2. Islamic Finance Defined
A system of financial laws, markets, and institutions
that has formed and developed in Islamic cultures
around the world
A form of economic organization built upon the
behavioral rules, norms, and principles of Islamic
society
2 1/12/2012
3. Central Theme:
Prohibition of Charging Interest (Riba)
No detailed definition exists in the Quran
Arabic for “excess, addition, surplus”
Money is a medium of exchange and not created to
be sought for its own sake: gambling, loansharking
Specific rules defined through jurisprudence in
Islamic law
Un-conventional from a Western lens as it prohibits
debt financing vehicles
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4. Central Theme:
Elimination of contract ambiguity (Gharar)
Legal and religious theme
Shariah: Man is faithful to his word
Quran: Contracts should be in writing and have
witness at final agreements
Takes the form of risk management & due diligence
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5. Common Financial Instruments
Transactional
Building blocks of Islamic
Sale of Sale of Right
Ownership
Currency
to Use finance
Lease
Property Spot
(Ijarah) Credit sales involve
financier to take title of
Price for Sale Barter
inventory
Spot Credit Future “Mark up” rate depends
on credit
Cost Plus Bay’ al-
worthiness, security and
(Murabaha) Muajjil collateral
Lump Sum
Cashflows replicate
conventional debt
Installment securities & Mirakhor, 2007)
(Iqbal
5 1/12/2012
6. Islamic Bank Balance Sheet
Assets Liabilities
Trade Financing
Demand Deposits
Salam Murabahah
Ijarah / Istisna
Real Estate Lease/Manufacture
Investment Accounts
Mudarahbah
P/L Sharing Investments
Musharakah
Special Investment
Equity Partnerships
Services
Capital
Reserves
Jo’ala, Wikala, Kifala
(Iqbal & Mirakhor, 2007)
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7. Islamic Financial Markets:
Top 10 Participant Countries
$5,000,000
$500,000
Annual Revenue (log scale)
INDONESIA
$50,000
$5,000
$500
BRITAIN
UAE
$50
PAKISTAN
QATAR
$5
JORDAN INDIA KUWAIT
$1
BAHRAIN
0 2 4 6 8 10 12 14 16
# of Institutions
= Relative Market Capitalization
Source: Bloomberg LP
7 1/12/2012
9. UAE Financial Institutions
Market Cap Annual Revenue
Name ($MM) ($MM)
NATIONAL BANK OF ABU DHABI $8,200 $10,242
MASHREQBANK $4,670 $6,581
ABU DHABI COMMERCIAL BANK $4,240 $10,625
ABU DHABI ISLAMIC BANK $1,980 $4,518
DUBAI ISLAMIC BANK (*) $1,960 $5,003
UNION NATIONAL BANK/ABU DHAB $1,940 $4,508
DUBAI FINANCIAL MARKET (*) $1,680 $144
COMMERCIAL BANK OF DUBAI $1,530 $2,353
UNITED ARAB BANK $987 $628
SHARJAH ISLAMIC BANK $542 $843
TAMWEEL PJSC $155 $583
DUBAI ISLAMIC INSURANCE CO $23 $38
EMIRATES ISLAMIC BANK $0 $1,013
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10. Evolution
Industry has weathered financial crisis better than
conventional banking
Adapts well to micro-financing in many economies
Promotes equity and risk sharing
Growth is strong: $0.5B in revenue, growing 10-15%
Need for innovation & efficiency
10 1/12/2012
