Understanding Islamic Finance -- Contents -- List of Boxes and Figures -- Foreword -- Preface -- Acknowledgements -- Part I Fundamentals -- 1 Introduction -- 1.1 Economic Scenario in the Neoclassical Framework -- 1.2 Conventional Debt: A Recipe for Exploitation -- 1.3 Growth per se May not Lead to Socio-economic Justice -- 1.4 Social Welfare Activities of the States -- 1.5 The Main Culprit -- 1.6 The Need of the Hour -- 1.7 Economics and Religion -- 1.8 Islamic Principles Can Make the Difference -- 1.9 Regulating Trade and Business -- 1.10 Islamic Finance Passing Significant Milestones -- 1.11 Could it Work to Achieve the Objectives? -- 1.12 About this Book -- 2 Distinguishing Features of the Islamic Economic System -- 2.1 Introduction -- 2.2 Islamic Sharīáh and its Objectives -- 2.2.1 Sources of Sharīáh Tenets -- 2.2.2 Objectives (Maqāsid) of Sharīáh -- 2.3 Why Study Islamic Economics? -- 2.3.1 The Role of Islamic Economists -- 2.4 Islamic Economics: What should it be? -- 2.4.1 Islamic Economics Defined -- 2.5 Paraphernalia of Islamic Economics -- 2.5.1 Ownership of Resources and Property Rights -- 2.5.2 Islamic Welfare Approach -- 2.5.3 The Factors of Production -- 2.5.4 Restrained Individual Freedom -- 2.5.5 Liberalism versus State Intervention -- 2.6 Summary -- 3 The Main Prohibitions and Business Ethics in Islamic Economics and Finance -- 3.1 Introduction -- 3.2 The Basic Prohibitions -- 3.2.1 Prohibition of Riba -- 3.2.2 Prohibition of Gharar -- 3.2.3 Prohibition of Maisir/Qimār (Games of Chance) -- 3.3 Business Ethics and Norms -- 3.3.1 Justice and Fair Dealing -- 3.3.2 Fulfilling the Covenants and Paying Liabilities -- 3.3.3 Mutual Cooperation and Removal of Hardship -- 3.3.4 Free Marketing and Fair Pricing -- 3.3.5 Freedom from Dharar (Detriment) -- 3.4 Summary and Conclusion -- 4 The Philosophy and Features of Islamic Finance.

4.1 Introduction -- 4.2 The Philosophy of Islamic Finance -- 4.2.1 Avoiding Interest -- 4.2.2 Avoiding Gharar -- 4.2.3 Avoiding Gambling and Games of Chance -- 4.2.4 Alternative Financing Principles -- 4.2.5 Valid Gains on Investment -- 4.2.6 Entitlement to Profit - With Risk and Responsibility -- 4.2.7 Islamic Banks Dealing in Goods not in Money -- 4.2.8 Transparency and Documentation -- 4.2.9 Additional Risks Faced by Islamic Banks -- 4.3 Debt versus Equity -- 4.4 Islamic Banking: Business versus Benevolence -- 4.5 Exchange Rules -- 4.6 Time Value of Money in Islamic Finance -- 4.7 Money, Monetary Policy and Islamic Finance -- 4.7.1 Status of Paper Money -- 4.7.2 Trading in Currencies -- 4.7.3 Creation of Money from the Islamic Perspective -- 4.7.4 Currency Rate Fluctuation and Settlement of Debts -- 4.8 Summary -- Part II Contractual Bases in Islamic Finance -- 5 Islamic Law of Contracts and Business Transactions -- 5.1 Introduction -- 5.2 Māl (Wealth), Usufruct and Ownership -- 5.2.1 Defining Various Related Terms -- 5.3 General Framework of Contracts -- 5.4 Elements of a Contract -- 5.4.1 Offer and Acceptance: Form of the Contract -- 5.4.2 Elements of the Subject Matter -- 5.5 Broad Rules for the Validity of Mu'āmalāt -- 5.5.1 Free Mutual Consent -- 5.5.2 Prohibition of Gharar -- 5.5.3 Avoiding Riba -- 5.5.4 Avoiding Qimār and Maisir (Games of Chance) -- 5.5.5 Prohibition of Two Mutually Contingent Contracts -- 5.5.6 Conformity of Contracts with the Maqasid of Sharīáh -- 5.5.7 Profits with Liability -- 5.5.8 Permissibility as a General Rule -- 5.6 W'adah (Promise) and Related Matters -- 5.6.1 Token Money (Hamish Jiddiyah) and 'Arbūn -- 5.7 Types of Contracts -- 5.7.1 Valid Contracts -- 5.7.2 Voidable (Fāsid) Contracts -- 5.7.3 Void (Batil) Contracts -- 5.8 Commutative and Noncommutative Contracts.

