THEORY AND PRACTICE OF MODERN ISLAMIC FINANCE

Transcription

1 THEORY AND PRACTICE OF MODERN ISLAMIC FINANCE THE CASE ANALYSIS FROM AUSTRALIA ABU UMAR FARUQ AHMAD BrownWalker Press Boca Raton

2 TABLE OF CONTENTS About the Author What's in this Book Acknowledgements list of Abbreviations and Acronyms Abstract xv xvn xxv xxvn xxix CHAPTER ONE: INTRODUCTION The Research Problem ):...-:.: Justification for the Study Objectives of the Study Methodology of the Study Benefits of the Study The Plan of the Study 46 CHAPTER TWO: THE SOURCES OF THE SHARI'AH - THE ISLAMIC LEGAL SYSTEM The SharTah: An Overview The Sources of the SharTah The Primary Sources A.I- Qur'an The Sunnah The Secondary Sources The Ijma" or Scholarly Consensus TheQiyas or Decision by Analogical Reasoning Th e Supplementary Sources The *Urfot Customary Practice of the Community The Istihsan or Juristic Preference Th e Maslaha or Public Interest The Istishab or Legal Presumption The Ijtihadot Independent Reasoning 69 CHAPTER THREE: THE APPLICATION OF THE SHARI'AH - THE ISLAMIC LEGAL SYSTEM The Sunni and Shi'a Juristic Schools of Islamic Law The Main Sunni Juristic Schools 76 VII

3 THEORY AND PRACTICE OF MODERN ISLAMIC FINANCE 1.I.I.I The Hanafi School The Maliki School The ShafTi School The Hanbali School The ShTa Juristic Schools The Application of the Shari'ah Principles of Financial Transactions to Islamic Finance Islamic Legal Maxims for Financial Transactions Intentions and Acts The Doubt and Certainty :...~_ The Removal of Harm The Rules of Necessity Offering and Obtaining Benefit versus Liability The Role of Custom The Limitation Philosophy and Rules of Transaction in Islamic Law Rife-Free Transactions Transactions Free From Gharar Contracts Void ofqimarand Maysir Sanctity of Contracts Non-interference in Price Fixation Fair Prices of Commodities Release of Adequate Information Devoid of Harm Application of Products in Islamic Financial System Islamic Modes of Financing Equity-based Financing Modes Debt-based Financing Modes 104 CHAPTER FOUR: THEORIES OF FINANCIAL REGULATION An Overview of Financial Regulation Theoretical Frameworks for Regulation The Public Interest Theory of Regulation no Abuse of Market Power in Externalities Public Goods Asymmetric Information 112 VIII

4 TABLE OF CONTENTS The Capture Theory of Regulation The Economic Theory of Regulation Categories of Regulation The Social Regulation Economic Regulation The Objectives of Financial Regulation^ Financial Stability Consumer Protection Competition Promotion Concluding Remarks 118 CHAPTER FIVE: HISTORICAL EVOLUTION OF FINANCIAL PRODUCTS Evolution of Conventional Financial Products The Concept of Time Value of Money Contingent Claims Negotiability of Claims Evolution of Islamic Financial Products Islamic Financial Products: The State of the Art Consumer and Business Loan: Islamic Alternatives Buy-Sell-Back Arrangements as Murabaha Lease-to-Purchase or Diminishing Partnership as 'Ijara or Musharaka Mutanaqisa Consumer Finance through a Three-Party Contract Known as Tawatruq Investment Vehicle: Islamic Alternative Corporate and Government Bonds: Islamic Alternatives Insurance: Islamic Alternative Bank Deposit and Fixed Income Security: Islamic Alternatives Concluding Remarks 132 CHAPTER SIX: ISLAMIC FINANCE PRACTICE IN THE AUSTRALIAN LEGAL CONTEXT The Regulatory Regime for Islamic Finance in Australia The Development of Legal Framework of Islamic Finance 142 IX

5 THEORY AND PRACTICE OF MODERN ISLAMIC FINANCE 6.2 Legal and Regulatory Challenges of Islamic Finance in Australia Legal and Regulatory Issues Problem of Operating as a Bank Regulatory Change The Incompatibility of the Basel Accords Mortgage Lending Law The Cost Prohibitiveness of Islamic Home Financing Exclusion from Lender of Last Resort Function ; L Absence of Interest-free Pension Funds Absence of Islamic Insurance Australian Legal Concern Islamic Legal Concerns Other Related Issues Lack of Understanding on Islamic Finance Risk Analysis and Balance Sheet Management Absence of a Standard Rate of Return Difficulty in Classifying Risk Sharing Funds Problem of Accounting Standard International Prospective 158 CHAPTER SEVEN: COMPLIANCE REQUIREMENTS FOR ISLAMIC FINANCE IN AUSTRALIA Prudential Standard Requirements of Islamic Finance Effective Legal, Regulatory and Supervisory Framework Improved Corporate Governance Effective Risk Management System Development of a Dynamic Islamic Financial System Development of Comprehensive Legal Framework Development of Vibrant Islamic Financial Markets Compliance with Core Principles Transparency and Disclosure Requirements 165

