E1FLAST 10/26/2009 17:38:31 Page36 E1FFIRS 10/26/2009 17:48:55 Page1 The Art of Islamic Banking and Finance E1FFIRS 10/26/2009 17:48:55 Page2 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia,andAsia,Wileyisgloballycommittedtodevelopingandmarket- ingprintandelectronicproductsandservicesforourcustomers’professio- nalandpersonalknowledgeandunderstanding. TheWileyFinanceseriescontainsbookswrittenspecificallyforfinance and investment professionals as well as sophisticated individual investors andtheirfinancialadvisors.Booktopicsrangefromportfoliomanagement to e-commerce, risk management, financial engineering, valuation, and financialinstrumentanalysis,aswellasmuchmore. For a list of available titles, please visit our Web site at www.Wiley Finance.com. E1FFIRS 10/26/2009 17:48:55 Page3 The Art of Islamic Banking and Finance Tools and Techniques for Community-Based Banking YAHIA ABDUL-RAHMAN John Wiley & Sons, Inc. E1FFIRS 10/26/2009 17:48:55 Page4 Copyright#2010byYahiaAbdul-Rahman.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orother- wise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct, withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpayment oftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive, Danvers, MA 01923, (978) 750-8400, via fax at (978) 750-4470, or on the Web at www .copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermis- sions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011,viafaxat(201)748-6008,oronlineatwww.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbest effortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttothe accuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwar- rantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedorex- tendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategiescontained hereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessionalwhereap- propriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitoranyothercom- mercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecon- tactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidethe UnitedStatesat(317)572-3993,orviafax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts, visitourWebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Abdul-Rahman,Yahia,1944- TheartofIslamicfinanceandbanking:toolsandtechniquesforcommunity-basedbanking/ YahiaAbdul-Rahman. p.cm.–(Wileyfinance;504) Includesindex. ISBN978-0-470-44993-6(hardback) 1. Banksandbanking–Islamiccountries. 2. Banksandbanking–Religiousaspects–Islam. 3. Finance–Islamiccountries. 4. Finance–Religiousaspects–Islam. I.Title. HG3368.A6A244 2010 332.10917’67–dc22 2009028344 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 E1FTOC 10/26/2009 18:6:39 Page5 Contents Preface xiii Acknowledgments xxix Chapter1: Introduction 1 Chapter2: TheFaith-BasedJudeo-Christian-IslamicFoundationoftheProhibition ofInterestandtheRF(Riba-Free)BankingSystem 13 AnIntroductiontotheJudeo-Christian-IslamicFoundations ofFaith 16 TheBook 16 ThePeopleoftheFaith 18 Loans 18 Usury/Interest 18 TheJudaicPositionontheChargingofRibit(Interest): Money,Lending,andInterestintheTorahandthe JewishTradition 21 LoanstothePoor 21 LendingtoNon-JewswithInterest 22 BusinessFinancing 23 TheChargingofRibit(Interest)intheRomanCatholic Tradition:ThenandNow 23 LendingtothePoor 24 PositionoftheContemporaryRomanCatholicChurch onAllowingtheChargingofInterest 25 TheChargingofRibit(Interest)intheTraditionandTeachings oftheEvangelicalChristianChurch 27 LendingtothePoor 27 LendingtotheEnemy 30 v E1FTOC 10/26/2009 18:6:39 Page6 vi CONTENTS BusinessFinancingandRelaxationoftheRulesof ProhibitingtheChargeofInterest 30 TheProhibitionofChargingofRibit/Riba(Interest/Usury) inIslam 31 TheDevelopmentoftheUniversalRiba-FreeSystem inIslam 31 TheConceptofGodOwningEverything 32 DevelopingtheInstitutionofGiving(Zakah)asa