Islamic Finance
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Islamic Finance

Principles and Practice, Third Edition

Hans Visser

In this extensively updated third edition, Hans Visser explores the ideas and concepts that drive and shape Islamic finance. This incisive book reviews the products, institutions and markets offered by Islamic finance in the modern marketplace, offering a critical discussion of the ways in which fiscal and monetary policy can be adapted to Islamic financial institutions. Visser offers new directions for economics and finance students, as well as students of Islamic finance and Islam studies more broadly.
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Chapter 5: Islamic banks

Hans Visser

Abstract

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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