Credit crunch: islamic perspective

The Credit Crunch: An Islamic Perspective

A THESIS SUBMITTED IN THE FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF

MASTER IN BANKING AND FINANCIAL LAW

QUEEN MARY UNIVERSITY OF LONDON

AUGUST 2009

Examination number: HM 550

Supervisor: Georges Walker

Introduction

`Markets are just neither moral nor immoral, they are just amoral'

Andre Compte- Sponville^1(*)

The financial crisis can be really damaging for the economies affected bringing them into recession. Starting the 14^th of August 2007, the subprime mortgage crisis expanded into a world financial crisis. Banks and financial institutions fell down.

Despite the last news that some banks had realised some benefits for the last quarter^2(*), we are currently witnessing a severe recession which transpires through the levels of unemployment and lack of growth registered for the last year.

As opposed to conventional banks, Islamic banks were not or were much less affected by the crisis.

The main banking activity is to take deposits and grant loans. Depending on the nature of such grants or loans, a bank must set aside capital as required by the regulation authorities.

As a result of their activity, banks may suffer a bank run because of the maturity mismatch between the deposits they receive usually available on demand and the loans they give. On the long term, banks find themselves unable to meet the sudden withdrawal demand, which leaves them under the threat of insolvency. The situation in which bank runs are spread over to other banks or financial institutions is called a systemic financial crisis^3(*).

A situation in which banks are reluctant to lend each other is called credit crunch^4(*). This situation can be the catalyst of a financial crisis.

According to Kindleberger^5(*), a financial crisis anatomy includes 4 stages:

At first, the investor will foresee an opportunity for benefit arising from a sudden change for example a new financial innovation, market improvement or technology discovery.

The price of the asset rising and a profit is expected which participates in creating a bubble or a «boom».

Following this euphoria, other unsophisticated investors try to copy other individuals in pursuing easy profits. It is called «herd behaviour». They invest in illiquid commodities without a real understanding of the markets.

Unexpectedly, prices become stagnant and some investors start selling which leads the prices into dropping down. This is «distress» which may lead to panic or crash.

The most popular financial crises since the 19^th century would include The Great depression in the 1930's, the 1973-1974 oil market crash, the 1980s Latin American debt crisis, in 1997 the Asian Financial Crisis and the last subprime mortgage crisis which started in 2007 with the fall of Northern Rock and grew internationally with the fall of Lehman Brothers and ended up pulling the world into recession^6(*).

Some studies try to forge a theory for financial crises:

Some proclaim that the markets are going to fix themselves according to the invisible hands theory of Adam Smith (Efficient market theory)^7(*).

Others are proclaiming the end of capitalism.

Fraser, the author of the book «Wall Street» says we are entering a new chapter of our history^8(*).

According to Marx^9(*), crises are an inherent element to the economy.

Economics are linked to profit, when the profit is minimized then crises emerge.

On the long run crises are more recurrent and more severe and the capitalist system will eventually fail.

A politically-based business cycle pioneered by Michael Kalacki, suggested that ups and downs in the economy are the result of political decisions. When a party policy enhances inflation and growth, the opposition will endeavour to access power and follow the opposite policy of low inflation and unemployment. This succession of opposite political orientation can be the origin of financial crises.

In opposition to the efficient market theory, Neo-Keynesian period economist Minsky theorised^10(*) that financial fragility is a typical risk inherent to the economy^11(*).

When the economy is growing, firms tend to move towards speculative financing leading lenders into the cycle of speculative investments too. When big firms default, all the system falls down^12(*).

Minsky presents 3 forms of speculators: the safe investors who can pay principal and interest, the more risky ones which can pay interest only and the Ponzi or speculative investors which rely on the rise of the prices of their assets to pay their debts.

If the theory of efficiency is correct then financial markets are destabilised by the presence of central banks, then pushing that reasoning to the extreme, the mere existence of central banks is questionable^13(*).

If Minsky's theory is the correct one, then the markets are inefficient and we must stabilise the system by adopting different policies using central banking and regulatory bodies to govern the financial markets.

Some recent theories criticise the conventional banking system accusing it of being incompetent and try to present Islamic finance as an anti-crisis model to follow^14(*).

As opposed to conventional banks, Islamic banks were not or were much less affected by the crisis.' Contrary to the commonly held perception, Islamic banks have to some extent been affected by the global financial crisis, especially due to the inherent risks of Islamic finance such as a higher maturity mismatch than conventional banks and many players having significant exposure to real estate sector.  The impact of the financial crisis has, however, been lower in comparison to conventional banks. Islamic banks are less debt reliant and more dependent on customer deposits for liquidity, thus limiting their exposure to credit markets'^15(*).

The question is: why did the lack of liquidity in the interbank market not have repercussions on the Islamic banking community? What is the difference between the Islamic banks and the conventional banks that helped them overcome the crisis? Is Islamic finance the alternative solution to our established conventional banking system?

Islamic finance, deals with «the provision of financial services on a basis that is compliant with the principles and rules of Islamic jurisprudence».^16(*)

It is based on risk sharing, prohibition of speculation and interest.

However Islamic finance is still a niche market and it is in perpetual evolution in the purpose of finding a balance between morale and business.

Most literature on Islamic finance considers it as a philosophy difficult to apply to conventional markets where Islam is not the main religion in practice.

Different arguments defend this theory, among others:

-The inability of Islamic banks to fulfil all the client's needs in a world surrounded by conventional banks.

-The principle of Islamic finance is self-destructive. The loss sharing principle common in Islamic finance leads to a high correlation of institutions falling down.

But counter-arguments developed especially during this most recent financial crisis have revealed that Islamic banks might be a viable solution for a more stable system or at least that there can be lessons to be learnt from those institutions to invigorate the system.

The diversification in the investments, the type of supervision and regulation of the Islamic Banking system and the control of the final use of the funds will limit the possibility of failure and insolvency.

The role of the central banking control is key and its intervention to develop laws promoting investing in safe and sound financial instruments is pretty essential.

The major objective of this study is to link between the credit crisis and Islamic law.

In order to achieve that objective, the study will follow the following outline:

1) We will try to present the development of Islamic banking, its background and the current modern situation of Islamic institutions.

2) We will briefly study Islamic principles and the difference between Islamic and conventional banks.

3) After presenting these core principles, we will analyse the structures of Islamic contracts which apply these principles.

4) We will present Islamic banking fundamental sources, their various interpretations and the different schools they enhance.

5) Then after having understood the fundamentals of Islamic finance, we will examine the factors that have led to its rise and future after the financial crisis.

The areas of research covered in this study involve:

1) A collection of material on Islamic banking and Islamic countries from UK and Lebanon

2) The use of an English translation of the Quran as a source of Islamic law

3) The examination of journals and newspapers related to the matter

Islamic financial law is a new discipline and is increasingly attracting attention from educational bodies. Some universities are even including it as part of their optional course offerings.

Some commentators question the prohibition of Riba and its practice to the point of accusing the Islamic financial markets of being a «300 million deception». Dr Muhammad Saleem, a prominent Islamic banking scholar in a brief presentation of the Islamic principles and their adaption to the modern world^17(*) describes the hypocrisy of some Islamic institutions and their «disguised» use of Islamic products.

So, is Islamic finance the solution to the financial crisis that hit the world starting August 2007 and the recession we are suffering now from? Will applying Islamic financial principles bring investor confidence back to the market?

We will try to answer all of these questions in our thesis by adopting the following analytical approach:

1) Checking the difference between Islamic finance and conventional banking.

2) Scrutinising the crisis, its causes and its consequences and the lessons we learn from it.

3) Trying to establish the link and to analyze the causes that kept Islamic banks away from being affected by the crisis and the lesson we can learn to transfer to conventional banks.

For this purpose the study is divided into 4 chapters:

The first chapter is an introduction to Islamic principles, Islamic concepts and issues.

Then, the second chapter discusses the application of these concepts in the financial markets in the form of Islamic contracts.

The third chapter presents a sorrow brief of the recent financial crisis.

And finally, the fourth chapter provides lessons to learn generally from the recent crisis and from Islamic banking during financial crises so we will talk about advantages and disadvantages of Islamic finance in the light of the recent turmoil.

Chapter I: The evolution of the Islamic financial system

1) Historical background of traditional Islamic finance

Considered as the last monotheistic religion after Buddhism Judaism and Christianity, Islam is not just a religion. It organises all aspects of Muslim life from social issues to commercial awareness.

The Quran and Islamic jurisprudence explain how a Muslim should treat his wife, what he is not allowed to eat and how he should manage his financial obligations.

According to the Islamic concept of «tawhid», the universe (earth and heavens) is a property of God. Humans have been trusted with these benefits and they will be accountable for their acts according to God's justice.

«Whatever you spend, surely Allah knows of it»^18(*)

«On that day you will surely be called to account for the bounty you were granted».^19(*)

Accountable for their acts, Muslims must submit for the Shariah in God's property.

A Muslim must seek justice in all aspects of his life and financing must be interest-free. Therefore and long in Muslim tradition, interest has been negatively perceived and completely forbidden.

A good Muslim follows the «halal» (the good) as opposed to the «haram» (the bad).

«Partake of the good things and work righteousness»^20(*)

Islam developed after the year 632 hegira by the force of the sword.

However its impact diminished in the post world war period with the emergence of the vision of separation of religion from the state affairs.

In fact, in the western world the banking system started to grow in the 17th century with the establishment of the bank of England (1694) and Riksbank Bank (1668).

The industrial revolution created an enhancement for their development.

However the Ottoman Empire which was dominant in the Middle East did not adapt to this situation.

After the collapse of the Ottoman Empire in 1918, it was taken over mainly by French and British colonies which transferred their banking system to the Arab countries occupied.

The people in need for financial services turned to conventional banking.

During the 1970s, the majority of these Arab countries earned their independence.

