MUHAMMAD AYUB is Director Training, Development and Shari’ah Aspects at IIBI, London. Formerly, he was with the State Bank of Pakistan (central bank) where he headed the Islamic Economics Division and Shari’ah Compliance Division as Senior Joint Director in the Research and Islamic Banking Departments. He also served as Head of Islamic Banking at NIBAF, the training wing of SBP. Besides contributing a large amount of material, he has been serving as Master Trainer on theory and practice of Islamic finance.For last two decades, he has been involved in R&D for facilitating I.B. Industry, Products Development, IB Prudential regulations, Risk management and Shari’ah related controls and audit of Islamic banking institutions. This, along with his association with various Commissions set up from time to time on application of Islamic banking system, has lent him a pragmatic and balanced approach, a prerequisite for presenting such a book.

• List of Boxes and Figures xviiForeword xixPreface xxiAcknowledgements xxvPART I FUNDAMENTALS 11 Introduction 31.1 Economic Scenario in the Neoclassical Framework 31.2 Conventional Debt: A Recipe for Exploitation 41.3 Growth per se May not Lead to Socio-economic Justice 61.4 Social Welfare Activities of the States 81.5 The Main Culprit 81.6 The Need of the Hour 91.7 Economics and Religion 101.8 Islamic Principles Can Make the Difference 111.9 Regulating Trade and Business 131.10 Islamic Finance Passing Significant Milestones 151.11 Could it Work to Achieve the Objectives? 161.12 About this Book 172 Distinguishing Features of the Islamic Economic System 212.1 Introduction 212.2 Islamic Sharî´ah and its Objectives 212.3 Why Study Islamic Economics? 252.4 Islamic Economics: What should it be? 302.5 Paraphernalia of Islamic Economics 322.6 Summary 413 The Main Prohibitions and Business Ethics in Islamic Economics and Finance 433.1 Introduction 433.2 The Basic Prohibitions 433.3 Business Ethics and Norms 643.4 Summary and Conclusion 704 The Philosophy and Features of Islamic Finance 734.1 Introduction 734.2 The Philosophy of Islamic Finance 734.3 Debt versus Equity 854.4 Islamic Banking: Business versus Benevolence 864.5 Exchange Rules 874.6 Time Value of Money in Islamic Finance 894.7 Money, Monetary Policy and Islamic Finance 904.8 Summary 96PART II CONTRACTUAL BASES IN ISLAMIC FINANCE 995 Islamic Law of Contracts and Business Transactions 1015.1 Introduction 1015.2 Mâl (Wealth), Usufruct and Ownership 1015.3 General Framework of Contracts 1055.4 Elements of a Contract 1065.5 Broad Rules for the Validity of Mu‘âmalât 1105.6 W‘adah (Promise) and Related Matters 1145.7 Types of Contracts 1175.8 Commutative and Noncommutative Contracts 1245.9 Conditional or Contingent Contracts 1265.10 Summary 1276 Trading in Islamic Commercial Law 1296.1 Introduction 1296.2 Bai‘ – Exchange of Values 1306.3 Legality of Trading 1316.4 Types of Bai‘ 1336.5 Requirements of a Valid Sale Contract 1336.6 Riba Involvement in Sales 1426.7 Gharar – A Cause of Prohibition of Sales 1436.8 Conditional Sales and “Two Bargains in One Sale” 1446.9 Bai‘ al‘Arbûn (Downpayment Sale) 1456.10 Bai‘ al Dayn (Sale of Debt) 1466.11 Al ‘Inah Sale and the Use of Ruses (Hiyal) 1476.12 Options in Sales (Khiyar) 1506.13 Summary 1527 Loan and Debt in Islamic Commercial Law 1557.1 Introduction 1557.2 The Terms Defined 1557.3 Illegality of Commercial Interest 1577.4 Loaning and the Banking System 1587.5 Guidance from the Holy Qur’ân on Loans and Debts 1597.6 The Substance of Loans 1597.7 Repayment of the Principal Only 1607.8 Time Value of Money in Loans and Debts 1607.9 Instructions for the Debtor 1617.10 Instructions for the Creditor 1627.11 Husnal Qadha (Gracious Payment of Loan/Debt) 1627.12 Remitting a Part of a Loan and Prepayment Rebate 1637.13 Penalty on Default 1657.14 Hawalah (Assignment of Debt) 1677.15 Security/Guarantee (Kafalah) in Loans 1687.16 Bai‘ al Dayn (Sale of Debt/Debt Instruments) 1727.17 Impact of Inflation on Loans/Debts 1727.18 Summary 