Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Introduction

The authors of this work would like to develop the understanding of the concepts of shariah and Islamic finance as the book progresses so that readers make up their own mind about the conclusion we offer. We encourage active reading and analyses and not passive reading, as we have been fortunate enough to have had mentors and teachers who encouraged learning, questioning, and understanding and not mere dogmatic rote learning.

The reader must understand that within the universe of Islamic finance money cannot be lent from one party to another with the intent of making a gain on the repayment of the loan. Conventional finance is built on the permissibility of this transaction whether it takes place between a depositor and a bank or it takes place between a borrower and a bank. To date, the aim of Islamic Finance has been to replicate the cash flows that take place in disbursing and servicing a loan with a sequence of sale contracts. For the best part of financial engineering in the industry, spot sales are combined with deferred payment sales to construct cash flows that resemble those of a loan. The underlying “sales contracts” must involve a permissible asset and the sale contract must abide by the laws of contracts of bai. Thus, much of the discourse in Islamic finance is a legal discourse based on the rights and obligations imparted to various parties in various contracts under varying circumstances.

Before proceeding further we therefore wish to highlight some ...