The increased wealth of the middle-eastern countries, due to their oil production gave rise to a major need for financial intermediation for investment in petro-dollars and the rise of people claiming the need to return to the basis of Islam and to invest according to Islamic principles^21(*).

Islamic banking was first initiated in Egypt by Ahmad Najjar who established banks which could lend money to the masses sharing losses and benefits without claiming interest. This experience was the catalyst of the development of Islamic banks.^22(*).

However this practice is not the oldest.

Some authors reveal the existence of institutions in India starting 1901, and also in Iran and Pakistan establishing «Zakat''^23(*) or insurance companies based on Islamic principles which aim at paying indemnities to the insured when in situation of accidental damage against earning insurance premiums.

Other attempts include a small Islamic bank that was founded in Pakistan according to Haron Sudin ^24(*) to fund Interest-free loans for poor landowners. The experience was unsuccessful due to a lack of funds.^25(*). The money was lent without interest

These examples reveal that the difficulty of establishing a typical Islamic bank didn't stop Muslims from trying to have institutions that followed their beliefs.

The absence of Islamic banks during that period can be explained by the poverty and the fact that the need for banks was limited and the limited individuals who used conventional banks were excused by the law of necessity in the Quran given the lack of institutions that applied Islamic law.

The independence of many Islamic countries during the 1940's through the 1970's and the important resources coming from the petro dollar money were the key factors in changing the panorama and were definitely the catalysts behind the development of Islamic banking.^26(*).

The initial experience was in 1963 in Egypt. Ahmad Al-Najjar was behind the idea of the launching of an interest free bank, the Myt Ghamr Bank^27(*).The bank couldn't stand up to the competition with conventional banks and the experience ended up in 5 years. This first experience was a crossroad for Islamic finance. It proved that Islamic finance is a viable solution. However, it must adapt to the competition by creating new ways. A change in the approach led to the switching to profit and loss sharing contracts.

The idea was incorporated in 1971 with the Nasser Social Bank of Egypt.

Nasser Social Bank had for objective providing loans for students, investment or social insurance purposes. Prohibited from taking interest, it funded itself by taking 2% of the loan granted for administration fees. Nasser social Bank developed into a model for other banks created successively.

In 1969, the organisation of a key Islamic conference^28(*) subsequent to the burning of Mosque Al Aqsa was going to be the mark in Islamic banking development.

A study initiated by this organization led to the creation of an Islamic bank which led into the creation of BID (Islamic Bank of Development) on the 20th of October 1975.

Following the creation of BID, some national banks were created: Dubai Islamic Bank (1975-1976), Kuwait Finance House (1977) Faisal Islamic Bank of Sudan, Faisal Islamic Bank of Egypt, Jordan Islamic Bank and Bahrain Islamic Bank among others.

In 1981, another generation of Islamic banks appeared with Dar EL Maal El Islami & El Baraka Group. This gave Islamic Banking an international flavour. However it was not until 2004 that Islamic Bank of Britain was launched in the United Kingdom^29(*). Lately, Sri Lanka launched an Islamic Bank^30(*). Overall there are 300 working Shariah compliant institutions in the world today.

2) Islamic principles

Islamic principles are revealed in the Quran, (it is Islam's Holy Book revealed successively by God to the prophet), the acts of the prophet and his opinions (the Hadith), the consensus of the community (Ijmaa and Fiqh) and the reasoning by analogy (Qiyas).

Islam is believed to be the first religion to bring social and economic justice. Exploitation of the weak is mainly prohibited in Islam. This social reform was forwarded by two major prohibitions: the prohibition of «Riba» and the prohibition of «Gharar».

A) The Islamic perception of interest or prohibition of Riba

According to the Oxford dictionary interest is «the extra money that one pays back when one borrows money or that one receives when one invests money»^31(*)

The lender receives money for its savings and the borrower pays interest because he owns the money and the agent makes money because he linked them together.

Interest is an important factor in the economy. It keeps the economy in motion.

Historically, interest was the subject of two concepts: biological and compensatory.

In the eastern society, loans were compared to biological life, for example animals and plants in a sense that a loan can generate benefits like plants and animals can biologically reproduce themselves. Therefore interest is legitimately justifiable^32(*).

However the doctrine of usury at that time prohibited the fact that money generates money and therefore, paying interest was not justified.

A totally opposite view was that interest was a compensation for the loss the lender would incur by lending the money. Literally, the Latin root for interest «intereo» means to be lost and interest originates from this word.

`'It is easy to see that if there is any doubt about repayment there must be interest for no one will voluntarily part with money, as a commercial transaction, in return for anything less than a 100% probability of the principal being repaid»^33(*).

Interest as a practice was condemned by all the religions except Judaism.

«Lend freely hoping nothing thereby» (Luke 6:35) says the Bible and is regarded by many annotators as a condemnation for interest in the Christian religion.

Whereas Judaism considered interest illegitimate but did not forbid it explicitly.

The philosophers adopted the same approach; Aristotle condemned interest and considered finance.^34(*)

Interest or Riba has been one of the most important topics in Islamic law. Riba had been mentioned 20 times in the Quran and it means literally «to increase».

a) Riba in Fiqh:

The Fiqh distinguishes between two different types of Riba: «Riba el nassia» and «Riba al fadel».

Riba al-fadel occurs from the discrepancy in the measures of quality in an immediate contract there is a difference between the counter values of commodities of the same kind.

It could be a difference in weight, currency or scale. An example would be an exchange of low quality commodities to good quality commodities.

Riba al nassia (Quranic Riba) occurs when the delivery of the commodities is delayed. For example: it takes the form of an increment on the loan received by the lender (due to a delay).

It is recommended that unless the commodities in question are of a different kind, the exchange should happen on spot and to the same counter values

Riba al nassia occurs in loans whereas Riba el fadl occur in sale and exchange transaction.

b) Riba in the Quran:^35(*)

Riba was prohibited successively in the Quran.

From the undesirability of Riba^36(*), revealed in Surat el Room to the express prohibition in Surat Imran^37(*) to having a war with God in Surat Al Baqarah^38(*).

 

c) Riba in the Hadith of the prophet:

The prohibition is also mentioned in the Hadith of the prophet: 

The Prophet (saw), cursed the receiver and the payer of interest, the one who records it (the contract) and the two witnesses to the transaction and said, «They are all alike (in guilt).»

 

Jabir ibn Abdullah, giving a report on the Prohet's farewell pilgrimage, said: The Prophet (saw), addressed the people and said, «All the riba al-jahiliyyah is annulled, the first riba htat I annulled is our riba, accruing to al-Abbas ibn Abdul Mutalib (the Prophet's uncle).»

Abu Hurayrah (ra) narrated that the Prophet (saw), said: «riba has seventy segments, the least serious is equivalent to a man committing incest with his own mother.»

 

Abu Hurayrah (ra) narrated that the Prophet (saw) said: «»God would not allow four persons to enter paradise or to taste its blessings: he who drinks wine, he who takes riba, he who usurps an orphan's property without right and he who is undutiful to his parents.»

d) Contemporary views on Riba:

There is a consensus among Muslims on the fact that Riba is prohibited. The views however diverge on what actually constitutes Riba.

Two different views on Riba can be observed:

According to some Muslims interest in the sense of any increase in the charges over a loan is prohibited^39(*).

According to another point of view interest in its moral definition is prohibited in the sense that it means exploiting the others economically. They consider the commercial loan allowed.

The most important verse related to Riba in the Quran is «lakum ru'usu amwalikum» (you are entitled to your principal) «la tazlimuna wa la tuzlamun» (Do not commit injustice and no injustice will be committed against you»).

The literal interpretation of the verse emphasises on the first part considering the second part as an explanation.

However, is this the correct interpretation or should we consider the rationale behind the interpretation?

In this verse borrowing is linked to injustice.

A consideration of the situation in the Islamic time supposes that only the poor would ask to borrow money. There were no laws for protection and only the needy would accept to pay interest as otherwise he would not have access to the funds.

However in our modern life taking a loan doesn't equate to poverty.

Modernist views on Riba analyse it from the scope of the cause of the prohibition which is injustice.

This view is supported by main Islamic banking scholars such as Fazlur Rahman, Muhamad Asad and Said Al Najar)^40(*).

They base their views on the historical context during the pre-Islamic period and they consider that pre-Islamic Riba was not equivalent to today's concept of interest because one party was rich and the other was poor^41(*).However, according to Muhamad Ayub who quotes the SAB(Shari'a Appelate Bench)«It is not to say that commercial or productive loan were not in vogue when Riba was prohibited .More than enough material has come to prove that commercial and productive loans were not foreign to Arabs»^42(*)

In this moral definition Riba could be described as undue profit.

So according to that concept when the money is provided to feed the poor, no interest should be taken for a consumption loan however if it is a production loan Riba is legitimate.

This neo-revivalist view is the dominant one in the contemporary debate and constitutes the base of modern Islamic banking.

The prohibition of interest has a serious impact on the financial transactions a Muslim can perform:

A Muslim cannot perform the daily standard operations of a conventional bank. Islamic banks are banned from taking any interest on provided loans or granting any interest on deposits. Charges for services are acceptable but should not be related to the financial value of the service.

B) Gharar

The prohibition of interest is one of the pillars of Islamic finance. If Riba receives increased attention that doesn't mean that Gharar is less important.

There is no clear definition of Gharar. The word in Arabic means cheating and uncertainty and in practice in Islamic finance, Gharar implies most often speculation.

In Islam, a contract which contains an element of uncertainty, risk or speculation is deemed to be void^43(*).

The sources that prohibit Gharar are the Quran and the Hadith of the prophet.

The prophet banned the sale of a «fish in the sea^44(*), the messenger forbade sale of what in the wombs, sale of the contents of the udders, sale of a slave when he is a runaway,»^45(*)

«Whoever buys foodstuffs let him not sell them until he has possession of them»^46(*).