RequiredIslamicRitual(LikePrayers) 34 BehavioralGuidelinesandtheDisciplineofGiving 38 BusinessFinance 39 TypesofRiba 41 Shari’aaProhibitsDeceptiveandSpeculativeActivities inBusinessTransactions(Gharar) 43 Chapter3:TheRuleofCommodityIndexationand thePrincipleofMarkingtotheMarket 47 DevelopmentoftheMark-to-the-MarketRule 53 Riba-FreeBusinessTransactionModels 54 Cost-Plus(Murabaha) 54 Leasing(Ijara) 56 JointVenture(Musharaka)DirectInvestment/Equity OwnershiporPartnership 58 MoneyManagement(Mudaraba) 59 FinancingFutureProduction(Ba’iulSalam) 59 Chapter4:Shari’aa:Shari’aaBoardsinIslamicBanks:AnOverview andaVisionfortheFuture 61 TheLaw:Shari’aa 63 SourcesofShari’aa 64 ApplicationofShari’aa 67 TheShari’aaBoardinanIslamicBankorFinance Company 75 TheRoleoftheShari’aaBoard 76 TheDutiesoftheShari’aaBoard 77 ApproachesUsedtoAppointShari’aaBoards 78 ConcernsofWesternCentralBankersandBank RegulatorsRegardingShari’aaBoards 79 TheDevelopmentofShari’aaScholarsandShari’aaCompliance CommitteesforRiba-FreeBanksandFinanceInstitutions inthe21stCentury 80 TheCentralBankandtheRegulatoryShari’aaCompliance Committee 81 E1FTOC 10/26/2009 18:6:39 Page7 Contents vii Chapter5:MoneyandItsCreation:TheFederalReserve System(CentralBanks),InterestRates,andCommodityIndexation 84 ThoseWho‘‘Make’’MoneyandOthersWho‘‘Earn’’Money 84 WhatIsMoney? 86 TheHistoryofMoney 87 Fiat(Paper)Money 88 AmericanCurrencyBeforetheFederalReserveSystem 89 TheFederalReserveBoardoftheUnitedStatesofAmerica 90 FunctionoftheFederalReserve 91 StructureoftheFederalReserveBoard(America’s CentralBank) 92 WhoOwnstheFederalReserveBank? 93 CreditCreationintheModernBankingSystem 93 TheDollarMadeAsGold!WhataWonderfulPlacetoBe! 96 ABriefHistoryoftheBrettonWoodsAgreement,Which ChangedtheWorldofMoney 96 TheFedFundInterestRatesSettingRegime 99 Fiat(Paper)MoneyandtheCyclicalNatureofthe FiatMoneyEconomy 102 TheProhibitionofRiba/Ribit:RulingsonRibainFiqh, theScienceofShari’aa 105 ReasonforProhibition 106 ApplicationofShari’aausingtheCommodity IndexationRule 108 HomesinAmerica 111 PriceofCoal 113 PriceofCrudeOil 114 PriceofNaturalGas 117 PriceofRice 118 Gold:ThatAmazingMetal 121 GoldReservesintheWorld 123 TheHistoryofGoldMarketsandPrices 124 GoldPriceFixing 125 MarkingtheInvestmenttotheMarket 128 Chapter6:CivilityandSocialResponsibilityofthe Riba-FreeBankingSystem 132 TheJudeo-Christian-IslamicValues:Civility,Morality, andSocialResponsibility 137 TheVisionofanIdealFaith-BasedJudeo-Christian-Islamic Society 140 NewTrendsthatCapturedtheImaginationofthePagansof theArabianPeninsula 141 E1FTOC 10/26/2009 18:6:39 Page8 viii CONTENTS ElementsoftheRiba-FreeEconomicSystem 142 Production 142 Distribution 142 Consumption 144 TheRiba-FreeJudeo-Christian-IslamicSystemandBusiness Ethics 144 TheMarketSystem 145 ManagementEthics 145 JusticeandFairnessonBothSides:TheBankandthe Customer 146 BankingandInvestmentBanking 147 ValuesandBusinessEthicsoftheRFBanker 149 Professionalism 149 Concentration 149 Consistency 149 Commitment 150 TheTenGoldenCovenantsoftheRFBank 150 WhereDoWeStartandHowDoWeRealizetheDream? 151 Chapter7:TheConventionalRiba-BasedBankingSystem 154 TheBankingSystemoftheUnitedStates 154 TypesofBankingServicesintheUnitedStates 156 NationalBanks 157 StateBanks 157 CreditUnions 159 InvestmentBanks 160 LicensingaCommercialBankintheUnitedStates 160 GovernmentSupervisionoftheBank 161 TheOfficeoftheComptrolleroftheCurrency 162 InsuranceofBankDepositsbytheFederalDeposit InsuranceCorporation(FDIC) 163 UnitedStatesBankingRegulations 163 ConsumerComplianceManagement 164 BoardofDirectorsandManagementSupervision andAdministration 164 ComplianceProgram 165 ComplianceCommittee 165 InternalControls 166 SummaryofFederalBankingRegulationsinthe UnitedStates 168 RegulationB:EqualCreditOpportunity 169 RegulationC:HomeMortgageDisclosureAct(HMDA) 172