Global financial crisis:

An Islamic finance perspective

By Dr Adel Ahmed

Presented by:
Ishak Kasim Harun G2119229
Ieman Huda Adnan G2020974
 Introduction
➢ Financial crisis 2008
● Might be only the tip of the iceberg.
● creating money from money, selling debts – subprime lending, short selling, and
absence of risk-sharing.
● The new business model basic on islamic finance will help the financial crises.
● How socially responsible investing interrelate into Shariah compliant investing.
Literature Review
Islamic Finance: the Beginning
● Started as a small industry and distinguishes itself from conventional finance with its ostensible
compliance with Shariah
● In the early years of Islamic Finance, it relies on three individuals with complimentary sets of discipline

○ Financial professionals who are familiar with conventional financial products, as well as the
demand for “Islamic” analogues of those products within various Muslim communities around the
world.
○ Islamic jurists (fuqha or experts on classical jurisprudence developed mainly between the eighth
and fourteenth centuries), who help Islamic financial providers to find precedent financial
procedures in classical writings, upon which contemporary analogues of conventional financial
products can be built.
○ Lawyers who assist both groups in structuring Islamic analogue financial products, while ensuring
their compliance with all applicable and relevant legal and regulatory constraints
Islamic Finance: the Historical Roots
● In the late nineteenth century, the Ottomans introduced Western-style banking to the Islamic world to finance their
expenditures
○ Though deemed permissible by some jurists, most jurists does not approve the practices as it violates the prohibition of
Shariah (uses of riba)
● Islamic revival played a central role in the intellectual and social foundations of independence movements of the
mid-twentieth century. To many intellectual founders of the movement, political independence was to be
supplemented with economic independence, through the definition of an Islamic economic system
● By the 1970s, theoretical discussions of Islamic economics had given rise to practical discussions of Islamic finance,
which turned juristic in nature: how can Muslims replace (conventional) financial practices (deemed to be
usury/riba based) with Islamic alternatives.
○ Mid-century literature suggested a PLS silent partnership alternative to interest-based lending. This
partnership-based focus survives in some Islamic financial practices (e.g. as a substitute for interest-bearing
bank deposits).
● However, with the help of Islamic jurists and lawyers, Islamic financial practitioners were soon able to provide close
analogues to almost all financial products, including various debt instruments and fixed-income investment vehicles
Islamic Finance: the Modes of Operations
1. Consumer and business loan alternatives
a. Three main tools are utilized under this type of financing

Buy-sell-back arrangement Lease-to-purchase or diminishing A three-party sale contract

(Murabahah)
Under this transaction, the bank obtains
a promise that its customer will
purchase the property on credit at an
agreed-upon mark-up (interest
alternative), then proceeds to buy the
property and subsequently sell it to the
customer
partnership (Musharakah (Tawarruq)
Mutanaqisah)
Since this type of financing can
A typical structure requires the bank easily replace lending for any
to create a special purpose vehicle purpose, it has allowed a number
(SPV) to purchase and hold title to of conventional banks to
the financed property. The SPV then announce that they will
leases the property to the customer, “Islamize” all of their operations.
who makes monthly payments that
are part-rent and part-principal.
Rents are calculated based on
market price
Islamic Finance: the Modes of Operations
2. Corporate and government bond alternatives

● In its early stages of development in the 1980s and 1990s, a number of bond alternatives were tried
with very limited success.
○ Some were based on PLS (e.g. in Sudan and Pakistan), while others guaranteed the principal but
did not guarantee a fixed rate of return (e.g. in Malaysia).
○ Once the securitization of leases became fully understood, a significant number of corporate and
government bonds were structured as lease-backed securities (Sukuk al-Ijara)
○ The largest issuance to date is the Dubai Port issuance ($10.2 billion) and next is the issuance of
Department of Aviation UAE ($750 million)
○ In 2020, Malaysia remains as the biggest contributor of Sukuk globally issuance up to USD 174.2
billion.
● Lease back bonds
○ Long term securities
○ Typically based on forward sales of some commodities (salam) and utilizing the concept of
“parallel salam” where enables the bond issuer to match a forward purchase with a purchase sale
for the same commodities and the same delivery date, but initiated at different times
Islamic Finance: the Modes of Operations
3. Investment vehicle alternatives

● In regards to investments, it is not hard for the Muslim investors to just picked companies which does not produced
products that are prohibited in Islam.
● However, it is a totally different story as to the interest.
● Therefore, there are three set of rules imposed to the companies which has been globally accepted for the investors
to look into upon the companies ;
○ exclude companies whose receivables accounted for more than 45% of assets;
○ exclude companies whose debt to moving average of market capitalization exceed 33%, and
○ exclude companies whose interest income exceeds 5% (or, for some, 10%) of total income