«He who purchases food shall not sell it until he weighs it»^47(*)

Each of the above operations includes an element of Gharar (uncertainty, risk, speculation).

In the Hadith, the prophet forbids an operation called «talaqi al rukban». It refers to a salesman who buys goods on the borderline of a market for a lower price then sells at the market price trying to take advantage of the ignorance of the buyer.

To prevent Gharar in a transaction, the contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transaction.

In summary, the concept of Gharar covers 2 elements of the contract: the subject matter and the price.

These two main elements are important to the contract. Otherwise the contract won't be legally binding. If they have an element of Gharar, the contract will be void.

Risk is inherent to all contracts. The scholars make the difference between two types of Gharar, «gharar khatir» (excessive or absolute) or uncertainty to the essential elements and «gharar qalil» (relative or nominal) or uncertainty to subsequent elements which are not considered key and which can be easily eliminated from the contract.

In opposition to Riba, the gharar qalil does not render the contract void.

Gharar can occur according to Nabil Saleh^48(*):

-There would be no want of knowledge regarding the existence of the subject-matter.

-There would be no want of knowledge regarding the characteristic of the subject matter or the identification of their species or knowledge of their quantity or the date of future performance. If any

-Control of the parties over the exchanged counter-values should be effective.

Uncertainty towards the existence of the subject matter cannot occur in an Islamic contract. However a subject matter can be a thing in the future at the time of contracting provided its future existence is certain^49(*).

Uncertainty towards the possession refers to the «fish in the sea» and to naked selling which refers to the selling of derivatives without the actual ownership and this is void in Islamic contracts.

The price must be determined at the time of the signature of the contract. A contract based on the ongoing price is void. In this matter, a decision on a forward foreign exchange contract was declared void by the court of Cassation of Abu Dhabi». The intention of both parties was to generate profits from the fluctuation of the various currencies. They would not know the result of their speculation until the transaction was closed. When the subject of a transaction is not assessed and is not known to either party and is based partially on luck. It is misleading. They become (...) illegal bets''^50(*).

C) Maysir

Last but not least, the Quran forbids «Maysir» or gambling because it comes from Satan who «wants only to sow enmity and hatred among you, and hinder you from the remembrance of God and from prayer»^51(*)

A transaction which involves gambling is prohibited. One must not ignore the fact that all commercial transaction include an element of risk.However.it depends on the intention of the person.

`'The distinction between prohibited speculation and legitimate commercial speculation is not clear»^52(*). An equity investment in a company is legitimate if the investor aims at keeping the share and participate in the productivity of the company. However, if the aim is purely to sell the shares for speculation purposes then the transaction involves Maysir and is prohibited^53(*).

3) The development of Islamic finance

Today, Islamic banking is a developed industry. This development has led to the development of Islamic finance with fully fledged panoply of products and services.

Funds managed accordance to Islamic law is worth USD 500 bn according to the FSA (Financial Services Authority)^54(*). With 300 Islamic financial institutions, the industry is considered to have reached critical mass compared to its status 300 years ago.

Starting from minor trials in 1963, three factors^55(*) have led to the development of Islamic finance to its current sophistication levels. The first one was the establishment of the Islamic Development Bank. One of the major objectives of this bank was promoting Islamic finance .The help of the Accounting Organisation for Islamic Institutions (AAOIFI) was effective lately. This bank proved the Islamic bank experience viable.

One third of the trade financing by IDB has been for oil imports, USD 1.5 bn were invested in project finance over the 1995-1999 period.

The second factor easing the development of Islamic finance was the oil price rises; a lot of national banks were created trying to use the benefits of this oil to poorer Muslim countries.

The third factor was the contribution of Islamic Fiqh, and the modernist view on Riba.

Trying to suit the customer's needs by presenting various services, multiple techniques were created. These techniques attracted a lot of criticism from more conservative Islamic scholars.

After the initial expansion many Islamic banks, in order to attract customers, Islamic banks followed two strategies:

The first was to widen the range of services on offer so they can meet the client's financial needs like offering international transfer of funds.

Also they offer financial schemes and housing loans where for example a property was purchased on behalf of the client who had to repay by instalments.

The competition of Islamic banks with conventional banks increased, especially as the latter started offering Islamic accounts or Shariah based products.

In order to make profits from their liquidity, Islamic banks unable to invest in government bonds started to invest in sukuks. Malaysia rose as the pioneer in Islamic banking.

The establishment of the Bahrain money market was the trigger to the emergence of Islamic markets for securities.

Three countries expressed the ambition of making their entire banking system in conformity to the Shariah: Iran, Sudan and Pakistan.

However, in most of the others countries the two systems cohabited, which made it more challenging for the Islamic banks with less clear objectives.

Islamic banking is well established now in the international community and some issues have been taken to increase its credibility.

The development of Islamic financial methods has led to the development of different forms of financial institutions. These vary between Islamic banks, Islamic windows, Islamic investment banks and funds, Islamic mortgage companies, Takaful companies and international Islamic financial markets.

In 1991, the Accounting and Auditing Organization for Islamic financial institutions (AAOIFI) was established to issue, audit and govern accounting standards especially for Islamic Financial Institutions.

The main body for supervision in the Islamic banking space remains the international financial services board based in Malaysia which plays a role equivalent to that of the BASEL committee on banking supervision in conventional banking.

Chapter II: Islamic contracts

The application of Islamic banking is in contradiction with conventional banking products due to the forbidding of Riba, Gharar and Maysir discussed earlier.

Therefore some techniques or contracts have been created in order to apply Islamic principles in the banking system.

When determining if a particular fund is Shariah compliant, the supervisory board takes into consideration certain core Shariah principles. Such principles include: ban of receipt of interest, avoiding uncertainty and discouraging risky behaviour.

These techniques have been the subject of a lot of literature.

Our main objective is to try to give a brief descriptive overview explaining why they are admitted by the Shariah.

1) Mudaraba^56(*)

It is an arrangement whereby one party or investor possessing capital (rab al maal) advances funds to his partner (mudarib) for trade purposes^57(*).

The benefits of his contract must be shared on a pre-agreed basis between both parties.

The percentage of benefit may differ from contract to contract. However, the determination of each one's part must be imperative.

In the case of loss, the parties who entrusted the others will bear the risk of loss. The other party or the manager of the Mudaraba (the mudarib) is considered to have lost his labour and time.

The mudarib will be charged for the losses incurred as a result of his negligence or breach of the contract terms.

The capital of the Mudaraba cannot be a debt owned by the mudarib for the reason that if it generates benefits, it will be assimilated to Riba.

The mudarib should manage the Mudaraba contract without interference from the investors.

There shouldn't be any time limit for a Mudaraba contract.

This can endanger the plans and the possibility of realising benefits.

The investor cannot request any guarantees from the mudarib.

The profits held will be fixed on a ratio basis not a fixed amount.

In practice, Mudaraba can be used by Islamic banks in two different ways:

The bank while taking money from the client plays the role of mudarib. When making the money at the disposition of other clients, the bank is rab al maal.

Mudaraba is used as a form of participation or trust financing^58(*), often when a number of investors want to pool their resources under the management of a third party.

It can be used to structure funds, syndicate other Islamic finance products or provide a format for a Shariah compliant deposit account.

2) Musharakah

A Musharakah is a joint venture arrangement^59(*). The word in Arabic literally means «participation». This partnership means participating finance in which the bank participates with one of its clients in a commercial industrial operation.

The losses are suffered by all the partners according to their participations. Profits are to be distributed among partners according to a pre-agreed ratio^60(*).

Musharakah can take many forms:

«Musharakah-moufawadah^61(*)»: or universal partnership, in which the profits and losses are equally split.

«Musharakah-inan»:^62(*) each partner is the agent but not the guarantor of the others. This is a Musharakah in which the profits and losses are split according to their participation and are limited to the amount of capital brought by the partners.

«Musharakah al daima» or permanent: in which the bank is a partner or owns a permanent share, it can sell its parts afterwards.

However, the most used form of Musharakah is the «Musharakah al moutanakissa» or «Musharakah moutanakissa bil tamallok »(diminishing musharaka)^63(*) which means a participation in which the borrower would get the whole ownership only after the bank has collected its participation back^64(*).

Each partner is required to contribute to the capital to a certain percentage.

Since all the partners participate in the money the priority for management is not given to anyone. However it can be delegated.

The contract is based on trust. In consequence, no guarantees should be provided.

The profit shares of each partner should be a percentage not a fixed amount.

The Musharakah is used by Islamic banks to finance projects.

It is used to participate in industrial, agricultural projects or services rather than commercial ventures^65(*).

3) Murabaha

Murabaha is a form of cost-plus financing^66(*).

In a Murabaha contract, the financial institution buys the product on request from the client. It sells it back to the client (for cash or instalments). It is evident that the bank will sell the product for a higher price than the one paid originally.

The Murabaha financing mechanism is translated as fixed profit and cost plus profit.

There is no reference to Murabaha in the Quran.

However it was justified by reference to Muslims practices in the prophet time to buy a commodity in a village and sell it in another on for a premeditated profit.

75% of Islamic banking contracts are based on Murabaha. This contract is widely used to help short-term financing to clients to purchase goods with a deferred payment. The basic three elements of Murabaha contracts are:

The price, related costs and benefits should be defined and determined in money.

The subject should be a commodity.

It is very crucial that the sale transaction includes a commercial risk for the buyer of the commodity. If the profit is predetermined it can be assessed as illegitimate Riba^67(*) .

Also some issues had been raised about the legality of premiums for the promise to buy or urboun.^68(*)Is the promise to buy compulsory, is the premium refundable in case of deferment of the contract? The current Islamic scholars think it is not binding which can cause losses for the purported buyer and can be linked to Gharar. Some banks present it as a proof of good intentions and a cost cover in case of non acceptance of the deal.^69(*)

4) Ijarah

The word Ijarah in Arabic refers to rent.

