the Issuer

Company:

C) Liquid Assets:

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Islamic Investment in Practice

Dow Jones Islamic Market Index – DJIM: Introduced in 1999 First benchmarks for sharia-compliant portfolio

management; Performance:

YTD : -27% Since 5 years : +44%

More info : www.djindexes.com

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Islamic Investment in Practice

Creative engineering – new products: Success of Sukuk investments; Alternative for derivatives products : ‘arbun contracts,

wahd contracts, …

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Thanks

Imane Karich

FINALYSE BRUSSELS

imane.karich@finalyse.com

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