Islamic Finance – Conventional methods of payment
Every financial system needs a way to settle payment transactions between buyers and sellers. When the seller has provided the precise item and received the agreed-upon quantity of value, the payment transaction is considered to be settled. Payment instruments and a centralized method for the exchange of monies between the suppliers of payment services are the two primary components of payment systems. The majority of payment services are provided by deposit-taking institutions, who frequently hold central bank-issued licenses to carry out such tasks. For the settlement of retail and wholesale transactions, several methods have been devised.
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Islamic Finance - Takaful: Islamic insurance
An Islamic insurance idea known as takaful is closely related to Islamic banking. It serves as a risk-reduction tool for both the bank's client and for the bank or lender. The idea, which has been practiced for more than 1400 years in a variety of forms, must adhere to the laws and standards based on Shari'ah principles and values. The Takaful system is, in theory, based on reciprocal cooperation, responsibility, and help. The goal of this method is to encourage people to support one another in acts of righteousness and piety. It is a type of mutual insurance, to put it briefly. In essence, takaful is a form of joint guarantee indemnity system in which a sizable number of people pool their financial resources to protect one another from potential losses. Acts involving interest (Riba) and contractual uncertainty are prohibited under a Takaful contract (Gharar). The policyholders of a Takaful firm are the fund's contributors or participants since they jointly participate in it for their mutual benefit – they are the fund's owners. On behalf of the participants or policyholders, the Takaful firm manages and runs the fund in the interim. Takaful businesses must follow Shari'ah rules and principles when conducting insurance business and other connected activities, such as investing money. A committee of certified Shari'ah scholars serves as the company's counselors on all Shari'ah-related concerns, ensuring compliance at all levels. Family Takaful, generic Takaful, and retakaful are the three main subcategories of the takaful industry. Takaful family Takaful or life Takaful This particular form of Takaful policy has a set maturity time, such as 10 or 20 years. In other words, if a participant passed away before the maturity term, his dependents would get payment. No payment would be due if the man passed away after the maturity period. Islamic Takaful, however, provides that the survivor will get both his original contribution and any investment income. Periodic premium contributions are a typical practice among contributors. These will be largely utilized to help them reach their personal savings goals. Regarding a donation account, which is used in part to support their families financially in the event of their death or should they suffer from a permanent handicap, participants or donors have varying financial capacities and varied saving or investing plans. Non-life Takaful policy (or general Takaful) Similar to non-life insurance, Takaful operators typically offer coverage for things like fire insurance, automobile insurance, liability insurance, marine insurance, worker's compensation, and fidelity on an annual renewal basis. The entire purpose is to give any participant who experiences the danger as specified in the policy Retakaful cash indemnity (Takaful reinsurance) Retakaful is a method through which a Takaful company will collaborate with other Takaful firms to offer mutual protection among Takaful operators on behalf of the scheme's members. Retakaful offers members in other Takaful schemes the chance to join a larger pool of funds to offset increased loss risks, whereas a Takaful scheme is a joint guarantee among its participants. Commercially speaking, the retakaful firm should have a bigger paid-up capital and be able to offer some financial support in the event that the retakaful fund falls short. Islamic Finance - Services for asset management and venture capital
Clients who lack the time or expertise to manage their own money entrust their assets to asset management organizations. These organizations are able to create and manage asset portfolios across sovereign nations thanks to their experience and networks that have been developed over many years. The ability of clients to invest in markets they would not otherwise have access to has been a major factor in the rise of asset management firms. Asset management firms have the freedom to manage distinct portfolios of both conventional and Islamic funds, in contrast to Islamic commercial banks. The latter is the most widely used type of fund management, along with equity funds. Others target high-net-worth individuals and corporate entities, while certain Islamic equities funds seek to target regular investors. Blocks of money are distributed by asset management companies. Customers make the required payment, which is subsequently combined with the money from other customers. Their minimal investments per unit or certificate could be as little as $100,000 or as much as $1 million USD. Professionally skilled managers invest the pool after identifying certain investments with high yields and low risk. It should go without saying that the investments must also adhere to Shari'ah. With such a sizable pool of money, the asset manager is able to diversify the portfolio, further reducing the investment's risk. Additionally, the operation's unit cost is reduced because to the high quantum involved, which further increases the savings. One of the IFS's segments with the highest growth is the market for Islamic equities funds. There are already more than 100 Islamic equity funds spread across the globe. The total assets handled by these funds in 2006 were over $5 billion USD, and they are expanding by 12%–15% annually. Diverse target audiences exist for Islamic funds. Some, like Malaysian and Gulf-based investment funds, serve their local markets. Others have a very distinct Middle East and Gulf region focus, despite having funding and bases in the west. Islamic mutual funds and Islamic unit trusts have grown rapidly as a result of the adoption of widely approved Islamic stock screening criteria, such as the DJIM. Some of the indices serve local markets, such as Malaysia's Kuala Lumpur Shari'ah Index (KLSI), which has helped the country's domestic Islamic unit trust industry flourish and expand. Venture capital services give investors the chance to put money into brand-new startups in order to support their expansion goals, possibly all the way to the initial public offering (IPO) stage. Contrary to mutual funds, which invest in listed stocks, venture capital services aim to make investments in unlisted businesses in order to maximize returns. Islamic Finance – Islamic Stock Broking