Ijarah is a contract relative to a specific benefit from the ownership of a good or product for a known cost.

There are two kinds of Ijarah:

The first one is «Ijarah»^70(*) or true lease, which represents an exchange transaction, where a benefit of an asset is transferred for a known price but ownership of the asset is not transferred.

The second one is «ijarah wa iqtinaa» ^71(*)or lease and ownership

This is a lease where the lessee derives economic use and achieves the ultimate ownership of the product.

For example a bank accepts to buy or rent a building and leases it back to the client^72(*).

This last contract is used whenever the commodity is leasable (aircraft, ships, real estate) of the lease with lease rentals used to partly pay the price of buying the property.

In this structure, a special purpose vehicle is used to carry the debt and equity portions of the purchase.

The price of the asset together with lease rentals is used to pass money both back to the fund and to repay the initial debt.

The difference with conventional lease to highlight is the risk taken by the lessee.^73(*)

5) Istisnaa

Istisnaa is a form of sale where a commodity is transacted before it comes into existence. It involves ordering a manufacturer to provide a specific commodity for the transaction. Islamic banks enter into a back to back Istisnaa structure which involves two contracts. The first contract is between the Islamic bank and the manufacturer whereby the bank acts as a buyer of the manufactured assets. The second contract is between the client and the Islamic bank whereby the bank acts as the seller of the manufactured assets.

To be Shariah compliant the contract must specify the features of the goods to be produced and the delivery date^74(*).

This type of financing is widely used Islamic project finance.^75(*)

6) The Islamic insurance (Takaful)

Takaful, literally means in Arabic «mutual guarantee».

The instinct of survival and protection has flourished to become a world business: the conventional insurance.

Some Muslims believe that there is no need for Islamic insurance, because in case of catastrophe, Muslims are supposed to help each other. Also, taking protection procedures is challenging the will of God^76(*).

Also they believe that insurance businesses are involved in illegal fields such as alcohol, pork and gambling.

Objections to conventional insurance can be resumed in five facts^77(*):

Insurance includes an element of Gharar or uncertainty concerning the price and the liabilities of the parties. The insurance can create an unlawful disadvantage.

Insurance includes an element of Riba. The premium can be non equivalent as it can be lost without getting any advantages.

The conventional insurance contract is a contract on security which is not defined in Islam.

It is against predestination.

It includes an element of gambling.

Against these objections some people see no problem in the conventional insurance:

Some scholars consider that conventional insurance doesn't include Riba or Gharar.

Others compare the conventional insurance to the custody contract or «Hirasa» in which the custodian receives money to provide security.

For those who compare insurance to gambling, gambling concerns unnecessary risk that the person takes. However, insurance is against risk not under its control.

Opponents of insurance see no value for this argument.

For them there is no contract in Islamic law where the security is the subject matter.

The subject matter may include Riba whereas the party can pay less and get more.

With all these controversial views, an alternative was found in the «Takaful» contract.

In 1985, the Takaful system has been invalidated as a system based on mutual cooperation. The Takaful is a mutual protection in case of casualties.

A Takaful contract company works on the basis of a Mudaraba contract with the manager of the funds being the provider of the Takaful contract or the Takaful Company.

Claims are paid from the premiums paid to the fund.

All the benefits are the property of the policy holders. However, in the case of deficit of funds, losses are covered by all the participants.

A Takaful company serves as a trustee or as a manager on the basis of «Wakala» or Mudaraba contract.

Guaranteeing each other or «Takaful» consists of a pool of funds formed by the collection of a periodic contribution, paid from the participants.

If these funds are not sufficient to cover the losses, an extra-donation or «tabarru» would be claimed from all the participants in the fund.^78(*)

7) Islamic securities

As a result of further activity in the Islamic sector, further innovation of Islamic financial instruments was necessary. In consequence, a new way for borrowers to raise capital was created facilitating the conversion of non tradable assets into liquid securities. We make the difference between Islamic equities and Islamic bonds.

A) Islamic equity

Equity represents shares of capital in conventional finance and the concept of risk sharing is common in Islamic finance. For this reason, the idea of using the existing equity market without developing a new one was perfectly logical. The process followed was that investment in common equity finance was encouraged. However, screening will permit to scan Shariah based stock on a criteria developed by many Islamic scholars who influenced the creation of an Islamic stock index^79(*).

These criteria can be divided between qualitative and qualitative criteria:

Qualitative criteria include the screening of the activity of the funds to check if they are Shariah compliant. Thus any shares in companies which deal with selling alcohol or pork should be banned.

The qualitative criteria concern the respect of an Islamic ratio.

As it was previously detailed, Islam prohibits interest. Therefore, the underlying investment must not pay interest''^80(*).

Another quantitative criterion is the leverage ratio to insure that the debt proportion is at acceptable levels to equity.

According to the Dow Jones Islamic Market Index, the total debt divided by trailing 12 month average capitalization should be 33%^81(*) .

B) Islamic bonds

By definition, conventional bonds uphold interest. Therefore, they cannot be the subject of Shariah compliant investments. An alternative was created: Islamic bonds or «sukuks».

A traditional bond is a loan of money creating a creditor debtor relationship; an Islamic bond represents an ownership stake in an existing asset.

Whereas the trading in conventional bonds realises the transfer of debt, the Islamic bonds is a transfer of benefits of ownership.

The transfer of Islamic bonds can be accomplished via one of the Islamic modes of financing.

The Ijarah contract is widely used in Islamic securitisations as per the below structure for example^82(*):

1. The originator sells an asset to a special purpose vehicle (SPV)

2. The SPV raises financing to purchase the vehicle by issuing an Ijarah sukuk (leasing bonds)

to investors. The amount raised by issuing the sukuk equals the purchase price.

3. The Ijarah sukuk represents an equity interest in the asset.

4. The SPV leases the asset back to the seller. The seller makes periodic lease payments to the SPV which match the SPV's obligation under the Ijarah sukuk.

5. At maturity, the SPV sells the asset back to the originator (ie. the lessee). The sale price covers any liability owed by the SPV to the Ijarah sukuk.

The discussion concerning Islamic securities concerns the idea of giving a guarantee to the investors to pay their principal and benefits. The scholars insist that investors should take risks on the performance of the sukuk and no guarantee related to that matter should be given.

Chapter III: the financial crisis

The financial crisis started with a credit contraction in 2007 spread to banking crisis and stock markets failure in 2008.

We will try to briefly describe the crisis in order to derive later the lessons to be learnt from Islamic finance practices to avoid future crises.

1) From a subprime mortgage contraction...^83(*)

Since 1970, we witnessed a market change and evolution, following the collapse of the Bretton Woods agreements, the new environment was based on interest rate instability.

Since that time growth was sustainable by the overseas expansion, high prices of oil, and the telecommunications boom.

Steps have been taken to the creation of a major financial market.

In 1999, the adoption of the Gramm-Leach Billy Act and the creation of a holding company which allowed the union between investment banks and commercial banks in the USA was a significant achievement.

Banks have been subject to a lot of competition during recent years, this has led to the deconstruction of financial risk in order to improve their profits.

A large part of the credit has moved from the banks towards the market through the process of securitisation. Securitisation allows a lot of profits for lower costs of funds.

The banks have lost the function of intermediation (disintermediation) with a lot of debtors issuing their own debt through bonds or commercial papers or via the process of securitisation by creating their own special purpose vehicles (SPV).

The process of securitisation is process by which the non tradable debts for example bank mortgages are transformed into securities that are sellable to a wide audience of investors according to their diverse risk profiles.

The repackaging of the securities and their sale has participated into the deconstruction of risks.

The widespread use of this process has led to less transparent and more complex products and procedures which were more difficult to assess by the rating agencies.

The weaknesses of this process were revealed with the deepening of the subprime mortgage crisis in the US which was the immediate cause of the financial meltdown.

The crisis began with a credit contraction starting the 9^th of August 2007.

On the 20^th of July 2007, Ben Bernanke warned of USD 100 bn of losses in the subprime market.

On the 9^th of August 2007 the credit crisis began. BNP Paribas decided to suspend the payment on three investment funds exposed to the subprime market.

Share prices started to fall; banks became concerned about each other's exposure to losses and restricted lending to each other.

On the 28^th of August 2007, The German Sachsen Landesbank was sold to the Landesbank Baden Wutterbeng. IKB lost USD 1 bn due to US subprime debt exposure.

On the 13^th of September 2007, Northern Rock faced a public run followed by a request for liquidity assistance from the Bank of England.

The bank was eventually nationalised on the 17^th of February 2008 after the refusal of private bidders by the treasury.

Société Générale suffered a EUR 4.9 bn loss through its trader Jerome Kerviel.

The instability spread to the US monoline insurance market worth USD 2.3 bn with the Federal Reserve having to announce a special USD 30 bn facility to allow JP Morgan to buy Bear Sterns initially for USD 2 per share on the 17^th of March 2008. This was the first occasion in recent times that the Federal Reserve has assisted in the bail out of a non banking financial institution.

The crisis seemed to be over and the dramatic success took everybody by surprise.

2) ....To Financial collapse^84(*)

However, it was still far from being the end. The credit crisis spread to other financial sectors. Financial insolvency and bail outs were the theme of the period starting the fall of Lehman brothers on the 12th of September 2008.

A) Freddie Mae and Freddie Mac.

On the 7^th of August 2008, Freddie Mae and Freddie Mac were nationalised at cost of USD 200 bn.

B) Lehman brothers

On the 14^th of September 2008, Lehman Brothers collapsed after 158 years .The bank had to file for chapter 11 bankruptcies.

After a record USD 3.9 bn loss, the shares of Lehman Brothers dropped and a saviour needed to be found.

