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Book: Islamic Finance: Law, Economics, and Practice

In his work “Islamic Finance: Law, Economics, and Practice”, Professor Mahmoud El-Gamal, as he himself claims, attempted ‘a qualitative overview of the practice of Islamic finance and the historical roots  that have defined its modes of operation’.

 

This book provides an overview of the practice of Islamic finance and the historical roots that define its modes of operation. The focus of the book is analytical and forward-looking. It shows that Islamic finance exists mainly as a form of rent-seeking legal-arbitrage. In every aspect of finance – from personal loans to investment banking, and from market structure to corporate governance – Islamic finance aims to replicate in Islamic forms the substantive functions of contemporary financial instruments, markets, and institutions. By attempting to replicate the substance of contemporary financial practice using pre-modern contract forms, Islamic finance has arguably failed to serve the objectives of Islamic law. This book proposes refocusing Islamic finance on substance rather than form. This approach would entail abandoning the paradigm of ‘Islamization’ of every financial practice. It would also entail reorienting the brand-name of Islamic finance to emphasize issues of community banking, micro-finance, and socially responsible investment.

Accessible analytical exposition by internationally renowned author on Islamic financial practice and its historical, religious and legal roots • Focuses on economic substance rather than religious and historical forms • Studies religious injunctions as regulatory mechanisms, in the tradition of ‘law and economics’.

About Author:

Mahmoud A. El-Gamal is Professor of Economics and Statistics at Rice University, where he holds the endowed Chair in Islamic Economics, Finance, and Management. Professor El-Gamal has also served in the Middle East Department of the International Monetary Fund (1995–6), and was the first Scholar in Residence on Islamic Finance at the U.S. Department of the Treasury in 2004. He has published extensively in the areas of econometrics, finance, experimental economics, and Islamic law and finance.

Table of Contents

1.Introduction

Finance without Interest?

  • Distinguishing Features of Islamic Finance

Prohibition-Driven Finance

Jurists, Shari‘a Boards, and Innovatio

Lawyers and Regulatory Arbitrage

  • Islamic Transactions Law as Common Law

Precedents, Analogies, and Nominate Contracts

Tradeoff between Efficiency and Legitimacy

  • Limits and Dangers of Shari‘a Arbitrage

Risk of Mispricing

Legal and Regulatory Risks

  1. Jurisprudence and Arbitrage

2.1 Islamic Law and Jurisprudence

The Canon: Qur’an, Tradition, and Consensus

Juristic Inference (Ijtihad) and Benefit Analysis

2.2 From Classical to Contemporary Jurisprudence

Jurisprudence, Revival, and Codification

Institution of Fatwa and Islamic Finance

2.3 Arbitraging Classical Jurisprudence

Shari‘a-Arbitraging Classical Property Law

Arbitraging Classical Contract Conditions

Arbitrage, Ruses, and Islamic Finance

3.Two Major Prohibitions: Riba and Gharar

3.1 The Prohibition of Riba

Canonical Texts on Riba

Economic Substance of the Prohibition of Riba

3.2 The Prohibition of Gharar

Definition of Gharar

Economic Substance of Prohibition

Insurance and Derivatives

3.3 Bundled vs. Unbundled Credit and Risk

  1. Sale-Based Islamic Finance

4.1 Basic Rules for Sales

Trust Sales: Murabaha, Tawliya, Waḍi‘a

Currency Exchange (Sarf)

4.2 Same-Item Sale-Repurchase (‘Ina)

Same-Item Trading in ‘Ina and Tawarruq

Custody Sale (Bay‘ Al-‘uhda) and Sukuk Al-ijara

4.3 Cost of Funds: Interest-Rate Benchmarks

Opportunity Cost for Conventional Fund Providers

Viability of Islamic Benchmark Alternatives

5: Derivative-Like Sales: Salam, Istisna‘, and ‘Urbun

5.1 Prepaid Forward Sale (Salam)

Parallel Salam

Conventional and Synthesized Forwards

5.2 Commission to Manufacture (Istisna‘)

5.3 Down-Payment Sale (‘Urbun)

‘Urbun as Call Option

  1. Leasing, Securitization, and Sukuk

6.1 General Lease Conditions

Flexible-Rate Financing

Subleasing, Repairs, and Insurance Costs

6.2 Asset-Backed Securities

Leasing and Securitization

Receivable Securitization and Sale of Debt

Bundling Asset-Based and Debt-Based Securities: A Paradox

6.3 Asset-Backed Leasing Bonds (Sukuk)

Credit-Rating Issues

Reward Pledges and Gifts Revisited

6.4 Usufruct Sukuk

6.5 Sukuk Al-Salam

  1. Partnerships and Equity Investment

7.1 Classical Types of Partnership

Silent Partnership: Theoretical Workhorse of Islamic Finance

Valid and Defective Silent Partnerships

7.2 Common-Stock Ownership

“Islamic Screens” and Their Shortcomings

Cleansing Returns

Positive Screens and the Islamic Brand Name

8.Islamic Financial Institutions

8.1 Banking and Islamic Banking

Theoretical Structure: Two-Tier Silent Partnership

Deposits vs. Loans: Trust and Guaranty

8.2 Insurance and Takaful

8.3 Two Sides of the Two Debates

Shari‘a Arbitrage vs. Islamic Prudential Regulation

8.4 Generic Agency Characterization of Financial Institutio

  1. Governance and Regulatory Solutions in Mutuality

9.1 Rent-Seeking Shari‘a Arbitrage and Absence of Mutuality

Potential for Mutuality in Islamic Banking

Need for Mutuality in Takaful

9.2 A Call for Mutuality in Banking and Insurance

Mutuality in Banking

Mutuality in Insurance

  1. Beyond Shari‘a Arbitrage

10.1 Shari‘a Arbitrage and Criminal Finance

10.2 Shari‘a Arbitrage at the Limit

Benchmarking ad Absurdum

Hedge-Fund Instruments – Shari‘a-Arbitrage Style

10.3 Self-Destructiveness of Shari‘a Arbitrage

Declining Shari‘a-Arbitrage Profit Margins

Dilution of the “Islamic” Brand Name

10.4 Toward a New Islamic Finance Identity

Macroeconomic Substance: Privatization Sukuk

Mosque-Based Network of Financial Mutuals

Positive Screens, Ethical Investment

Bibliographic Information

Title: Islamic Finance: Law, Economics, and Practice

Author: Mahmoud El-Gamal

Publisher: Cambridge University Press

Language: English

Length: 240 pages

ISBN: 9780521741262

Pub. Date: February 2009

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