Islamic Finance
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Islamic Finance

Principles and Practice, Second Edition

Hans Visser

This thoroughly updated and revised second edition analyses the ideas behind Islamic finance, the forms Islamic finance has taken in practice and the tension between the two that may occasionally arise. Along with an expanded section on the history of the ban on interest, this second edition contains a much more extensive discussion of investment and savings accounts, sukuk and tawarruq.
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Chapter 4: Forms of Islamic finance

Principles and Practice, Second Edition

Hans Visser


The pioneers of the idea of an Islamic economy had no idea how to shape such an economy; neither did the first practitioners of Islamic finance (Kahf 2004). There was no blueprint available and the development of the various financial instruments had to be a trial-and-error process. The most widely used financial instrument, murabaha (see Section 4.3.1), did not even exist in its present form when the first serious large-scale initiatives for Islamic banking were launched: the Islamic Development Bank and the Dubai Islamic Bank, both established in 1974. It was derived by Sami Hamoud, a visionary Jordanian economist, from a publication by al-Shafii and was not recommended to these two banks until 1976, while he himself applied it in 1978 in the Jordan Islamic Bank (Kahf 2004, p._33, n. 13; Nyazee 2009, p._3). The early writers on Islamic finance and the Islamic economy in general had to navigate in uncharted waters and came up with inchoate and sometimes incoherent proposals. On one page Qureshi plays with the idea that banks should neither pay nor charge interest and that the costs of banking should be borne by the state. Two pages further on, he advocates partnerships between banks and their clients which would yield profits, apparently without any need for the state to step in (Qureshi 1991, pp._131, 133). Mahmud Ahmad (1999, ch. 2) developed a scheme where banks provide free credit and debtors are required to furnish a counter loan, not unlike the practice of JAK Banken in Sweden (see Chapter 3, Section 3.4.1).

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