Any rescue plan couldn't be possible without the intervention of the state.

However, the treasury took the decision that the US authorities could not bail out another investment bank and that a private solution had to be found. Lehman was forced into bankruptcy on the 15^th of Sept 2008 after Barclays walked away from the negotiation. Barclays would later acquire Lehman's North American investment platform for less than USD 2 bn.

The fall of Lehman Brothers was the trigger to the spread of the systemic financial crisis.

C) Merrill Lynch

With the crisis at Lehman Merrill Lynch was forced to accept a USD 50 bn offer by bank of America after a week of negotiation with the deal being announced on the first day of the announcement of Lehman Brothers' bankruptcy.

D) Goldman Sachs and Morgan Stanley

Goldman Sachs and Morgan Stanley registered as bank holding companies to save themselves from bankruptcy.

E) American International Group

The treasury then had to provide a separate support package for AIG which was the world's largest insurer with a market value of USD 239 bn with the allowance of USD 89 billion credit facility in return for an 89% stake in the group.

Following its practice of providing insurance for the financial institutions in «credit default swap» format, the bank announced in May 2008 a loss of over USD 10 bn.

F) Washington Mutual

Considerable market pressure was also placed on Washington Mutual (WAMU)

With deposits of USD 188 bn in June 2008, it was decided by the federal deposit Insurance Corporation to allow WAMU to close on the 25^th of September 2008. By acquiring the deposits of all the retail branches of the company but without the unsecured debts, JP Morgan became the biggest bank in the US.

Thirteen other lenders were allowed to fall down in 2008; WAMU was the biggest failure in the US.

The crisis also affected the United Kingdom.

The shares of the financial institutions and banks dropped during September and October 2008.

Panic spread. However, it was limited by the intervention of the government via a package which included injection of liquidity into the interbank market, bank recapitalisation and credit guarantee schemes.

Bradford and Bingley and Halifax Bank of Scotland suffered a lot of pressure due to the drop in their asset prices joint by the contraction in the inter-bank market.

G) Bradford and Bingley

The discussion about which solution is better to approach the financial institutions in difficulty led to the lack of confidence and interest in the financial market, the treasury had to consider whether to take B&B over in the form of public ownership either in whole or in part.

The decision was taken to nationalise part of the business and to sell the 200 branches to Spanish Banco Santander.

H) HBOS(Halifax Bank of Scotland)

Following the collapse of HBOS shares of 40%, a rescue package was agreed with Lloyds TSB on the 17^th of September 2008. A merger was discussed for GBP 12.5 bn.

In September 2008, The Financial Services Authority (FSA) announced that it would ban financial short selling.

We are currently suffering a major recession even more severe than originally predicted.

After analysing the financial crisis a study of the causes which led to such an unprecedented crisis becomes imminent.

3) The causes of the crisis^85(*)

The causes of the crisis can be resumed to four main reasons:

A) Credit accumulation^86(*)

Following 9/11 and the boom in the technologies, the interest rates were kept low in US to encourage spending and give a boost to the economy.

Following the Community reinvestment Us Act, banks had to lend to diverse panoply of borrowers in order to give access to housing for everyone.

Interest rates were kept low encouraging spending. The flow of money resulting from securitisation and from the Asian countries led to a raise in the prices, which created a bubble in the housing, oil, commodities and food markets.

The cheap credit provided by the «originate to distribute» model followed by the financial institutions, linked to a greed or appetite for consumption and for easy money resulted in the creation of a housing bubble resulting in the increase of the prices which attained its limits in August 2007 when prices started to drop down inciting people to sell their houses, with more houses on the market, the cycle started triggering backwards and basically a lot of mortgage borrowers were not able to meet their mortgage payment and found their mortgages moving into negative equity territory which triggered the crisis.

B) Product complexity^87(*)

The securitisation process which started developing since the 1970s with the creation of Fannie Mae and Freddie Mac in the US was the basis of the creation of more complicated financial products.

The re-securitization of securitised products linked with other products creating Collateralised Debt Obligations (CDOs) in what is called repackaging of debts in a structure which was widely spread made the matters worse.

New derivative products were launched including CDS (credit defaults swaps) and TRS (Total return Swaps).

Also, the expansion of what is called «shadow banking» system contributed into the transformation of the subprime mortgage crisis into credit crunch.

Shadow bank by definition means an intermediary between banks and investors. Not allowed to granting deposits, they weren't regulated. A familiar example would be special purpose vehicles, hedge funds, mutual funds and monolines.

These entities were created by banks as off balance sheets funds in order to follow the more profitable investment strategies. Not regulated shadow institutions didn't have to follow the safety and soundness instructions in the sense that they could borrow and invest with high leverage. The function of these institutions and the fact that they borrow short and invest in long term illiquid assets make them vulnerable to the market disruption. They were made to sell their illiquid assets precisely when the prices of such assets were falling therefore deepening the crisis.

C) Asset valuation^88(*)

The complexity of the products led to a mispricing of debts. After Basel II, the system relied on the grading of the rating agencies. Amid the growing competition and the increasing complexity of products, the rating agencies failed to assess the risks and used wrong methods of assessment.

Relying on the professional opinion of the rating agency a lot of banks who retained highly rated assets had to reassess them and record their losses on the balance sheet according to the mark to market practice.

D) Market risk^89(*)

The «originate to distribute» model meant that the debt was originated and immediately sold off the balance sheet. So the banks didn't exercise any credit assessment on the mortgages any further.

These bad debts were mingled with good debts. When they went into default, they triggered the loss of value to the entire pyramid.

4) Response to the crisis.^90(*)

The responses to the crisis were immediate national and international responses.

The immediate regulatory responses:

A number of immediate reactions were scheduled in response to the turmoil of the financial crisis. These immediate responses were characterised by their protectionist nature in an attempt to contain the immediate effects of the crisis.

The US has taken a macro reaction trying to pull liquidity into the market and purchase the bad assets.

An injection of USD 180 bn was initiated by the US government. The funds were provided by national central banks including Switzerland and Canada. This extended lender of last resort funding intended to maintain dollar liquidity within the market.

The TARP or Troubled Asset Relief Programme was initiated. It was based on the principle of buying the distressed debts from the US financial market.

Under the initiative of treasury secretary Henry Halson, the TARP consisted of a new corporation established to buy distressed residential and commercial mortgage backed security from any major institution.

It was later announced that 250 billion of the funds used would be used to recapitalise the banking system following the UK model.

In the UK, the immediate response following the Lehman Brothers collapse consisted of the deposit protection scheme, a new special resolution regime, the ban of short selling by the FSA and the Bank of England extended a special liquidity scheme.

The special resolution regime or SRR helped the banks in difficulty by providing a set of tools to permit the authorities to take control of a bank that is judged to be failing.

The special liquidity scheme is a swap system of highly rated assets into government treasury bills.

The recapitalization of the major banks with investing around GBP 37 bn in RBS (20bn), HBOS (12bn) and Lloyds TSB (5bn).

The international Response includes a G20 meeting which decided to inject money into the system and some reports including Turner report^91(*), De larosiere Group Report^92(*). After assessing the causes of the crisis, de larosiere report invited for more supervision via and better crisis management whereas Lord Turner report blamed the shadow banking, rating agencies for their responsibility for the crisis and strengthen a solution based on liquidity, capital control and fundamental accounting changes.

Some proposed solutions for the crisis can be resumed as the following^93(*):

Joseph Stiglitz invite for a new glass Stegall act and the minimizing of the leverage of lending.

Simon Johnson consider that the too big to fail doctrine is an essential feature for the systemic risk. For that reason, institution too big to fail should be restricted.

Paul Krugman invite for a wider regulation to include deregulated sectors like hedge funds.

Ben Bernanke invited for the closure of the non regulated activities.

These entire propositions to change the system prove that mistakes were made and lessons are to be learnt.

Chapter IV: lessons from the financial crisis

Islamic finance was initiated as a Shariah based choice. For the practitioners of the Islamic religion, it is now presented as the ultimate alternative after the financial crisis. Islamic finance has been insulated from the financial crisis in certain aspects.

According to the Vatican «ethical spirits on which Islamic finance is based may bring banks closer to their clients and to true spirit which should mark every financial service»^94(*).

Islamic finance principles address key issues of the crisis. However, despite its advantages, Islamic finance as currently practiced cannot rise as an alternative to conventional finance. However, lessons can be learnt from it that can be applied to conventional banking methods.

1) Advantages and disadvantages of Islamic finance

A) Advantages of Islamic finance

According to Hans Visser^95(*): «Islamic finance presents potential positive effects: lower danger of insolvency, financial crisis, speculation, participation in the financial system».

a) Risk profile of Islamic finance institutions

The common view considers Islamic finance to be less risky or safer than its opponents. This was always considered to be a disadvantage because the lesser the risks, a business takes the less benefits it generates. However, under the current turmoil, safer investments turn to be an advantage.

The misconception of Islamic finance's risk profile shows that the Islamic institutions are not risk free but it is it is the management of these risks that makes Islamic institutions secure.

Whereas, the conventional banks take guaranteed returns on their investments, Islamic banks practices rely heavily on investment in business which includes the risk of losses and benefits^96(*).

Islamic finance faces «asset risks, market risks, Shariah non-compliance risk, greater risk of returns risk, greater fiduciary risks and greater legal risks^97(*)».

Hans Visser states the importance of operational risk in a system based on technology^98(*).

The credit risk in Islamic finance is minimal. The deposit taking is based on PLS (profit and loss sharing) methods. This means that the bank and the depositors share losses. However the margin of losses is very small. The loans are gathered in a pool and invested in different projects. Overall, the possibility of losing in sum is lower due to the diversification so the risk for the depositors to lose money is lower.

b) Providing Shariah compliant instruments

Another advantage of Islamic finance is providing Shariah compliant finance to those pious people in quest for investments which respect Islamic ethos.