5.8.1 Uqood-e-Mu'awadha (Commutative Contracts) -- 5.8.2 Uqood Ghair Mu'awadha (Tabarru') or Gratuitous Contracts -- 5.8.3 Legal Status of Commutative and Noncommutative Contracts -- 5.9 Conditional or Contingent Contracts -- 5.10 Summary -- 6 Trading in Islamic Commercial Law -- 6.1 Introduction -- 6.2 Bai' - Exchange of Values -- 6.3 Legality of Trading -- 6.3.1 Trade (Profit) versus Interest: Permissibility versus Prohibition -- 6.4 Types of Bai' -- 6.5 Requirements of a Valid Sale Contract -- 6.5.1 The Object of the Sale Contract -- 6.5.2 Prices and the Profit Margin -- 6.5.3 Cash and Credit Prices -- 6.6 Riba Involvement in Sales -- 6.7 Gharar - A Cause of Prohibition of Sales -- 6.8 Conditional Sales and "Two Bargains in One Sale" -- 6.9 Bai' al'Arbūn (Downpayment Sale) -- 6.10 Bai' al Dayn (Sale of Debt) -- 6.11 Al 'Inah Sale and the Use of Ruses (Hiyal) -- 6.12 Options in Sales (Khiyar) -- 6.13 Summary -- 7 Loan and Debt in Islamic Commercial Law -- 7.1 Introduction -- 7.2 The Terms Defined -- 7.3 Illegality of Commercial Interest -- 7.4 Loaning and the Banking System -- 7.5 Guidance from the Holy Qur'ān on Loans and Debts -- 7.6 The Substance of Loans -- 7.7 Repayment of the Principal Only -- 7.8 Time Value of Money in Loans and Debts -- 7.9 Instructions for the Debtor -- 7.10 Instructions for the Creditor -- 7.11 Husnal Qadha (Gracious Payment of Loan/Debt) -- 7.12 Remitting a Part of a Loan and Prepayment Rebate -- 7.13 Penalty on Default -- 7.13.1 Insolvency of the Debtor -- 7.14 Hawalah (Assignment of Debt) -- 7.15 Security/Guarantee (Kafalah) in Loans -- 7.15.1 Risk and Reward in Pledge -- 7.15.2 Benefits from Pledge -- 7.16 Bai' al Dayn (Sale of Debt/Debt Instruments) -- 7.17 Impact of Inflation on Loans/Debts -- 7.18 Summary -- Part III Islamic Finance - Products and Procedures.

