HANDBOOK OF ISLAMIC FINANCE Dr. Mabid Ali Al-Jarhi Professor of Economics and Finance Ankara Social Sciences University Dr. Abdulazeem Abozaid Professor of Islamic Finance Qatar Foundation Dr. Adnan Owaida Assistant Prof. of Economics and Finance Ankara Social Sciences University Editorial Board Dr. Ahmad Fayez Al-Harsh Assistant Prof. of Economics and Finance Ankara Social Sciences University Dr. Tawfiq Azraq Assistant Prof. of Economics and Finance Ankara Social Sciences University Dr. Abdulrahman Yazici Assistant Prof. of Economics and Finance Ankara Social Sciences University Translated from Arabic by Dr. Abdulazeem Abozaid Page 1 of 490 Table of contents Table of contents 2 Introduction ................................................................................................................................................ 20 Chapter One ................................................................................................................................................ 23 Shariah Justifications of Islamic Finance ..................................................................................................... 23 Chapter Two ................................................................................................................................................ 40 Economic Advantages of Islamic Finance ................................................................................................... 40 First advantage: economic efficiency ..................................................................................................... 40 The second advantage: economic stability ............................................................................................. 41 The third advantage: the risk of information asymmetry is reduced ..................................................... 45 The fourth advantage: the positive role of Islamic finance in development .......................................... 47 Fifth advantage: consistency of the national economy .......................................................................... 48 The sixth advantage: social justice .......................................................................................................... 49 The seventh advantage: the ability to survive ........................................................................................ 51 Chapter Three ............................................................................................................................................. 54 Validity of Islamic Investment and Financing Contracts ............................................................................. 54 The essence of Riba ................................................................................................................................ 54 Validity of the investment and financing contracts ................................................................................ 54 Formal validity......................................................................................................................................... 54 Achieving formal validity using tricks...................................................................................................... 55 Validity of purpose and its relationship to the essence of contracts ..................................................... 56 Contemplating the implications of the contracts given the Shariah economic objectives .................... 56 Validity of contracts and the tricks to Riba ............................................................................................. 59 Validity of transactions according to the economic standards .............................................................. 60 Page 2 of 490 Chapter Four ............................................................................................................................................... 62 General rules for profit sharing................................................................................................................... 62 The concept of Musharaka: .................................................................................................................... 62 Legitimacy of Musharaka: ....................................................................................................................... 63 Classification of Musharaka (the contractual partnership) .................................................................... 63 Musharaka characteristics and advantages: ........................................................................................... 64 Musharaka in economic analysis: ........................................................................................................... 67 Musharaka terms and conditions ........................................................................................................... 68 Types of Musharaka ................................................................................................................................ 69 Partnership in a specific deal .............................................................................................................. 69 Permanent Musharaka ....................................................................................................................... 70 Chapter Five ................................................................................................................................................ 72 Permanent Musharaka ............................................................................................................................... 72 The first stage: the stage of starting the partnership ............................................................................. 72 Eligibility and agreement of partners ................................................................................................. 72 The second stage: managing the Sharika................................................................................................ 76 Stage Three: end of the Sharika .............................................................................................................. 83 Liquidation of the Sharika: .................................................................................................................. 83 Partners undertaking to buy the Sharika's assets upon liquidation ................................................... 83 Partners withdrawing from the Sharika .............................................................................................. 84 Chapter Six .................................................................................................................................................. 85 Diminishing Musharaka .............................................................................................................................. 85 Diminishing Musharaka application of housing financing: ..................................................................... 86 Additional Shariah provisions for diminishing Musharaka ..................................................................... 87 The independence of the sales and leasing contracts from the Musharaka contract ....................... 87 Page 3 of 490 Commitment to the Shariah provisions in profit and loss .................................................................. 89 Renting the other partner’s share ...................................................................................................... 91 Violations during application: ................................................................................................................. 91 a. The client undertakes to purchase the financier's share at a specified price ............................ 91 b. Evading liabilities of ownership .................................................................................................. 92 c. Transferring the ownership of the bank’s share to the customer after paying the installments without executing the necessary sales contracts ............................................................................... 93 Modus operandi of diminishing Musharaka ........................................................................................... 94 Capital contribution: ........................................................................................................................... 95 Management of the diminishing Musharaka ...................................................................................... 96 Distribution of profit resulting from the project: ............................................................................... 96 Musharaka Applications.......................................................................................................................... 97 First: Musharaka in domestic trade .................................................................................................... 97 Second: Musharaka for importing goods ............................................................................................ 97 Third: Musharaka-based Letters of Credit .......................................................................................... 98 Fourth: Musharaka in agricultural activities ....................................................................................... 98 Fifth: Opening investment accounts based onMusharaka ................................................................