Numbers of scholars disagree with the Islamic practices which diverge from the theory. The real Islamic techniques are based on PLS methods like Musharakah and Mudaraba .However, Murabaha who according to Taqi Usmani^99(*) was allowed exceptionally became the rule.

Some have gone further in their critic suggesting that it is a plot created by the gulf countries to attract petro dollars money to Islamic countries; they use «hiyal» (stratagems, deviated tactics) to extract indirect interest^100(*).

Also Mudaraba and Ijarah are considered Shariah compliant. They are the rule because they suit the need of the community which must act in a competitive field and must follow innovation to get adapted, without it there is not only growth but slow death^101(*). The allowance of the Shariah boards gives credibility to the instruments used.

However some work must be done on the authenticity of the Islamic finance operation which will be discussed later on.

No study has been conducted on the number of Muslims who don't invest their money because of the lack of existence of suitable investments. However, it is logical to suggest that the existence of Islamic finance attracts more funds into the system which can activate the economic cycle.

c) Anti crisis model

The most relevant advantage in the recent crisis is the fact that Islamic finance proved to be an anti crisis model.

However, many critics state that the Islamic finance institutions weren't affected because they were simply invested in other products than the ones concerned by the crisis. A question must be asked that if a subsequent turmoil were to hit the oil price, will the Islamic banks be financially viable and continue to be resilient?

The secret of Islamic finance protection against crisis is the moral hazard incentive.

According to Chapra^102(*), the absence of depositors' protection in Islamic finance is a safety net from crises.

Being aware of the absence of protection, the investors will tend to invest in credit worthy institutions.

The depositors are not protected, with the absence of a depositor protection scheme as a safety net, they are more concerned with the soundness of the institution they are trusting with their funds.

Aware of the check exercised, the institutions try to preserve their self image. They tend to rely more on safe investments or backups because there understand that there aren't any institutions that are too big to fail.

The institution regarding this fact will exercise more severe credit worthiness checks of the borrowers or the projects they are investing in. This will serve as a safety net against possibilities of insolvency.

However, a question about the effects of the investor supervision is questionable .The availability of information and the professionalism of investors to analyse this information is problematic.

In the same way, conventional banks are careful about their business according to KYC (Know Your Customer) they check the person background and credit worthiness before granting a loan. However, the last crisis was due to subprime loans which are loans that couldn't be paid because the bank didn't exercise their function of control which was a major factor to the crisis.

Another valid point in the Islamic banking model is the relationship between the banks and their shareholders. In fact Islamic banks are usually small; their relations with their shareholders are more personal not only commercial so in case of problems the shareholders stand up by the institution which avoids bank runs.

These mutual control and close relationship net avert insolvency of Islamic institutions.

d) Islamic finance emphasises on productivity and risk sharing

In Islam, money cannot generate money. In order generate a benefit; one must participate in the production or the risk taking procedure. This is usually achieved by the Islamic contracts or profit loss sharing principle.

Islamic finance includes less speculation. In fact, the transactions relying on gharar khatir (excessive uncertainty) and Maysir (gambling) are prohibited.

Short selling defined as a selling of a product at a price in the hope of buying it in the future when the prices will drop down is prohibited under Islamic finance. It includes forbidding short selling which relies in selling what is not in the seller's ownership.

Riba operations are also prohibited. This makes illegal all the operations based on derivatives and options because it includes interest selling. 'The Islamic banking industry escaped the immediate fallout from the industry, largely because the ban on interest prevented banks from investing in the assets that turned toxic for conventional banks'^103(*)

Islamic finance is based on participation and risk sharing. Unlike conventional banks, Islamic banks don't provide loans; they provide funds according to profit and loss sharing methods. According to Siddiqi^104(*), Islamic finance's approach to risk is realistic but cautious.

The loss and sharing modes put emphasis on the viability of the project and also on the risk profile of the customer. This emphasis on productivity is another advantageous feature of Islamic finance.

B) Disadvantages of Islamic finance

However, Islamic finance presents some disadvantages.

According to Hasser^105(*), Islamic finance comparing to conventional banks presents some disadvantages:

`More risks for depositors, higher costs, and principal-agent problems, inadequate financing, limited supply, insurance with pitfalls, less scope for diversification and hedging'. In addition to some of these points we will talk about tax and regulation issues.

a) Risk for depositors

The reduction of danger of insolvency is counter balanced by increased risks for depositors.

The profit and loss sharing model means depositors' interest can fluctuate. Even if the depositors can monitor the bank, their scope of managing is very restrained to the voting measures against the management or retrieving the funds.

However, it is recommended that under PLS sharing modes and as a safety net, banks can reduce their percentage of participation in the contract bearing losses, so depositors won't be affected.

It is very usual in a small traditional bank that depositors are the shareholders .Their margin of action is widespread and this can limit the disadvantage of Islamic finance.

Ummer Chapra^106(*) recommends that depositors must be represented in the council and administration of banks to participate in the decision making process.

b) Higher costs

Islamic finance is too complicated and expensive.

While the conventional system is more competitive, each Islamic transaction requires more than one contract, which is highly costly.

Banks have to deal with delivery issues which are not part of their business.

The required guarantees can limit the room of manoeuvre of the clients.

c) Diversification of hedging and growth

Futures, forwards, derivatives are banned. By consequent, the possibility of hedging against risks is very limited.

The possibility of investing in higher risk projects and triggering higher risk return is very limited.

The rule of `no risk, no gain' and the perspective of growth and innovation are restrained.

d) The principal-agent problem

The principal instruments are vested compliant to Shariah law by Islamic boards.

The Shariah boards are appointed by the banks. They are very costly and can trigger conflicts of interest when the advisers try to keep the business of the banks that are paying their fees running.

However, in response to this conflict of interest some countries like Malaysia and Bahrain came up with other types of boards. They are constituted by regulators who appoint a Shariah board who is responsible of vetting the legality of the instruments^107(*).

This process can be judged slow but more transparent.

However, the industry which is growing faster is suffering from a lack of qualified scholars, which put in question the professionalism of the qualified opinion obtained.

Also this situation can generate conflicts of interests due to the fact that the same scholars can assist the Shariah boards of two competitors.

Some countries like Malaysia have tried to sort this lack by training scholars but the process is slow and costly.

e) Lack of uniformity of Shariah standards

The existence of different Shariah boards and different Shariah opinions promotes inconsistent interpretation and application of Shariah rules. A contract can be legal in one jurisdiction (like lease and sale back) and completely illegal in the others.

The lack of Shariah scholars of high standards is a major problem is Islamic finance. Shariah scholars can be counted as 60 worldwide and earn high fees. They also sit on the boards of several different companies most often competitors which lead to a massive conflict of interest^108(*).

The work of AAOIFI (which gathered scholars from different schools) or the example of Malaysia which created a unique Shariah board supervised by the central Bank^109(*) are very effective measures towards standardisation but not sufficient.

f) Limited supply and inadequate financing

The Islamic financial institutions need a secondary market for Islamic financial instruments.

Their financial ratios are pretty high. However, the inability to invest the money affects their benefits and their competitiveness.

The creation of a secondary market in Pakistan is a good step on the right path^110(*).

It helps Islamic institutions seek liquidity in case of shortage.

In order to be resilient to the crisis, Islamic banks must have access to an Islamic lender of last resort. They are now bound by the law of necessity to accept central banking findings; an interest free solution must be purported.

g) Tax issues

Shariah compliant structures often involve double contracts usually on assets.

The possibility of tax liabilities is a negative point in the growth of the industry that is unable to compete with conventional counterparts.

«Property tax, gain tax, stamp duty tax need to be assumed in a neutral way between Islamic and conventional so they won't be any path of innovation»^111(*).

In the United Kingdom, stamp duty has been removed by the Bill 2009 which is still waiting for the royal assent^112(*).According to an analysis published on Deloitte's site, «Finance Bill 2009 will introduce relieving measures for stamp duty land tax, capital gains and capital allowance rules for land transactions involved in connection with the issuance of sukuks. The changes are intended to remove the previous tax barriers that essentially prevented the issuance of real estate backed sukuk by UK corporate - thus enabling sukuks to be held, issued and traded without incurring stamp duty land tax and corporate tax costs over and above that which would be incurred in connection with similar dealings in traditional corporate bonds».

h) Lack of authenticity

All these disadvantages affect the authenticity of the Islamic finance as conform to the Shariah spirit!

2) General lessons to be learnt

After establishing the advantages and disadvantages of the Islamic financial system, it is now clear that such a system cannot constitute an alternative to the current system. Its resilience to the crisis in general can help to extract lessons to be learnt from it. However these lessons are joined to other general lessons which need to be explained to enhance the current financial architecture. After the exposition of the general lessons or improvements to the system, a more specific analysis will be conducted to see the lessons we can learn from Islamic practices specifically.

A) General lessons to be learnt from the crisis^113(*)

A lot of studies tried to conclude lessons to learn from the financial crisis. Some propositions to deal with the financial crisis must be linked to the causes. According to Professor Georges Walker: `'the core causes of the crisis can be summarised in term of credit accumulation, product complexity, incorrect valuation, risk separation, and ineffective central bank and liquidity support».

a) Credit accumulation

Excessive money and excessive lending lead to a rise in assets price. Coordination between fiscal authorities and regulators concerning interest rate management or the restriction of certain products can limit the formation of bubbles which would not burst. Cheap credit which does not reflect the customer ability to repay is a problem and the credit risk must be evaluated before lending.

b) Product innovation

Product innovation is necessary. However, this innovation must not exceed the capacity of the bank to manage the risks. «We only innovate what we can manage»

The co-mingling of toxic debts with good assets was like putting a bad apple in a box of good ones. It infects the entire box. This must be controlled.

c) The liquidity support

The liquidity of the bank assets must be controlled. Investing in bonds because of their higher return was wrong policy. The secure investment in government bonds is more recommended.

d) Asset valuation

Under Basel II the reliance on the rating agencies was so important. Their role needs to be minimised. The mark to market rule must be suspended in crisis time created to strengthen the supervision this rule tends to be procyclical. It leads institutions to show temporary deficits on their balance sheet which lead to panic under stress time.

e) More transparency and accountability

Transparency means the provision of relevant information in a complete way within a reasonable lapse of time. The lack of transparency led to panic. The complexity of the products and the ignorance of who might be exposed to them led to the interbank crisis and to the panic of investors.

