this is an Islamic Finance course, the homework is 2 parts. The first part is a Q&A for chapter 9&10, the second part is 5 calculation questions, " only PART B is required" for the calculations.
HW 2 - Due Date of Final Grade Chapter 9: The Structure and Operations of the Islamic Financial Institutions How would you categorize the structure of the Islamic financial institutions? What are the components of cach category of the Islamic financial institutions? What are the components (just list) of the non-depository Islamic financial institutions? What is Islamic Finance? ‘hapter 10: The Products and Services of the Islamic Financial Institutions What are the products and services (just list) of Islamic financial institutions? What are the functions of the investment bankers to their business clients? What are the differences between an Islamic investment bank and a private equity firm? How are the loan’s selling price and profit margin calculated and determined? pupa Bwbe CALCUTION PRACTICE QUESTIONS -- For Chapter 11 1. (a) (b) @ © @ © @ © @ © The profit formulais: «© = (P*r*t*asr)/(36000) Calculate the mudharabah interbank investment profit using the followings: P = $100,000; r= 12%; t= 3 months; asr= 70:30 Calculate the mudharabah interbank investment profit using the followings: P = $120,000; r= 14%; t= 6 months; msr= 75:25 The current price formula is: CP =RV *[1 — (r*t)/(36000)] Calculate the mudharabah interbank investment current price using the followings: RV = $180,000; r= 10%: t=2 months Calculate the mudharabah interbank investment current price using the followings: RV = $220,000; r= 11%; t=>5 months The yield formulais: YY = {[(RV ~CP)/RV)]*(360/t)} Calculate the mudharabah interbank investment yield using the followings: CP = $100,000; RV = $130,000; t= 3 months Calculate the mudharabah interbank investment yield using the followings: CP = $230,000; RV = $320,000; t=6 months Price of government investment certificate formula: Pgic = [RV+ (r*t*RV)] / 360 Calculate the government investment certificate’s price using the followings: RV = $480,000; r= 16%; t=3 months Calculate the government investment certificate’s price using the followings: RV = $540,000; r= 14%; t=6 months IAB’s Mudarabah Sales Price formula: ~~ SP = RV*{[1+(r*t)] / 36000} Calculate the IAB’s mudarabah sales’ price using the followings: RV = $480,000; r= 16%; t=3 months Calculate the IAB’s mudarabah sales’ price using the followings: RV = $540,000; r= 14%; t=6 months HW 2 - Due Date of Final Grade Chapter 9: The Structure and Operations of the Islamic Financial Institutions How would you categorize the structure of the Islamic financial institutions? What are the components of cach category of the Islamic financial institutions? What are the components (just list) of the non-depository Islamic financial institutions? What is Islamic Finance? ‘hapter 10: The Products and Services of the Islamic Financial Institutions What are the products and services (just list) of Islamic financial institutions? What are the functions of the investment bankers to their business clients? What are the differences between an Islamic investment bank and a private equity firm? How are the loan’s selling price and profit margin calculated and determined? pupa Bwbe PowerPoint Presentation The Essentials of Islamic Banking, Finance and Capital Markets Chapter 9 The Structure and Operations of the Islamic Financial Institutions John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets John O. Kuforiji Historical Development of the Islamic Financial Institutions and Instruments --- The fundamental principles of Islamic financial system survived despite the decline of the importance of the Islamic financial techniques under the colonial influence of the European powers. --- The Islamic financial system developments are from 632 AD to 2019; as summarized in exhibit 09.01. (a) 632 AD to 1922 --- The Formative Era (b) 1950 to Present --- The Modern Era John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments --- Prohibition of interest and legitimization of alternative ways of financing started in 632 AD but the emergence of a true Islamic finance began in 1963. --- Why is it that it took the Islamic world so long to come up with the interest-free financing mechanism? --- The answers are:- (1)The modern conventional commercial banking system came with birth of industrial revolution, when trade and industrial activities institutionalized financial intermediation. (2)The Islamic civilization was under the Europeanpowers between 13th century and 20th century. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments (a) Formative Era of the Islamic Finance Development --- Interest was declared unlawful in Islam by 632 AD. --- In the early Islamic empires, between 4th and 10th century; banks were referred to as the “sarraffeen”. The “suftaja” and “hawala” were the first forms of Islamic credit papers. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments Formative Era of the Islamic Finance Development --- In the golden age of Islamic civilization, between the mid-7th and mid-13th century Islamic financialstructures, products, and services were:- Promissory notes (reqaab al-sayarifab); bill of exchange (suftaja); bill of trade or letter of credit (suftajeh); goods bonds (sukuk); cross-border checks (sakkwas); and Islamic coinage (sunnal money). John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments Formative Era of the Islamic Finance Development --- The 15th century Islamic debt financing mechanisms were:- (a)riba al-nasi’ah (interest loan) (b)riba al-fadl or riba al-buyuu’ (usury trade) and deferred sale of ‘uquud al-mu‘aawaÌaat (exchange contracts). John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments Formative Era of the Islamic Finance Development --- The 15th century Islamic equity financing mechanisms - ‘uquud al-‘ishtiraak (participatory contracts) - comprise of:- (a) mushaarakah (partnership) (b)mudhaarabah (silent partnership) (c)musaaqaat, and (d)muzaara‘ah. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments Formative Era of the Islamic Finance Development --- Under the Ottoman Empire from 1301 to 1922, improvement of Islamic civilization was constrained; but the Ottoman Empire issued sukuk in 1775 to obtained cash against income from the tobacco traditional tolls. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments (b) Modern Era of the Islamic Finance Development ---In the 1950’s; Pakistan made an attempt to establish Islamic banking system. Then, the rich Pakistani landowners deposited their funds with banks without interest rewards. --- In 1963, the first modern Islamic savings bank was established in Mit Ghamr, Egypt; but it later mergedwith the national banks in 1967. