By Hennie Van Greuning, Zamir Iqbal
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Extra resources for Risk Analysis for Islamic Banks
Sample text
However, Shariah allows jurists to determine the extent of gharar in a transaction and, depending on the circumstances, whether it invalidates the contract. By prohibiting gharar, Shariah prohibits many pre-Islamic contracts of exchange, considering them subject to either excessive uncertainty or opaqueness to one or both parties to the contract. In many cases, gharar can be eliminated simply by stating the object of sale and the price. A well-documented contract eliminates ambiguity as well. ” Some argue that prohibiting gharar is one way of managing risks in Islam, because a business transaction based on the sharing of profit and loss encourages parties to conduct due diligence before committing to a contract.
The following are some of the noteworthy developments. Recognizing the need for standards, a self-regulatory agency—the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)—was established. AAOIFI was instrumental in highlighting the special regulatory needs of Islamic financial institutions. AAOIFI defined accounting and Shariah standards, which were adopted or recognized by several countries. However, as the market grew, the regulatory and supervisory authorities, with the help of the IMF, established a dedicated regulatory agency, the Islamic Financial Services Board (IFSB), in the early 2000s to address systemic stability and various governance and regulatory issues relating to the Islamic financial services industry.
Investing Instruments Investing instruments are vehicles for capital investment in the form of a partnership. There are two types of investing instruments: fund management (mudarabah) and equity partnerships (musharakah). Mudarabah, which can be short, medium, or long term, is a trust-based financing agreement whereby an investor entrusts capital to an agent to undertake a project. Profits are based on a prearranged, agreed ratio. A mudarabah agreement is akin to a Western-style limited partnership in which one party contributes capital, while the other runs the business; profit is distributed based on a negotiated percentage of ownership.