B) Lessons to be learnt from Islamic finance

Number of ethical Islamic rules is relevant to the crisis. The asset backed financing, the prohibition of sale of debt, transparency and certainty in contracts played a very important role in the escape of Islamic institutions from the crisis. These ethical values can be transmitted into the conventional system in order to make them resilient to shock waves'^114(*)

a) A shift versus a more conservative model

According to Rodney Wilson, «the soundness of Islamic banks is accounted by the fact that they are a classical bank model, with financing derived from deposits rather than being funded on the interbank market»^115(*). However, funding in the interbank market is not a problem especially that Islamic banks are thriving to have this type of lending. It helps banks obtain foreign currencies and extra lending. However, the extra reliance on this type of market like the Northern Rock system proves to be wrong. The establishment of a clearing house is recommended by Andrew Mc Knight would remove the credit risk exposure of banks to each other. Unlike conventional finance which generates money from money, Islamic finance is asset based^116(*).For this reason, money supplied via the Islamic financial techniques creates real assets. The use of low leverage rule helps control the amount of money in the system which leads to financial instability. A lesson to learn from Islamic finance is to shift steadily towards a low leverage more conservative model.

b) The limitation of speculation

Pure speculation made the headlines last year. The banking practice based on the «originate to distribute model» was motivated by the thrill to make profits. The financial crisis revealed the weakness of such system which can collapse under any default in underlying assets. The lesson to learn is to limit the scope of such operations which must meet the need of the borrowers. However, innovation must be encouraged to suit the financial need of the borrowers only and not for gambling purposes. Derivatives for instance can be used for hedging purposes only. According to Andrew Mc Knight, banks should go `back to reality `by not creating a virtual world not part of an underlying asset^117(*).

c) Risk participation

In Islamic finance, risk sharing replaces risk shifting. When participating in the risks, the fund provider will give more importance to the productivity of the project. The credit worthiness of the client will come in a second degree. However, in the conventional system, the risk was shifted and no attention was gift to the credit worthiness of the client, one of the causes of the crisis.

d) Transparency and authenticity^118(*)

The role of the rating agencies was widely criticised in this article. ^119(*) The conflicts of interest and the mistake in assessing the crisis all reflect a non transparency endangered by a non accountability.

The need for more transparency in the system is urgent like the settlement of a national sharia board in some countries; a credit agency directed by regulators could be anticipated.

e) More regulation

The financial crisis put the emphasis on these off balance sheet funds (shadow banking and hedge funds) and instruments. «Better regulation is needed and in places tighter «^120(*) . In order to improve this issue regulation must be strengthened regarding collateral used by banks and financial ratios which must be increased.

f) Invest in financial literacy^121(*)

Financial awareness should be raised between citizens. A large numbers of home owners insist on the fact that if they were better advised they wouldn't have invested. Awareness to innovation and to risks should be monitored in classes in high school ^122(*)

g) The Widespread of Islamic justice

Islamic objectives are to spread justice in the society. For this reason, if a borrower cannot pay his debt, the Islamic rule requires giving him time in order to repay. The use of these techniques by current banks helps prevent the bankruptcy of a lot of depositors^123(*). This morality in operations has reduced the «animal spirit `in all the people and help them consider the good of the society on the long term. This was proposed by those who recommended the «adoption of a voluntary mortgage write-downs plan» ^124(*) .This justice requires that bonuses should not be paid in case of problems so employees can share the burden in bad times.

h) Prohibition of the payment of interest

Interest and inflation is the monster of our economy. If interest can be abolished, a lot of problems will be resolved^125(*).This is for sure is an extreme solution.

Conclusion

Islamic Finance that started as a simple idea, turned out to be a long-term viable industry. In fact, it adapted to the clients' needs through the development of Shariah compliant instruments. The ruler of Islamic finance is justice: the provider of capital and the client should participate in sharing the risks of loss and profits. Interest, speculation and uncertainty are not allowed. In order to put these principles into practice, some contracts are used after being screened as conform to the Shariah.

Despite, the large numbers of critics, Islamic finance has emerged as a «winner from the credit crunch». Less affected then its opponents; Islamic finance is presented as the alternative or the solution to the financial crisis. However, it is still a minor sector compared to the larger more established financial world.

Furthermore, the problems within the Islamic finance institution are too crucial to compete with conventional old banking traditions.

To say the least, the multitude in the Shariah board opinions, the conflict of interests, the non presence of a unified regulatory body, and the absence of an interbank liquidity market are all major issues that the Islamic finance industry still needs to sort out.

However, Islamic banks present some advantages that have helped insulate them from the crisis, especially their more conservative approach to lending and the widespread of justice principle.

The study of the causes of the crisis can be resumed in excessive lending triggered by high leverage and cheap credit. The «generate to distribute'' model was triggered by securitisations and securitisation of securitisation.

This complexity of products led to mispricing and misrating of debts by the rating agencies.

From a subprime mortgage crisis, the crisis turned into an international financial crisis which led to systemic failure.

According to Gordon Brown «we saved the banks we saved the world» but maybe if we learn from the Islamic financial world, we can avoid some of the mistakes next round.

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1) FT week end November 6/9/2008 the bad dream team. By Jennifer Hughes

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* 1 ^_French philosopher, André Comte-Sponville, «Le capitalisme est-il moral?» (Albin Michel, Paris, 2004).

* 2 ^_ Fransesco Guerrera and others `Citi and BofA Fail to Allay Fears' Financial Times, London, 17July 2009) Accessed August 26, 2009 < http://www.ft.com/cms/s/0/72045088-72cc-11de-ad98 00144feabdc0.html?nclick_check=1.

* 3 ^_ Charles Goodhart and Gerhard llling, Financial Crises Contagion and the Lender of Last Resort (a Reader,2002)252.

* 4 ^_Robert T. Clair and Paula Tucker, 'Six causes of the Credit Crunch 'Federal Reserve Bank of Dallas Economic Review, Third Quarter 1993,1, http://www.dallasfed.org/research/er/1993/er9303a.pdf...SIx causes of the credit crunch: Robert T.Clair and Paula Tucker.p.1 > accessed August 26, 2009 .

* 5 ^_ Charles Kindleberger, Manias, Panics and Crashes: A History of Financial Crises, 3^rd edition (New York John Wiley & sons,, 1996). The book was originally published in 1978

* 6 ^_ Seminar on history of financial crisis by Lee C.Buchbeit Clearly Gottlieb Steen & Hamilton LLP New York

* 7 ^_ George Cooper `'The origins of Financial Crisis»Vintage,USA,2008,13

* 8 ^_ http://www.nytimes.com/2008/10/05/business/05era.html?_r=1&dlbk

* 9 ^_ `The enormous power, inherent in the factory system, of expanding by jumps, and the dependence of that system on the markets of the world, necessarily beget feverish production, followed by over-filling of the markets, whereupon contraction of the markets brings on crippling of production'. The Capital, Volume I, Chap 25.

* 10 ^_Hyman P. Minsky Stabilizing an Unstable Economy (Economic review, 2008) Foreword XV.

* 11 ^_ http://www.nytimes.com/2008/10/05/business/05era.html?_r=1&dlbk

* 12 ^_ Hyman P.Minsky, Stabilizing an unstable economy (Economic Review,2008)Foreword p.XV

* 13 ^_ George Cooper `'The origins of Financial Crisis»(Vintage,USA,2008)37

* 14 ^_ Martin Matthew,' Credit crunch winners emerge', MEED: Middle East Economic Digest 10/24/2008,Vol 2,Issue 43 p.24-25.ISSN 0047-7230

* 15 ^_ The World Islamic Banking Conference' Further Growth For Islamic Institutions Still Outperforming Conventional Counterparts'2008/2009 Competitiveness Report http://www.megaevents.net/islamic_banking/report_pr.html> last accessed 26 August 2009

* 16 ^_ Simon Archer and Rifaat Ahmed Abdel Karim Islamic Finance: Innovation and Growth - Chapter 1 (Euromoney Books and AAOIFI ) 4

* 17 ^_. This book assesses the Islamic dishonest and deceptive practices and concludes that Islamic banks do not practice what they preach.

Dr.Muhammad Saleem, Islamic Banking a 300$billion deception (Xlibris Corporation, 2006).

* 18 ^_ Quran (3:92)

* 19 ^_ Quran (102:8)

* 20 ^_ Quran (23:51)

* 21 ^_ Frank E.Vogel and Samuel L.Hayes, Islamic Law and Finance Religion Risk & Return(Kluwer Law International,Nethrlands,2008) 5

* 22 ^_ Nathalie Schoon, » Islamic Banking and Finance» (Spiramus Press Ltd, London, 1999) 8.

* 23 ^_ Zakat is a compulsory financial religious duty on Muslims to pay2.5% of their wealth and assets each year for charity works.

* 24 ^_ Simon Archer and Rifaat Ahmed Abdel Karim,» Islamic Finance: Innovation and Growth» (Euromoney Books and AAOIFI) 30.

* 25 ^_ Rodney Wilson, Banking and Finance in the Arab Middle East, New York,1983.

* 26 ^_ Ibid 21

* 27 ^_ Simon Archer and Rifaat Ahmed Abdel Karim, Islamic Finance: Innovation and Growth (Euromoney Books and AAOIFI) 30.