Mutual fund companies either
mimic their screening rules, or obtain
licenses from one of the indices, which
they use as a benchmark
The growing unanimity over the general screens
used by Islamic
mutual funds has enabled Islamic private equity
and investment banking boutiques to
thrive
Islamic Finance: the Modes of Operations
4. Insurance alternatives - Takaful
● The vast majority of Islamic jurists declared the use of, and investment in, insurance companies to be impermissible
under Islamic jurisprudence.
● This prohibition is based on two considerations:
○ the first consideration is that “safety” or “insurance” is not itself viewed as an object of sale in a classic Islamic
jurisprudence the insured-insurer relationship is viewed to be one akin to gambling
○ The second consideration is the fact that insurance companies tend to concentrate their assets in
interest-based instruments such as government bonds and mortgage-backed securities
● Takaful
○ No commutative financial contract that allows one to interpret premium payments as prices and
insurance claim fulfillment as an object of sale
○ The policy holders are viewed as contributors to a pool of money, which they agree voluntarily to share in
cases of loss to any of them
Islamic Finance: the Modes of Operations
5. Bank deposit and fixed income security alternatives

● Islamic banks can only accept fiduciary deposits, for which they cannot pay interest, since interest would be
considered usury/riba once the principal is guaranteed
● However, they are allowed to accept “investment account” funds, which they may invest on behalf of the
account holders, and share profits and losses thereof
Islamic Finance: the Principles of Islamic finance
● Islam determines all aspects of a Muslim’s life, covering the articles of their faith and the relationships between man and
God, between human beings, moral and behavioural code, as well as giving the framework for their daily activities.
● Islamic law or Shariah governs all economic and social activities and undertakings of Muslim

Fairness Right of individuals to pursue The strict and explicit prohibition of

● Everyone is involved in a transaction
makes informed decisions and is not
misled or cheated.
● Islamic model aims at social justice
and the economic prosperity of the
whole community
personal economic well being, but
makes a clear distinction between
● Modern Islamic banking has
what commercial activities are
allowed and what are forbidden.
● Prohibition on transacting
with prohibited items
riba
developed mechanisms to allow
interest income to be replaced
with cash flows from productive
sources, such as returns from
wealth generating investment
activities and operations.
 The link between Global Crisis and Islamic Finance
modelThe root and the primary cause of the
crisis
The excessive and imprudent
lending by banks over a long period

Why and how can this happened?

The “too big to fail” concept, which

Inadequate market discipline in the
financial system resulting from the
absence of Profit-Loss Sharing
tends to give an assurance to big
The mind-boggling expansion in the
banks that the central bank will
size of derivatives, particularly credit
definitely come to their rescue and
default swaps (CDSs),
not allow them to fail
 Issues and Recommendations
➢ Excessive and imprudent lending by banks over a long period.
➢ Oen factors that make this possible:
● Believing the rescue from the central bank.
● The amount of lending to subprime borrowers and speculators increased steeply.
● Abusive, unfair, or deceptive lending practices led some borrowers into mortgages
that they would not have chosen knowingly.
 Issues and Recommendations
● The supervisors failed to perform their task effectively.
❖ Islamic financial system
● One of the most important objectives of Islam is justice for the humanity.
● Quran 57:25
➔ There is two conditions of moral value;
○ Risk sharing and assisting poor people.
➔ The basic principle is “No risk no gain”.
➔ The lending and borrowing must be through the islamic contracts.
 Issues and Recommendations
★ Number of conditions to laid down:

1- The asset which is being sold or leased must be real, and not imaginary or notional.

2- The seller or lessor must own and possess the goods being sold or leased. 3- The
transaction must be a genuine trade transaction with full intention of giving and taking
delivery.

4- The debt cannot be sold and thus the risk associated with it must be borne by the lender
himself.
- Islamic finance system is capable of minimising the severity and it introduces great discipline.
 Conclusion
● Islam encourages business and trade activities that generate fair and legitimate profit.
● In Islamic finance, there is therefore always a close link between financial flow and productivity.
○ This intrinsic property of Islamic finance contributes towards insulating it from the potential risks
resulting from excess leverage and speculative financial activities which are part of the root causes of the
current financial crisis
● The element of profit and risk-sharing feature of Islamic finance transactions requires a high level of disclosure
and transparency in the Islamic finance system.
● These unique comprehensive features of Islamic Financial system enables the industry to emerge as a
competitive system which might offer better approach than the conventional financial system
● Supported by significant development of the industry, diversity of IFIs and markets, strong legal and regulatory
framework and recognition from international financial system had contributed so much in the emergence of
Islamic Financial system globally.
● This is evident by the fast growing of Islamic Finance throughout the world