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Hans Visser

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Hans Visser

The introduction sets out the aims of the book, which are to analyze Islamic finance within the context of the belief system and the world view underlying it and to discusses its limitations and the tension between Islamic ideals and the need to compete in the market place. To put the Islamic finance industry into perspective, some figures are given of its size and of the market share of Islamic banking in a number of countries.

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Hans Visser

This chapter is about the motives for Muslims to advocate the use of financial instruments that obey specific Islamic requirements. The movement for an Islamic economy and an Islamic financial system in particular, started in the second half of the nineteenth century with a new Islamic awakening but took a different turn after the First World War. A new impetus was given with the rise in oil wealth in a number of predominantly Muslim countries after the 1973–74 oil crisis. Other industries followed. The chapter concludes by highlighting the diversity of views among Muslims on the various forms of Islamization of the economy.

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Hans Visser

A Muslim’s life ideally is ruled by Islamic religious law, the sharia. The sharia is a narrow sense is God’s eternal will as expressed in the Quran and in the example given by the Prophet Muhammad, the sunna. The Islamic jurisprudence or fiqh is based on the sharia. Sharia in a broad sense includes not only Quran and sunna, but also legislation resulting from the fiqh. The fiqh draws on various sources. These are discussed in this chapter, along with the different ways in which rules and norms can be derived from those sources. Separate attention is paid to the question of how Muslims living among a non-Muslim majority should observe the sharia.

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Hans Visser

Islamic economics, and Islamic financial economics as part of it, is a child of the Islamic reform movement that started in the later part of the nineteenth century. Islamic economics is first and foremost normative economics. There have also been calls to develop a distinct Islamic theoretical system of economics, with its own epistemology. The principles underlying the Islamic norms and the idea of a distinct Islamic economic science are discussed first. This is followed by a review of the Islamic rules and norms that shape the Islamic economy. One of these norms, the prohibition of riba, had close parallels in Christianity and Judaism and still has echoes in Western secular society. These parallels are also briefly described. Next is a section on the Islamic economic order and after that a survey of Islamic criticisms of the prevailing Islamic financial institutions, including the solutions proposed by the critics.

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Hans Visser

This chapter first discusses Islamic forms of finance that are based on profit sharing or profit-and-loss sharing (PLS), next the simple forms of finance other than profit or profit-and-loss sharing and finally more complex forms of finance. Much attention is paid to Islamic derivatives and the use of promises in structuring them. Another section discusses the requirements that Islamic contracts have to meet, which differ in several respects from conventional contracts.

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Hans Visser

In this chapter we analyse how banks go about applying Islamic principles. The relevant ones are the ban on riba, the ban on gharar and maysir, the ban on haram products and the peculiarities of Islamic contract law. It is shown that some of these principles may lead to serious moral hazard and information problems and we examine how the banks deal with those problems. We start with a survey of the financial instruments offered by the banks, that is, the liabilities side of the bank’s balance sheet. Next we discuss the specific problems thrown up by some of these liabilities. Then we turn to the problems associated with typically Islamic bank assets. Agency problems figure prominently. A few observations on the practice of Islamic banking follow.

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Hans Visser

In addition to banks, there are specialized financial institutions active in various fields of Islamic finance, in particular in insurance, real estate finance, portfolio investment and related activities, pensions and microfinance. An important institution furthermore has traditionally been the waqf (foundation). Waqfs, or awqaf, are undergoing a transformation and take up new roles. Other new phenomena are crowdfunding, with Islamic crowdfunding platforms active since roughly the mid-2010s, and Islamic digital currencies, making their appearance in the late 2010s. This chapter looks at the way these institutions function within the limits posed by the prevailing application of the sharia. The first sector is insurance, which is followed by Islamic home finance and its limitations, investment and waqf; furthermore Islamic pension funds, hedge funds, microfinance institutions, crowdfunding and digital currencies are briefly discussed.

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Hans Visser

Chapter 7 covers three subjects: public finance, monetary policy and banking supervision. The various sections provide a review of the riba-free instruments that are used for government borrowings, monetary policy, helping the banks’ liquidity management and developing an interbank money market. Furthermore, the problems of maintaining a level playing field in supervising a mixed Islamic-conventional system are analyzed.

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Hans Visser

Chapter 8 first looks at what Islamic finance does for a country’s economic development. Next, its claim of being fundamentally different from conventional finance and on an altogether higher ethical level is critically assessed. Related to this issue, we focus on areas where Islamic finance has some catching up to do. The chapter winds up with some musings on the directions Islamic finance might take. All the time, it must be kept in mind that judgements can only be of a tentative character, as Islamic banking and finance is a work in progress, even if it is by now an established fixture in the financial landscape.