* 28 ^_ Simon Archer and Rifaat Ahmed Abdel Karim Islamic Finance: Innovation and Growth - Chapter 1 (Euromoney Books and AAOIFI ) 4

* 29 ^_ 25 organizations offer Islamic finance services in the UK.

* 30 ^_ http://www.newhorizon-islamicbanking.com/index.cfm?action=view&id=10782&section=news&return=latest&return_action=view&return_id=83

* 31 ^_ Hornby, A.., Oxfrod Advanced Learner's dictionary(New York ,2000).677-678.

* 32 ^_ Newby Gordon, A History if the Jews of Arabia, Columbia S.C.,1988,p.56.

* 33 ^_ Homer,Sidney,A History of Interest Rates,p.74

* 34 ^_Saleh N.A ,Unlawful Gain and Legitimate Profit in Islamic law (Cambridge University Press,Cambridge,1986)12

* 35 ^_ Saleh N.A ,Unlawful Gain and Legitimate Profit in Islamic law (Cambridge University Press,Cambridge,1986)42

* 36 ^_Quran,30:39

* 37 ^_ Quran,3:140

* 38 ^_ Quran, 2:275

* 39 ^_ Muhamad Ayub, Understanding Islamic Finance (2007)50.

* 40 ^_ Abdullah Saeed, Islamic Banking and Interest: a Study on the prohibition of interest and its contemporary interpretation(1999)

* 41 ^_ Ibid

* 42 ^_ Muhamad Ayub, Understanding Islamic Finance (2007)50.

* 43 ^_ Muhamad Ayub, Understanding Islamic Finance (2007)59.

* 44 ^_ Ibn Hanbal.

* 45 ^_ Ibn Maja.

* 46 ^_ Bukhari.

* 47 ^_ Bukhari.

* 48 ^_ Saleh N.A, Unlawful Gain and Legitimate Profit in Islamic law (Cambridge University Press, Cambridge, 1986)66.

* 49 ^_ Simon Archer and Rifaat Ahmed Abdel Karim,Islamic Finance: Innovation and Growth (Euromoney Books and AAOIFI)23 .They refer that gharar applies to buying on margin and dealing on stocks and options .

* 50 ^_ Abu Dhabi Court of Cassation Judgement no.158&208/18 reported in Price and Tamimi United Arab Emirates Court of cassation Judgements 1989-1997(Kluwer Law International :19980,p.23.

* 51 ^_ Frank E.Vogel and Samuel L.Hayes, Islamic Law and Finance Religion Risk & Return (87).

* 52 ^_ Atif Hanif,'Islamic Finance an Overview' [2008] International Energy Law Review 1.

* 53 ^_ Ibid

* 54 ^_ Ibid.

* 55 ^_ Simon Archer and Rifaat Ahmed Abdel Karim, Islamic Finance: Innovation and Growth (Euromoney Books and AAOIFI) 30.

* 56 ^_ Mudaraba is known as a profit losses sharing arrangement.

* 57 ^_ Michael Balir QC abd G A Walker,Markets and Exchanges Law (OUP,2006)11

* 58 ^_ Atif Hanif,'Islamic Finance an Overview'[2008]International Energy Law Review 1.

* 59 ^_ Atif Hanif,'Islamic Finance an Overview'[2008]International Energy Law Review 5.

* 60 ^_ Ibid.

* 61 ^_ Saleh N.A, Unlawful Gain and Legitimate Profit in Islamic law (Cambridge University Press, Cambridge, 1986) 113.

* 62 ^_ Saleh N.A, Unlawful Gain and Legitimate Profit in Islamic law (Cambridge University Press, Cambridge, 1986) 114.

* 63 ^_ Atif Hanif,'Islamic Finance an Overview'[2008]International Energy Law Review 5.

* 64 ^_Saleh N.A, Unlawful Gain and Legitimate Profit in Islamic law (Cambridge University Press, Cambridge, 1986) 114.

* 65 ^{_ _} Atif Hanif,'Islamic Finance an Overview'[2008]International Energy Law Review 5.

The difference should be made between diminishing musharaka and equity financing. In the latter, the insolvent customer could not be treated as a debtor of the capital provider.

* 66 ^_ Michael Balir QC abd G A Walker,Markets and Exchanges Law (OUP,2006)5.

* 67 ^_ Saleh N.A, Unlawful Gain and Legitimate Profit in Islamic law (Cambridge University Press, Cambridge, 1986) 114.

* 68 ^_ Simon Archer and Rifaat Ahmed Abdel Karim, Islamic Finance: Innovation and Growth (Euromoney Books and AAOIFI) 93.

* 69 ^_ ibid

* 70 ^_ Atif Hanif,'Islamic Finance an Overview' [2008]International Energy Law Review 6.

* 71 ^_ Ibid

* 72 ^_ Ibid

* 73 ^_Eloise Walker, Shari'a Finance [27 April 2009, issue 978, 17] Tax Journal .

* 74 ^_ Atif Hanif,'Islamic Finance an Overview' [2008] International Energy Law Review 6.

* 75 ^_ Ibid

* 76 ^_ Muhamad Ayub, Understanding Islamic Finance (2007)418.

* 77 ^_ ibid

* 78 ^_ ibid

* 79 ^_ Michael Blair QC and G A Walker, Markets and Exchanges Law (OUP,2006)8.

* 80 ^_Ibid.

* 81 ^_ Ibid.

* 82 ^_Atif Hanif,'Islamic Finance an Overview' [2008] International Energy Law Review 7.

* 83 ^_ G .A Walker, `Credit Contraction, Financial Collapse and Global Recession' Butterworths Journal of International Banking and Financial Law JIBFL (Feb 2009)

* 84 ^_ Ibid

* 85 _ G A Walker, `G A Walker, `Financial Crisis Cause and Correction' (Financial Regulation International (Informa 2008) Dec, 1-2

* 86 ^_ Ibid

* 87 ^_ Ibid

* 88 ^_ Ibid

* 89 ^_ Ibid.

* 90 ^_ G .A Walker, `Credit Contraction, Financial Collapse and Global Recession' Butterworths Journal of International Banking and Financial Law JIBFL (Feb 2009)

* 91 ^_ http://www.fsa.gov.uk/pubs/other/turner_review.pdf

* 92 ^_ http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf.

* 93 ^_ Encyclopedia Wikepedia ,accessible in 31 August 2009, http://en.wikipedia.org/wiki/Regulatory_responses_to_the_subprime_crisis#cite_note-stigcnn-10

* 94 ^_ Robbin Wiggleworth, `Credit Crunch May the Industry Beliefs`(2009)Financial Times .<http://www.ft.com/cms/s/0/87d150ee-3836-11de-9211-00144feabdc0.html>

* 95 ^_ Hans Visser, Islamic Finance: Principles and Practice (2009) 134.

* 96 ^_ Muhamad Ayub, Understanding Islamic finance (2007) 452.

* 97 ^_ Ibid.

* 98 ^_ Hans Visser, Islamic Finance: Principles and Practice (2009) 135.

* 99 ^_ Muhammad Taqi Usmani, An Introduction to Islamic Finance (2000) 241.

* 100 ^_ Muhammad Saleem,Islamic Banking -a 300 billion $ deception(2006)introduction.

* 101 ^_ Don Sheelan,2003,p.7

* 102 ^_

* 103 ^_ Euroweek Jan 2009 Review of 2008.p99

* 104 ^_ Siddiqi, Current Financial crisis and Islamic Economies(2008)3

* 105 ^_ Hans Visser, Islamic Finance: Principles and Practice (2009) 138.

* 106 ^_ Umer Chapra ,Innovation and authenticity in Islamic finance, speech delivered at Eight Harvard University Forum on Islamic Finance, April 2008.

* 107 ^_ Michael Blair, Georges Walker, Robert Purves, Financial Services Law, (2008)2^nd edition, Oxford, chap 19.

* 108 ^_ Hans Visser, Islamic Finance: Principles and Practice (2009) 97

* 109 ^_ Hans Visser, Islamic Finance: Principles and Practice (2009) 97

* 110 ^_`Pakistan Islamic Banks look to kick-start interbank financial market' [31 July2009].

http://www.newhorizonislamicbanking.com/index.cfm?section=news&action=view&id=10790accessed 26 August 2009.

* 111 ^_ Michael Blair and G A Walker ,Markets and Exchanges Law (OUP,2006)

* 112 ^_ http://www.ukbudget.com/UKBudget2009/business/Budget09-business-islamic-finance-alternative-finance-investment-bonds.cfm

* 113 ^_

* 114 ^_ How to build a financial System more resilient to shockwaves, financial times 12 August 2009,

http://www.ft.com/cms/s/0/1b4f2794-86d7-11de-9e8e-00144feabdc0.html> Last accessed 14 August 2009.

* 115 ^_Rodney Wilson, «Why Islamic banking is successful? Islamic Banks are unscathed despite of the financial crisis», p.3

* 116 ^_ Muhamad Taqi Usmani,An introduction to Islamic finance, XVI

* 117 ^_ Andrew Mc Knight. A review of 2008, class seminar.

* 118 ^{_ _} Mark M Zandi, Financial Shock: a 360 look to the subprime mortgage crisis (2008)238.

* 119 ^_ Ft week End October 18/19 2008 Sam Jones when junk was gold.

* 120 ^_ Georges Cooper, The Origins of Financial Crisis,Vintage books,2008(VII)

* 121 ^_ Mark M Zandi, Financial Shock: a 360 look to the subprime mortgage crisis(2008)236.

* 122 ^_ Ibid

* 123 ^_ Ibid

* 124 ^_ Mark M Zandi, Financial Shock: a 360 look to the subprime mortgage crisis(2008)233.

* 125 ^_ Georges Cooper, The Origins of Financial Crisis, Vintage books,2008(43)