6 TABLE OF CONTENTS 7.4 Consumer Credit Code of Islamic Finance Concluding Remarks 168 CHAPTER EIGHT: CRITICAL ANALYSIS OF FINANCIAL INSTRUMENTS USED BY ISLAMIC FINANCIAL SERVICES PROVIDERS (IFSPS) IN AUSTRALIA Australian Islamic Financial Services Providers: An Overview Muslim Community Cooperative (Australia) Limited Islamic Co-operative Finance v Australia Limited Iskan Finance Pty Limited Instruments Used by Australian Islamic Financial Services Providers: A Critical Analysis Equity-based Financial Instruments Rules of Mushamka Mutanaqisa Contract Critique of Musharaka Mutanaqisa Contract IFSPs' Home Financing on Musharaka Mutanaqisa: How it Works in Practice? Non-Equity (Debt-Based) Financial Instruments Rules Relating to Murabaha Contracts Risk Management in Murabaha: IICG versus Symphony Gems [2002] Critique of Murabaha Contract IFSPs' Home, Motor Vehicle and Consumer Goods Financing on Murabaha Rules of the 'Ijarahwa Iqtina' Con tract Critique of the Ijarahwa Iqtina' Contract Motor Vehicle Financing under the 'Ijara wa 'Iqtina': How it Works in Practice? Rules and Forms of the Ijara Muntahia Bittam/eek Contract Home Financing under the 'Ijara Muntahia Bittamieek: How it Works in Practice? Critique of the 'Ijara Muntahia Bittamieek Contract Concluding Remarks 220 XI

7 THEORY AND PRACTICE OF MODERN ISLAMIC FINANCE CHAPTER NINE: PRACTICE OF MODERN ISLAMIC FINANCE IN AUSTRALIA: COMPARATIVE ANALYSIS AND DIVERGENCE FROM THE SHARTAH IFSPs' Musharaka Mutanaqisa Home Financing and the Conventional Mortgage: A Comparative Analysis IFSPs'Home Financing on Ijara Muntahia Bittamieek and Conventional Mortgage: A Comparative Analysis IFSPs' Motor Vehicles Financing on Ijara wa Iqtina' and Conventional Motor^Vehicles Financing: A Comparative Analysis The Extent of IFSPs' Compliance with the SharTah in their Current Practice Divergence from the SharTah in IFSPs' Practice of Debt-based Financial Products Islamic 'IjaraMortgages Financing on Murabaha 245 CHAPTER TEN: THE UK REGULATORY FRAMEWORK FOR ISLAMIC BANKING: APPROPRIATENESS FOR ADOPTION INTO AUSTRALIA o. 1 The Legislative Framework for Islamic Finance in the UK o. 1.1 The Financial Services Authority: The UK's Single Statutory Authority o. 1.2 The Role of the Financial Services Authority as a Regulator Conditions for Authorisation of Islamic Banks The UK's Tax Proposals for Shari'ah- Compliant Products on Islamic Financial Services Providers and their Users Taxation of SharTah-compliant Financial Products: Recent Developments The Key Concepts in the New Tax Proposals Application of the New Tax Proposals to Islamic Finance Stamp Duty Land Tax 264 XII

8 TABLE OF CONTENTS 10.3 The Objectives of the UK's Financial Regulations and Their Application to Islamic Banking The Aims and Objectives of the UK's Financial Regulations The Relationship between the Objectives of the UK's Financial Regulations and Islamic Banking Structures Islamic Banking under the Current UK Regulatory System The Attitude of the UK Courts Towards the SharTah Shamil Bank of Bahrain EC versus Beximco Pharmaceuticals Umited and Others [2004] The Relevance of the UK Approach to the Australian Experience in Islamic Banking 271 CHAPTER ELEVEN: SUMMARY, FINDINGS, AND RECOMMENDATIONS Summary and Findings of the Study Recommendations for the Study Suggestions for Further Research 287 References Cited 289 Glossary of Arabic Terms 305 XIII