Transcript Introduction to IF

Introduction to Islamic Finance
Sami Al-Suwailem
IRTI, IDB
1429H - 2008
Objectives of Islamic Finance
Wealth creation
Justice
Benevolence
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Principles of Islamic Finance
Economic transactions are generally
acceptable unless otherwise stated
Origins of prohibited dealings:
Injustice: Riba
Ignorance: Gharar
ً
ً
 ‫ وحملها اإلنسان إنه كان ظلوما جهوال‬
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Economic
Transactions
Prohibited
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Acceptable
4
Riba
All religions prohibit riba
Most legal systems put restrictions on
interest:
Interest ceiling
Ban on compound interest
 Why?
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What’s wrong with Riba?
Interest grows faster than wealth
Why?
Debt burden destroys the economy
Impossibility of repayment
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$1 Borrowed at 5% in 1 AD
1000
1,546,318,920,731,950,000,000
1500
60,806,303,788,323,700,000,000,000,000,000
2000
2,391,102,204,613,620,000,000,000,000,000,000,000,000,000
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Borrow 1 pence
at 4% in 1 AD
In 1750 debt equals weight of
the globe of gold
In 1990 it equals 8190 globes!
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Money & Debt in the U.S.
35,000
30,000
$billions
25,000
20,000
15,000
10,000
5,000
0
1976
1980
1985
1990
M2
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1995
2000
2005
2007
Total debt
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Debt Repayment
Debt exceeds available money
Repayment only with new debt
Economy is servicing debt
Interest exceeds 70% of exports
African countries pay for debt services
twice as health-care
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Debt Inverted Pyramid
Debt
wealth
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Restrictions on Debt
E.U. requirements:
Deficit < 3% of GDP
Debt < 60% of GDP
Intertemporal Budget Constraint:
The present value of debt go to zero
Prevents Ponzi financing
Why this won’t work?
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Islamic Solution
Finance is tied to real transactions
Finance always serves real economy
Return on financing is paired with
wealth creation
Address debt creation from the start
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Debt in Islamic Economy
Debt
Wealth
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Finance in Islam
Finance is embedded in real transactions
Islamic contracts:
Deferred sale, leasing, Salam, Musharakah…
Time value is in line with real value
Lending is strictly a non-profit activity
Lending vs. financing?
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Riba vs. Deferred Sale
Def. Sale
Riba
Debt
Tied to real
exchange
Not tied to real
exchange
Time
Value
Compensated by
gains from trade
Not
compensated
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Types of Riba
Debt riba: riba nasee’ah
Incremental riba: riba al-fadhl
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Riba al-Fadhl
Debt Riba consists of:
unequal amount + delay
Unequal amount = riba al-fadhl
Delay = riba al-nassa’
Each component is prohibited to
prevent any possibility of debt riba
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Riba al-Fadhl…
Specific types of commodities:
Gold and silver (money)
Wheat, barley, date, and salt (staple food)
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Gold
Silver Wheat Barley Dates
Salt
Gold






Silver






Wheat






Barley






Dates






Salt






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Range of Riba al-Fadhl
Applies to any fungible and necessary
commodity
Contemporary example?
What about water?
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Reasons for Riba al-Fadhl
Prevents the possibility of debt riba
 How?
Protects necessary commodities and
goods
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The Principle of Similarity
Similarity negates gain from trade
Variety allows mutual benefit
Diversity is essential for prosperity
Stronger similarity imposes stronger
restrictions of exchange
Riba: imbalanced exchange of similars
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Similarity
Low
High
Locate sale and riba
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Conclusion
Roots of prohibited transactions:
Riba
Gharar
Islamic principles promote better
growth and more balanced wealth
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