Contents Acknowledgements I ntroduction i ii Part üne: Understanding Islamic finance Chapter 1 Basic principles of Islamic banking Evolution of lslamic banking Foundation of Islamic banking Sale-based i nstruments Murabahah Salam lstisna Lease-based instruments Partnership-based instruments Musharakah Mudarabah Concluding observations 5 5 6 6 6 8 8 8 9 9 9 9 Chapter 2 Islamic banking for SMEs Partnership contracts Joint venture Oiminishing Musharakah Passive partrıership lnstruments with predictab\e returns Oeferred payment sa\e Leasing Short-term production finance Long-term production finance Other instruments Foreigrı excharıge Letters of cred it Guarantee Uni\ateral promise Oown payment 11 l l l l 12 12 14 14 15 16 17 18 18 19 19 19 19 F İ A g e n c y a g r e e m e n t I nvestment certi fic a t e W h ic h t r ans a c t ion t ype ? W h e n Isla m ic fın a n c e m a y or m a y n ot b e t h e b e s t c h oic e P r oh i b it e d i n d u s t r ie s T r a n s a c t ion -t ype c on s id e r a t ion s O t h e r g e n e r al c on s id e r a t ion s C os t P u r pos e I n forma t ion L e g al a n d t a x r e qu ir e m e n t s C h a p te r 3 I sl a mic mic r ofi na nc e : a n e m e r g i ng m a r k e t nic h e O e v elopm e n t of t h e lsla m ic fin arıc e in d u s t r y Glob al e xp a n s ion G ov ern m e n t r e g u l a t ion I nternational organ izat ion s lslamic microfınance Demand Government promotion of lsla m ic m icrofın a n c e 1 ncl on e s ia P a k is t a n B a n k s d ow n s c a l in g a ncl e xpa n d in g prod u c t !in e Islamic nıicrofınance: CGAP survey results Limited outreach Islanıic nıicrofınance by institution type Focus on lndonesia Possible challenges to the growth of Islamic mic r ofin a n c e T h e qu e s t ion of a u t h e n t ic it y B u ilcl in g c a pa c it y P r od u c t d iv e r s it y L e v c r a g in g Za k a t a n d fslanıic fu n d s C h a p te r 4 I sl a mic b a nk i ng fo r w o m e n: a c a se stud y O c c u pa t ion al s tru c t u r e I nvestnıent habits of w om e n N e e d for lsla m ic b a n k in g for w om e n W om e n 's e c on om i c r ole M ult it a s k in g F in a n c ial pla n n in g W om e n a s e n t r e pr e n e u r s A z Za hra pr iv ile g e la d ie s b a n k in g C on c e p t a n d s tra t e g y C u s t onıe r pr ofile Procl u c t s a n d s e r v ic e s offe r e d A z Za hrn E qu it y H om e F in a n c in g -i A z Za h r a M u d ara b a h C urr e n t A ccou n t -i A z Za h r a M u d a r a b a h G e n e r al In v e s t m e n t A ccou n t -i A z Za h r a H ir e Pur c h a s e -i 2 0 2 0 2223 23 24 24 24 24 25 25 26 28 28 28 33 29 29 30303031 31 31 33 34 34 35 35 36 36 37 37 3940 40 40 40 40 41 41 42 42 42 42 43 43 vii Banking for women in other countries Masrafy Bank, Bahrain Emirates Islamic Bank, United Arab Emirates Further opportu n iti es 43 43 44 44 Part Two: Using Islamic Finance 1 ntroduction 47 Chapter 5 Islamic finance: what it is and where it is available to SMEs I ntroductiorı Basic distinctions between Islamic and conventional banking Deposits Lending contrasted to credit and investment Concluding observations Chapter 6 Key products and how they compare to conventional counterparts Murabahah (cost-plus sale) Key distinctions Simple Murabahah Strengths and weaknesses for micro-enterprises and SM Es Alternative applications of simple Murabahah Agency Murabahah Strengths and weaknesses for micro-enterprises and SMEs Alternative application of agency Murabahalı Murabahalı to purchase order Strengths and weaknesses for micro-enterprises and SMEs Alternative application of Murabahah to purchase order Musawamah Strengths and weaknesses for micro-enterprises and SMEs Alternative applications of Murabahalı for working capital Bai al l nah Tawarruq Strengths and weaknesses for micro-enterprises and SMEs Concluding observations ljarah-leasing Strengths and weaknesses for micro-enterprises and SM Es Ijarah Muntahiyah Bi Tamleek - lease ending in ownership Strengths and weaknesses for