174PART III ISLAMIC FINANCE – PRODUCTS AND PROCEDURES 1778 Overview of Financial Institutions and Products: Conventional and Islamic 1798.1 Introduction 1798.2 What is Banking or a Bank? 1798.3 The Strategic Position of Banks and Financial Institutions 1808.4 Categories of Conventional Financial Business 1818.5 The Need for Islamic Banks and NBFIs 1858.6 The Issue of Mode Preference 1958.7 Islamic Investment Banking 1998.8 Islamic Financial Markets and Instruments 1998.9 Summary and Conclusion 2119 Murabaha and Musawamah 2139.1 Introduction 2139.2 Conditions of Valid Bai‘ 2149.3 Murabaha – a Bai‘ al Amânah 2159.4 Bai‘ Murabaha in Classical Literature 2159.5 The Need for Murabaha 2169.6 Specific Conditions of Murabaha 2179.7 Possible Structures of Murabaha 2209.8 Murabaha to Purchase Orderer (MPO) 2229.9 Issues in Murabaha 2299.10 Precautions in Murabaha Operations 2339.11 Musawamah (Bargaining on Price) 2349.12 Summary 23810 Forward Sales: Salam and Istisna‘a 24110.1 Introduction 24110.2 Bai‘ Salam/Salaf 24110.3 Benefits of Salam and the Economic Role of Bai‘ Salam 24210.4 Features of a Valid Salam Contract 24310.5 Security, Pledge and Liability of the Sureties 24910.6 Disposing of the Goods Purchased on Salam 25010.7 Salam – Post Execution Scenarios 25210.8 Salam-Based Securitization – Salam Certificates/Sukuk 25410.9 Summary of Salam Rules 25510.10 Salam as a Financing Technique by Banks 25710.11 Istisna‘a (Order to Manufacture) 26311 Ijarah – Leasing 27911.1 Introduction 27911.2 Essentials of Ijarah Contracts 28011.3 General Juristic Rules of Ijarah 28111.4 Modern Use of Ijarah 28711.5 Islamic Banks’ Ijarah Muntahia-bi-Tamleek 29111.6 Summary of Guidelines for Islamic Bankers on Ijarah 29812 Participatory Modes: Shirkah and its Variants 30712.1 Introduction 30712.2 Legality, Forms and Definition of Partnership 30812.3 Basic Rules of Musharakah 31212.4 The Concept and Rules of Mudarabah 32012.5 Mudarabah Distinguished from Musharakah 32712.6 Modern Corporations: Joint Stock Companies 32812.7 Modern Application of the Concept of Shirkah 33012.8 Diminishing Musharakah 33712.9 Diminishing Musharakah as an Islamic Mode of Finance 33912.10 Summary and Conclusion 34313 Some Accessory Contracts 34713.1 Introduction 34713.2 Wakalah (Agency) 34713.3 Tawarruq 34913.4 Ju‘alah 35113.5 Bai‘ al Istijrar (Supply Contract) 35514 Application of the System: Financing Principles and Practices 35714.1 Introduction 35714.2 Product Development 35814.3 The Nature of Financial Services/Business 35814.4 Prospects and Issues in Specific Areas of Financing 36914.5 Islamic Banks’ Relationship with Conventional Banks 38414.6 Fee-based Islamic Banking Services 38414.7 Summary and Conclusion 386Appendix: The Major Functions of a Sharî´ah Supervisory Board In the Light of the AAOIFI’s Sharî´ah Standard 38715 Sukuk and Securitization: Vital Issues in Islamic Capital Markets 38915.1 Introduction 38915.2 The Capital Market in an Islamic Framework 39015.3 Securitization and Sukuk 39115.4 Summary and Conclusion 41216 Takaful: An Alternative to Conventional Insurance 41716.1 Introduction 41716.2 The Need for Takaful Cover 41716.3 The Sharî´ah Basis of Takaful 42016.4 How the Takaful System Works 42216.5 Takaful and Conventional Insurance Compared 42716.6 Status and Potential of the Takaful Industry 42816.7 Takaful Challenges 429Appendix: Fatâwa (Juristic Opinions) on Different Aspects of Insurance 43017 An Appraisal of Common Criticism of Islamic Banking and Finance 43317.1 Introduction 43317.2 The Common Myths and Objections 43317.3 Appraisal of Conceptual Criticism 43617.4 Appraisal of Criticism on Islamic Banking Practice 44517.5 Conclusion 45618 The Way Forward 45718.1 Introduction 45718.2 Agenda for the Policymakers 45718.3 Potential, Issues and Challenges for Islamic Banking 46118.4 Conclusion 479Acronyms 481Glossary 485Bibliography English Sources 497Arabic/Urdu Sources 503Suggested Further Readings 505Index 509

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