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Understanding Islamic Finance 3. For other titles in the Wiley Finance Series please see www. Understanding Islamic Finance Muhammad Ayub 5. No part of this publication may be reproduced, stored in a retrieval system or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except underthe terms of the Copyright, Designs and Patents Act or under the terms of a licence issued by the CopyrightLicensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing ofthe Publisher.

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Anniversary Logo Design: Richard J. ISBN cloth : alk. Finance—Islamic countries. Finance—Religious aspects—Islam. Economics—Religious aspects—Islam. A6A98 Ltd, Pondicherry, IndiaPrinted and bound in Great Britain by Antony Rowe Ltd, Chippenham, WiltshireThis book is printed on acid-free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper production.

Contents xi 8. Contents xiii Contents xv List of Boxes and FiguresBoxes 8. ForewordThe last decade has seen an unprecedented growth not only in the practice of Islamic bankingand finance but also in the literature on Islamic finance.

This book, however, is not merelyanother addition to the available literature. It has a marked distinction. A goodcoverage of recent innovation in Islamic financial products is also a distinguishing featureof this book.

Islamic finance is a subject that has now been recognized as a distinct academic disciplineto be included in the curricula of economics, business, finance and management facultiesof institutions of higher learning. There are several universities and institutions, both inMuslim and other countries, that are teaching courses on Islamic banking and finance. Theseteaching programmes, however, have been seriously constrained by the non-availability of astandard textbook to be followed.

I can say with confidence that this book carries the statusof a textbook to be prescribed in the senior levels of undergraduate programmes as well asin graduate programmes in the relevant faculties. Islamic finance is still a new subject. There is great interest in conducting research ondifferent aspects of its theory and practice in the contemporary set-up. Students of economicsand finance keenly look for topics of research in this field.

The analytical approach adoptedin this book is conducive to bringing to light potential areas of research. Thus, researchstudents in the area of Islamic finance should find this book a must read.

The author of the book has a long experience of research in the State Bank of Pakistan the central bank of the country , which has played, during the last decade, a significantrole in promoting Islamic finance in the country. By virtue of his position in the researchdepartment of the State Bank of Pakistan, he has a very valuable insight into the operationsof Islamic banks as well as their feasibility to survive in competition with the conventionalbanks in the country.

His approach in presenting the material in this book is very pragmatic. I congratulate the author as well as the publisher in bringing out this useful book. PrefaceIslamic scholars have been critically examining the modus operandi of modern commercialbanks ever since their establishment in the Muslim world in the last decade of the nineteenthcentury.

Keeping in mind that direct or indirect intermediation between resource surplus andresource deficit units was necessary to fulfil the growing needs of human societies and forthe development of business and industry, Islamic scholars and economists started offeringconceptual models of banking and finance as a substitute for the interest-based financialsystem by the middle of the twentieth century.

Institutions offering Islamic financial services started emerging in the s in isolation,but the movement of Islamic banking and finance gained real momentum with the estab-lishment of Dubai Islamic Bank and the Jeddah-based Islamic Development Bank in Tocomplete the cycle of Islamic finance, institutions offering Takaful services started emergingin as a substitute for the modern insurance system. Theestablishment of the Islamic Financial Services Board IFSB in , as a standard-settinginstitution, also paved the way for making Islamic finance a globally acceptable proposition.

It provided impetus for the promotion and standardization of financial operations of Islamicfinancial institutions IFIs , involving consultations among the relevant regulating authoritiesand the international financial institutions. The emergence of Sukuk as investment andliquidity management instruments in the last six years not only tended to complete theinvestment cycle in the emerging financial structure, but also provided a powerful drivingforce for its development, with huge potential ahead.

The amazing develop-ment so far, the present state of affairs and the challenges ahead give rise to some crucialconsiderations for the experts, policymakers and practitioners in Islamic finance. First, therapid growth of the industry over the last decade has enhanced the demand for committed,devoted and professionally trained personnel for Islamic banking operations. In particular,students of business and finance, the product developers for the emerging industry and thepersonnel involved in operations need to have proper knowledge of the principles of Islamicfinance, the essential requirements of different Islamic modes of financing and how they canbe applied to various operations and services of banks and financial institutions.

Accordingly,the availability of any comprehensive book, covering both theory and practical aspects ofIslamic finance, is regarded a prerequisite for promoting Islamic banking and finance. I accepted the challenge and worked on the outline, covering Islamic economics as the basisof Islamic finance, principles of Islamic finance, the main features of Islamic commerciallaw, modes, products and procedures to be adopted by Islamic financial institutions and therole Islamic finance can play in the development of the financial system and economies.

The external reviewer of Wiley, while giving his expert opinion on the original manuscript,suggested adding a chapter on appraisal of common criticism of Islamic banking and finance. Although such discussions were there in scattered places in the book, covering all criticismand misconceptions about the principles and operations of Islamic banks in one chapter inthe final manuscript will hopefully help readers to remove confusion, besides adding valueto the book. In places, the minority view inrespect of some products has also been included to give a measure of dissent.

Preface xxiii Among those who accept the prohibition of interest, there are two approaches: accordingto the mainstream approach, IFIs can use both categories of Islamic modes, while somebelieve that Islamic banking, in letter and spirit, means only Shirkah-based transactions.

A common question faced by the practitioners is whether the Islamic banking in vogue willbe able to remove distortions created by the interest-based system, even in the long run. Fiscal, credit and monetary policies of the states have a crucial impact on the financialbusiness in any economy. This would require the creation of real-asset-based money onlyand promoting retail and corporate financial services on the basis of fair play and risk-sharing.

Therefore, for sustainable and all-pervasive development of economies and thewelfare of human beings as a whole, the real-asset-based system of finance with care forsocio-economic ethics needs to be introduced gradually on a wider scale. Other people at Wiley,who persistently persuaded me to carry on the work, include Emily Pears and VivienneWickham and the rest of the editorial staff of this wide-range publishing house.

I have extensively benefited from the scholarly works of a number of institutions andindividuals in the preparation of the book. The institutedeserves my deep appreciation and gratitude. I must gratefully appreciate the invaluableservices of Dr Ahmad Mohamed Ali, President of the IDB, in rendering the IRTI a refer-ence point for anyone desirous of understanding conceptual and operational contours of theemerging Islamic finance industry.

Scholarly works of a large number of other personalities also helped me a lot in thepreparation of this book. I pay my profound gratitude to all of them.

Tahir Mansoori. I wish to record my thanksand gratitude to all of them.


Understanding Islamic Finance

You are currently using the site but have requested a page in the site. Would you like to change to the site? Muhammad Ayub. This book is not only an important text for all banks and financial institutions entering this particular market with a commitment to building Islamic financial solutions, but is also essential reading for undergraduate and postgraduate students of Islamic finance.







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