micro-enterprises and SMEs Sale leaseback Forward Ijarah - forward lease Alternative application of forward Ijarah Strengths and weaknesses for micro-enterprises and SMEs Conclud i ng observations Bai al Salam - forward sale 48 48 50 51 53 54 55 55 56 57 57 58 58 59 59 59 60 60 60 61 61 62 62 63 63 64 64 65 66 66 67 67 67 68 68 viii Simple Salam Strengths and weaknesses for micro-enterprises and SMEs Parallel Salam Strengths and weaknesses for micro-enterprises and SMEs Salam against undertaking Strengths and weaknesses for micro-enterprises and SM Es Concluding observations Bai al istisna (construction/manufacturing) Simple istisna Strengths and weaknesses for micro-enterprises and SMEs Para! !el istisna Strengths and weaknesses for the micro-enterprise and SME Concluding observations Musharakah (joint venture/partnership) Simple Musharakah Strengths and weaknesses for micro-enterprises and SMEs Declining balance Musharakah Strengths and weaknesses for micro-enterprises and SMEs Alternative application of declining balance Musharakah lmport finance Musharakah Strengths and weaknesses for micro-enterprises and SMEs Concluding observations Mudarabah (managed partnership) Strengths and weaknesses for micro-enterprises and SMEs Mudarabah deposit Wakalah Conclud i ng observations Chapter 7 Provi ders of lslamic financing Fully Aedged Islamic banks Islamic windows Limited lslamic product Offerings The Islarnic Oevelopment Bank Group Concludi ng observations Chapter 8 Accessing lslamic finance Considering lslamic finance Choosing Islamic finance Step I Pre-appl ication Step 1.1 Pre-application: understanding the cornpany's financial needs Step l.2 Pre-application: determining the right financial instrument Step 1.3 Pre-application: Finding the right financier and service provider Step 2 Application Step 2 Application: Documentation and funding Step 3: Approval and post-closing Annex: Application and closing checklist for the micro-enterprise and SME 69 70 70 70 71 71 71 72 72 73 73 74 74 74 75 76 76 77 77 77 78 79 79 80 80 81 82 83 83 83 84 84 85 86 86 87 88 88 89 89 89 89 90 92 ix Chapter 9 The role of a sharia adviser 95 Chapter 10 Regulations, tax implications and jurisdictional guidelines Regulators Tax implications Jurisdictional issues Conclusion Appendix: Frequently asked questions Tables 1. Financing instruments in lslamic banks 2. Outreach of lslamic microfinarıce, by country 3. Outreach of lslamic microfinance, by institution type 4. Malaysia, women at decision-making level in the public sector, 2007 5. Malaysia, womerı at decision-making level in the corporate sector, 2007 Figures l. A simple Musharakah transaction 2. A simple Mudarabah structure 3. A simple Murabahah structure 4. Operating lease 5. A financial lease 6. A simple Salam structure 7. A simple istisna structure 8. A simple Bai al Arboon structure 9. A simple Sukuk structure 10. Malaysia: population by stratum and sex, 2007 11. Malaysia: distribution of ma le employment by occupation, 2006 12. Malaysia, distribution of female employment by occupation, 2006 13. Malaysia, public-sector personnel by service group and sex, 2006 14. Depositor-bank relationship in a conventional bank 15. Mudarabah PSIA relationship in an Islamic bank 16. Simple Murabahah 17. Agency Murabahah 18. Murabahah to purchase order 19. Musawamah 20. Bai al lnah 21. Tawarruq 22. ljarah 23. Ijarah Muntahiyah Bi Tamleek - lease ending in ownership 24. Leaseback 25. Forward ljarah 26. Simple Salam 97 97 98 98 99 101 10 32 33 39 39 12 13 14 15 15 17 l8 20 21 37 38 38 38 51 52 57 58 60 61 62 63 64 65 66 67 69 X 27. P a r all el S a l a m 28 . S ala m a g a in s t u n d e r t a k in g 29. S im ple l s t is n a 3 0 . P a r all el is t is n a 31. M u s h a r a k a h 3 2. D ecl in in g b a l a n c e M u s h a r a k a h 3 3 . l m p or t fi n a n c e M u s h ara k a h 3 4 . M u d ara b a h fin a n c in g 3 5. M u d a r a b a h d e p os it 3 6. P r e -a p p l ic a t ion t e p s 70 71 72 73 76 77 78 8