Islamic Finance Term Paper

Topics: Bank, Islamic banking, Sharia Pages: 27 (8881 words) Published: April 17, 2014
UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
MASTER OF BUSINESS ADMINISTRATION

GROUP ASSIGNMENT
SEPT – DEC 2013

TOPIC: ISLAMIC FINANCE

PRESENTED BY:
NAMEREGISTRATION NO
NDIRANGU MERCYD61/60537/2013
KIIO PETERD61/61023/2013
AGAO EMILYD61/79814/2012
MUTUKU ESTHERD61/80221/2012
OCHOLA JOSHUAD61/79312/2012
MUHALIA JOHND61/67666/2011
MAURICE OJOWD61/75719/2012
NICODEMUS KIPTOOD61/76091/2012
MOHAMMED CHUTE

OCTOBER 2013

TABLE OF CONTENTS

LIST OF ABBREVIATIONS3
INTRODUCTION4
1.BACKGROUND AND EVOLUTION OF ISLAMIC FINANCE5
2.THEORY REVIEW OF ISLAMIC FINANCE7
2.1 Shariah7
2.2 Monetary and Macro Theory8
2.2.1 Behavior of Credit Markets8
2.2.2 Risk-sharing9
2.2.3 Equity Considerations10
2.3 Banking Theory11
2.4 Islamic Financial Transactions14
2.4.1 Bai’al’inah (Sale and buy- back agreement)14
2.4.2 Bai’bithaman ajil (Deferred payment sale)14
2.4.3 Bai’muaijal (Credit sale)14
2.4.4 Mudarabah15
2.4.5 Murabahah15
2.4.6 Musawamah15
2.4.7 Bai Salam16
2.4.8 Hibah (Gift)16
2.4.9 Istisna16
2.4.10 Ijarah17
2.4.11 Ijarah thumma al bai (Hire Purchase)17
2.4.12 Ijarah-wal-iqtina17
2.4.13 Musharakah (Joint Venture)18
2.4.14 Qard Hassan/ qardul Hassan (Good Loan/ benevolent loan)18 2.4.15 Sukuk (Islamic Bonds)18
2.4.16 Takaful (Islamic Insurance)19
2.4.17 Wadiah (safekeeping)19
2.EMPIRICAL EVIDENCES20
2.1 Differences between Islamic Finance and Conventional Banking20 2.2 Relationship between Islamic Banking & Economic Growth20 2.3 Relationship between Liquidity Risk Management and Financial Performance of Islamic banks21 2.4 Effect of foreign presence on Islamic bank’s performance22 2.5 Efficiency in Islamic Banking23

2.6 Comparison of Technology between Islamic and Conventional Banks23 2.7 Impact of monetary policy shocks on the conventional and Islamic banks in a dual Banking System23 2.8 Islamic Banks and Financial Stability24

3.UNRESOLVED ISSUES IN ISLAMIC FINANCE25
3.1 Deposit Mobilization – How does it affect Islamic ideals?25 3.2. Financial distress in Islamic Banks25
CONCLUSION27
REFERENCES28

LIST OF ABBREVIATIONS
AAOIFIAccounting and Auditing Organization for Islamic Financial Institutions CBKCentral Bank of Kenya
CSVCostly State Verification
DEAData envelopment Analysis
FCBFirst Community Bank
FIQHFurqaan Institute of Quranic Healing
GABGulf African Bank
IDBIslamic Development Bank
IFRSInternational Financial Reporting Standards
IFSBIslamic Financial Services Board
KFHKuwait Finance House
LTDLimited
MENAMiddle East and North Africa
NGONon-Governmental Organization
OCBCOversea-Chinese Banking Corporation
OICOrganization of Islamic Conference
ROEReturn on Equity
ROA Return on Asset
SEASouth Eastern Asia
VARVector Auto Regression Methodology

INTRODUCTION
Islamic finance refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. Just like conventional financial systems, Islamic finance features banks, capital markets, fund managers, investment firms, and insurance companies. However, these entities are governed both by Islamic laws and by the finance industry rules and regulations that apply to their conventional counterparts. Contrary to popular belief, Islamic finance or banking is not just for Muslims. It aims to lay the foundations of an ethical and fair financial system, which consequently affects the socio-economic conditions of the market it is implemented in. Islamic financing, hence, can aptly service everyone irrespective of religious beliefs, wealth, ethnicity, caste or creed. The most distinguishing feature of the Islamic economic system is the prohibition of interest. Usury, Interest and Riba are synonymous terms but they have different technical meanings. Usury refers to the consumption loans given on higher rates and thus causing exploitation of...


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Cihak.M, Hesse.H, (2008) Islamic Banks and Financial Stability, IMF Working Paper
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http://dx.doi.org/10.1108/03068290310500652
Salman Syed Ali and Ausaf Ahmad, 2007Islamic Banking and Finance: Fundamentals and Contemporary Issues.
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