CONTEMPORARY ISLAMIC FINANCE The Robert W. Kolb Series in Finance provides a comprehensive view of the field of finance in all of its variety and complexity. It covers all major topics and spe- cializations in finance, ranging from investments, to corporate finance, to financial institutions. Each volume is written or edited by a specialist (or specialists) in a particular area of finance and is intended for practicing finance professionals, grad- uate students, and advanced undergraduate students. The goal of each volume is to encapsulate the current state of knowledge in a particular area of finance so that the reader can quickly achieve a mastery of that discipline. Please visit www.wiley.com/go/kolbseries to learn about recent and forth- coming titles in the Kolb Series. CONTEMPORARY ISLAMIC FINANCE Innovations, Applications, and Best Practices Editor Karen Hunt-Ahmed The Robert W. Kolb Series in Finance John Wiley & Sons, Inc. Copyright C 2013 by John Wiley & Sons, Inc. 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ISBN 978-1-118-18090-7 (cloth); ISBN 978-1-118-22739-8 (ebk); ISBN 978-1-118-24033-5 (ebk); ISBN 978-1-118-26497-3 (ebk) 1. Finance–Islamic countries. 2. Finance–Religious aspects–Islam. I. Hunt-Ahmed, Karen. HG187.4.C66 2013 332.088'297–dc23 2012028585 Printed in the United States of America. 10987654321 To Ozakh and Hazar, my loving daughters To Martha Hunt In memory of Thomas Daniel Hunt Contents Acknowledgments xi 1 Introduction: Islamic Finance in the World Economy 1 Karen Hunt-Ahmed PART I The Contemporary Islamic Finance Landscape 2 Contemporary Islamic Economic Thought 19 Mohammad Omar Farooq 3 The Legal Framework of Islamic Finance 39 Cynthia Shawamreh 4 Globalization and Islamic Finance: Flows and Consciousness 63 Karen Hunt-Ahmed 5 Islamic Science and the Critique of Neoclassical Economic Theory 75 Waleed El-Ansary 6 Juristic Disagreement: The Collective FatwaAgainst¯ Islamic Banking in Pakistan 103 Shoaib A. Ghias 7 Managing Liquidity Risk in Islamic Finance 121 Dr. Muhammad Al-Bashir Muhammad Al-Amine 8 Elements of Islamic Wealth Management 147 Paul Wouters 9 Sukuk¯ and the Islamic Capital Markets: An Introduction 165 Michael J. T. McMillen vii viii Contents 10 Shari’a-Compliant Mutual Funds 189 Monem Salam 11 The Evolution of Shari’ah-Compliant Indexes and Why They Outperform Conventional Indexes over the Long Term 195 Tariq Al-Rifai 12 Takaful 203 Farrukh Siddiqui 13 Islamic Human Resources Practices 215 William Marty Martin 14 An Integrated Islamic Poverty Alleviation Model 223 Ali Ashraf and M. Kabir Hassan 15 How Does an Islamic Microfinance Model Play the Key Role in Poverty Alleviation? The European Perspective 245 Sabur Mollah and M. Hamid Uddin PART II Case Studies 16 Islamic Finance in an Almost Postcrisis and Postrevolutionary World: As in Politics, All Islamic Finance Is Local 257 Mark Smyth 17 Stepping Forward, Backward, or Just Standing Still? A Case Study in Shifting Islamic Financial Structures Offshore 267 Umar F. Moghul 18 Islamic Mortgages 283 David Loundy 19 Shari’a Quality Rating 293 Nasir Ali Merchant 20 Islamic Mutual Funds’ Performance in Saudi Arabia 303 Hesham Merdad and M. Kabir Hassan 21 Shari’ah-Compliant Real Estate Investment in the United States 323 John L. Opar CONTENTS ix 22 Risk and Derivatives in Islamic Finance: A Shariah Analysis 331 Dr. Muhammad Al-Bashir Muhammad Al-Amine 23 Islamic Microfinance 353 Blake Goud About the Editor 367 Index 369 Acknowledgments any people worked together to make this book possible. I would like to begin by thanking Bob Kolb for presenting me with the idea for an M “Islamic Finance” volume, and my colleague at DePaul University, Timur Gok, for introducing us in the first place. I am forever grateful to the contributors to this volume: they supported the vision and were rewarded for that support with pesky follow-up questions and edit requests, which they endured with good humor. Those who have known me for years have seen a new side of me; I hope my editorial persona has not scared them away or scared away those authors who are new to my professional network. Emilie Herman and Kevin Commins at John Wiley & Sons kept all of us on track. Emilie’s patience apparently knows no bounds. I would also like to thank colleagues and friends who have supported me in the writing process. Annette Iskra, Suzanne Gaskins, Richard Taub, John Lucy, Rick Shweder, Sheikh Nizam Yacouby, Imam Senad Agic, Aminah McCloud, Juliet Bromer, and Jack Mosevich have patiently helped me sort through priorities in the continuing struggle to balance professional and personal life. Ali Fatemi, the chair of DePaul’s Finance Department, made life easier at work so I could dedicate time for the book. I owe a huge debt of gratitude to my research assistant, Sarah Lalji, who put in many hours of work to take care of book details, in addition to her full-time school schedule. My daughters, Ozakh and Hazar, are the most wonderful people in my life. They make life rich and help me grow as a person, as I hope I am helping them grow. They are the best at supporting my work and also at letting me know when it is time to take a break. I would like to thank Omer Ahmed for introducing me to the life that led to a long association with Islamic finance and its professionals. He made it possible for me to do fieldwork in Dubai, with children, and to meet many of the contributors to this book. Finally, I would like to thank my parents, Tom and Martha Hunt, for telling me I could accomplish whatever I wanted to in life and then supporting me while I did. xi Contemporary Islamic finance: Innovations, Applications, and Best Practices. Edited by Karen Hunt-Ahmed. Copyright © 2013 John Wiley & Sons, Inc. Published 2013 by John Wiley & Sons, Inc. CHAPTER 1 Introduction Islamic Finance in the World Economy KAREN HUNT-AHMED President, Chicago Islamic Microfinance Project Lecturer, DePaul University he religion of Islam has existed for 1,400 years but Islamic economic the- ory and its financial institutions as an industry emerged only in the 1970s. T Islamic banks are late twentieth-century institutions designed, against the backdrop of a global economy dominated by capitalist business practices, to help Muslims conduct business internationally while simultaneously upholding tra- ditional Islamic values related to trade finance and currency movement. The basis for their existence is the Islamic moral prohibition on charging interest— interest is a central component of capitalist banking—yet Islamic banks conduct billions of dollars of business annually in the world economy and the de facto Islamic banking transaction is—in most cases—virtually identical to a capitalist banking transaction. The industry of Islamic Banking and Finance (IBF)1 is the manifestation of attempts to apply Islamic law and Islamic economic theory to financial dealings. An Islamic Financial Institution (IFI) refers to any financial institution that per- forms Islamic transactions derived from either Islamic law or Islamic economic the- ory. An Islamic Bank is an institution that performs conventional banking services2 (or their Islamic equivalent) such as checking accounts, savings accounts, loans, and so forth.