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments The Modern Era of the Islamic Finance Development (1970’s) --- The 1970’s developments were:- (a)In 1971 Nasser Social Bank in Egypt was established through a presidential decree. (b)In 1973, Islamic Philippine Amanah bank was established. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments The Modern Era of the Islamic Finance Development (1970’s) (c) In 1975, Dubai Islamic Bank in the United Arab Emirate and Islamic Development Bank (IDB) in Saudi Arabia, were established. (d) In 1977, the Kuwait Finance House, the Faisal Islamic Banks of Sudan, and the Faisal Islamic Bank of Egypt were established. (e)Also, in 1977 the International Union of Islamic Banks was established. (f)In 1978, an attempt to establish an Islamic banking in Luxembourg did not materialize. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments The Modern Era of the Islamic Finance Development (1980’s) (a) In the 1980’s we have Islamic commercial banks, takaful insurance, and investment companies; with Islamic compliant banking, insurance, and investment products and services in the African, Gulf, Middle East, and Asian Pacific regions of the world. (b)In the 1980s, Iran and Sudan nationalized all banks to become Islamic financial system. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments The Modern Era of the Islamic Finance Development (1990’s) (a) In the 1990’s we have Islamic commercial banks, takaful insurance, investment companies, asset management companies, and brokerage and dealership firms; with Islamic compliant banking, insurance, investment, mutual funds, unit trust, bonds, and stocks products and services in the Gulf, Middle East, and Asian Pacific regions of the world. (b) In 1990, the Shell MDS of Malaysia issued sukuk. (c) In 1999, International Union of Islamic Banks became the General Council of Islamic Banks and Financial Institutions (CIBAFI). John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments The Modern Era of the Islamic Finance Development (2000’s) (a) From year 2000 to date, we have Islamic commercial banks, takaful insurance, investment companies, asset management companies, and brokerage and dealership firms; with Islamic compliant banking, insurance, investment, mutual funds, unit trust, bonds, and stocks products and services in the African, Gulf, Middle East, Asian Pacific, European, and American regions of the world. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets Historical Development of the Islamic Financial Institutions and Instruments The Modern Era of the Islamic Finance Development (2000’s) (b) During the 2007-2009 world financial crises, the Islamic banks performed better than the conventional banks. (c) This performance prompted some attractive attentions to the profit-and-loss sharing models of the Islamic financial institutions by the world. (d) With mixed perceptions, but just to capitalize on the potential of that market, global financial institutions such as Citibank, Hong Kong Shanghai Banking Corporation (HSBC), Goldman Sachs, BNP-Paribas and Union Bank of Switzerland (UBS) established Sharia compatible financial products and services. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets The Principles that the Islamic Financial Institutions must follow --- Five guiding principles for Islamic financial institutions:- (a) The prohibition of interest (riba) in all financial activities and transactions. (b) The avoidance of uncertainty-based transactions and ambiguous business transaction contracts (gharar). (c) The avoidance of gambling and games of chance. (d) The avoidance of investment in non-permissible business activities. (e) All the financial institutions must have Sharia Supervisory Boards. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets The Principles that the Islamic Financial Institutions must follow --- The prohibition of interest in all financial transactions implies that investment in interest-based products or investment in funds that purchase the equity of firms that promote interest-based products are all outlawed --- In Islam, riba is believed to be unfair, exploitative, and unproductive because it represents sure gain to the lender without any risk and it represents a reward in return for no work done by the lender. --- Riba is seen in Islam as an enemy of the socio-economic growth and development of a nation. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets The Principles that the Islamic Financial Institutions must follow --- Sharia permits income generation through either working for wages or risks-and-rewards sharing mechanism as stated in the mudharabah partnership contract or mutual agreement between the parties to a business venture or transaction. --- The risk-and-reward sharing implies that if the financialinstitutions want to get profit; then, they must also bear the risk associated with it. --- In Islam, all contractual obligations and mutual agreements or contracts must be free of ambiguities, uncertainities, speculations, as well as contain full disclosure of information that all the parties to a contract will understand. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets The Principles that the Islamic Financial Institutions must follow --- In Islam, "deception excessive risk," or "excessive uncertainty" are prohibited in all Islamic business and financial transactions or activities. Examples:- (a) gharar is present if the object of the sale is not in the possession of the seller or does not exist at the time the parties enter into the contract. (b) in a sale of an asset, if the asset being sold and its price are not clearly defined or specified or available at the time of the contract; such sale contract would be considered to have excessive risk and uncertainty (gharar). John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets The Principles that the Islamic Financial Institutions must follow --- Islamic financial institutions cannot fund or finance non-permissible business transactions, activities, and ventures. It the responsibility of the Sharia supervisory board of the financial institutions to ensure that this rule is not violated. --- The avoidance of investment in non-permissible business activities also implies avoidance from profiting from non-permissible business activities. John O. Kuforiji The Essentials of Islamic Banking, Finance and Capital Markets The Principles that the Islamic Financial Institutions must follow --- The role