8 Overview of Financial Institutions and Products: Conventional and Islamic -- 8.1 Introduction -- 8.2 What is Banking or a Bank? -- 8.3 The Strategic Position of Banks and Financial Institutions -- 8.4 Categories of Conventional Financial Business -- 8.4.1 Commercial Banking -- 8.4.2 Investment Banking -- 8.4.3 Other NBFIs -- 8.4.4 Conventional Financial Markets -- 8.5 The Need for Islamic Banks and NBFIs -- 8.5.1 The Structure of Islamic Banking -- 8.5.2 The Deposits Side of Islamic Banking -- 8.5.3 Instruments on the Assets Side -- 8.6 The Issue of Mode Preference -- 8.7 Islamic Investment Banking -- 8.8 Islamic Financial Markets and Instruments -- 8.8.1 Islamic Funds -- 8.8.2 Principles Relating to Stocks -- 8.8.3 Investment Sukuk as Islamic Market Instruments -- 8.8.4 Trading in Financial Instruments -- 8.8.5 Inter-bank Funds Market -- 8.8.6 Islamic Forward Markets -- 8.8.7 Foreign Exchange Market in the Islamic Framework -- 8.8.8 Derivatives and Islamic Finance -- 8.9 Summary and Conclusion -- 9 Murabaha and Musawamah -- 9.1 Introduction -- 9.2 Conditions of Valid Bai' -- 9.3 Murabaha - a Bai' al Amānah -- 9.4 Bai' Murabaha in Classical Literature -- 9.5 The Need for Murabaha -- 9.6 Specific Conditions of Murabaha -- 9.6.1 Bai' Murabaha and Credit Sale (Murabaha-Mu'ajjal) -- 9.7 Possible Structures of Murabaha -- 9.7.1 Direct Trading by Bank Management -- 9.7.2 Bank Purchases Through a Third Party/Agent -- 9.7.3 Murabaha Through the Client as Agent -- 9.8 Murabaha to Purchase Orderer (MPO) -- 9.8.1 MPO - A Bunch of Contracts -- 9.8.2 Promise to Purchase in Murabaha -- 9.8.3 MPO - The Customer as the Bank's Agent to Buy and Related Matters -- 9.9 Issues in Murabaha -- 9.9.1 Avoiding Buy-back -- 9.9.2 Khiyar (Option to Rescind the Sale) in Murabaha -- 9.9.3 Time of Executing Murabaha -- 9.9.4 Defaults by the Clients.

9.9.5 Rebates on Early Payment -- 9.9.6 Rollover in Murabaha -- 9.9.7 Murabaha Through Shares -- 9.9.8 Commodity Murabaha -- 9.10 Precautions in Murabaha Operations -- 9.11 Musawamah (Bargaining on Price) -- 9.11.1 Musawamah as a Mode of Financing -- 9.12 Summary -- 10 Forward Sales: Salam and Istisna'a -- 10.1 Introduction -- 10.2 Bai' Salam/Salaf -- 10.3 Benefits of Salam and the Economic Role of Bai' Salam -- 10.4 Features of a Valid Salam Contract -- 10.4.1 Subject Matter of Salam -- 10.4.2 Payment of Price: Salam Capital -- 10.4.3 Period and Place of Delivery -- 10.4.4 Khiyar (Option) in Salam -- 10.4.5 Amending or Revoking the Salam Contract -- 10.4.6 Penalty for Nonperformance -- 10.5 Security, Pledge and Liability of the Sureties -- 10.6 Disposing of the Goods Purchased on Salam -- 10.6.1 Alternatives for Marketing Salam Goods -- 10.7 Salam - Post Execution Scenarios -- 10.7.1 Supply of Goods as Per Contract -- 10.7.2 Failure in Supply of Goods -- 10.7.3 Supply of Inferior Goods -- 10.8 Salam-Based Securitization - Salam Certificates/Sukuk -- 10.9 Summary of Salam Rules -- 10.10 Salam as a Financing Technique by Banks -- 10.10.1 Risks in Salam and their Management -- 10.11 Istisna'a (Order to Manufacture) -- 10.11.1 Definition and Concept -- 10.11.2 Subject Matter of Istisna'a -- 10.11.3 Price in Istisna'a -- 10.11.4 Penalty Clause: Delay in Fulfilling the Obligations -- 10.11.5 The Binding Nature of an Istisna'a Contract -- 10.11.6 Guarantees -- 10.11.7 Parallel Contract - Subcontracting -- 10.11.8 Istisna'a and Agency Contract -- 10.11.9 Post Execution Scenario -- 10.11.10 The Potential of Istisna'a -- 10.11.11 Risk Management in Istisna'a -- 11 Ijarah - Leasing -- 11.1 Introduction -- 11.2 Essentials of Ijarah Contracts -- 11.2.1 Ijarah and Bai' Compared -- 11.3 General Juristic Rules of Ijarah -- 11.3.1 Execution of an Ijarah Contract.

11.3.2 Determination of Rent.