Services for Islamic stockbrokers Islamic stockbroking services operate under institutional and regulatory frameworks that are comparable to those of traditional stockbroking, but they adhere to Shari'ah principles in all of their operations and services. For instance, Islamic stockbroking services are limited to supporting the creation, trading, and distribution of securities that adhere to Shari'ah, and they also assist institutions in offering margin-financing options that are compliant with Shari'ah. With the help of margin financing, the consumer can buy a specific share on credit. In the future, the customer will later pay the financier a greater selling price. Murabahah margin finance, in which the financier buys the specified shares at price 'x' and sells them to the customer at price 'x+y' due later, is highly popular for this purpose. In Malaysia, BIMB Securities Sdn Bhd (a division of Bank Islam Malaysia Berhad) introduced the first full-fledged Islamic stockbroking service in 1994. It is uncommon to come across a specialised Islamic stockbroking firm in the IFSI of other nations. This is so that any broker of a Muslim investor's choice can invest on their behalf if they are looking for Islamic-compliant companies. This has been made possible by the availability of published lists of Shari'ah-compliant stocks offered by recognized international and local Islamic stock-screening firms and organizations. Islamic Finance - Islamic commercial and investment banking
When commercial banks were initially conceived of as serving the retail economy, merchant banks started out working with wholesale enterprises. These banks have historically provided services for financial transactions involving financing sums that are too large for conventional banks to handle. Thus, their area of expertise was restricted to tasks like bond issuance and syndication. They grew their companies over time to offer advice and underwriting services. Their fee-based activities expanded, pushing deposit taking and loan making—despite their substantial volume—to the background. However, the current fad is for commercial banks to evolve into investment banks. Because the banks are permitted to offer more goods, such as asset management and structured products, investment banking is a more expansive variant of merchant banking. Islamic merchant or investment banks specialize in setting up financing that complies with Shari'ah and providing advice services that complies with Shari'ah. Islamic securities, Islamic asset-backed securitization, Islamic structured finance, Islamic financing syndications, and other fee-based activities utilizing recognized Islamic principles like Murabahah, Ijarah, Istisna', and Kafalah are some of the more consumer-focused products they arrange or offer advice on. Islamic Finance – Urbun
"Urbun" is essentially a down payment given by a buyer to a seller following the execution of a legally binding contract by both parties. The down payment serves as a pledge to buy the items. Islamic Finance- Islamic derivative financial products
A financial instrument called a derivative derives its value from the value of an underlying asset. When market players agree to exchange money, assets, or some other value at a future date based on the underlying asset, the value of the right to buy (call option) or sell (put option), for instance, is established. Due to the problem and level of uncertainty, it includes a forward transaction in terms of payment and delivery that needs special consideration for Shari'ah compliance. Synthetic investment instruments, also known as structured products, are developed when market-available regular financial instruments are unable to satisfy investors' particular needs. Structured products can mimic direct investment, can be used to decrease a portfolio's risk exposure during the asset allocation process, or can take advantage of the current market trend. It is typically a pre-packaged investment strategy based on derivatives (i.e., options and, to a lesser extent, swaps) that offers principle protection if held to maturity. In essence, Islamic derivative instruments—more precisely, structured products—are made to mitigate the risk of a legitimate economic transaction. Islamic derivatives would function in the same way as traditional derivatives. Although all financial plans have similar goals, it should be recognized that each must take a distinct path and employ a different methodology to get there. Derivative instruments often operate on the idea of paying a premium to obtain higher protection, which is quite similar to how insurance works. Forwards, futures, options, and swaps are frequently used as representations of derivative products. Each of these instruments has distinctive characteristics and uses. Options, for instance, can be used to purchase the right to buy an underlying asset, like stock or commodities, in the future. After paying the premium, an option holder has the right to buy the underlying share at a specific price in the future. The holder will profit by using his option to purchase the asset at a price below market value if the asset's future value increases. The holder will not exercise his option if the asset's price falls, and the loss will only exceed the premium amount paid. The goal of risk management is also something that Islamic derivatives aim to accomplish. You might think of an Islamic option as a down payment on a transaction. If the price rises in the future, the buyer may go ahead and make the purchase. The contract expires and the value of the derivative instrument, or "down payment," is forfeited in favor of the vendor if the price in the future drops and no purchase is made. The sum paid to purchase the option (known as "Urbun") will be taken into account when determining the purchase price in the event that the purchase contract is executed. To handle actual business risks in the sector, Islamic finance has additionally provided profit rate swap and forward currency exchange. Islamic Finance – Islamic Money Market (IMM) for short term Financial Products
Islamic short-term financial instruments for the money market The IMM is a financial market for short-term securities, as opposed to the ICM. Inter-bank short-term financing in the IMM is accomplished by the issuing of short-term financial instruments or through the conclusion of contracts like repurchase agreements. The domestic financial system receives short- to medium-term liquidity from the IMM. The IMM's overarching goal is to fortify the institutional framework of Islamic banking activities. This is accomplished by addressing the short-term liquidity needs of market participants and investing surplus liquid resources. Additionally, the IMM acts as a conduit for the dissemination of monetary policy. The overnight call rate, which affects money market rates, is set by the central bank. The money market rate has an impact on other financial markets' interest rates as well as the rates at which different financial institutions lend money to people and businesses. This is how the overall economy is impacted by the central bank's monetary policy. As a result, changes in financial pricing in relation to the overnight call rate affect how the IMM develops. This is necessary to keep the dual financial system stable. The Islamic Interbank Money Market (IIMM) of Malaysia and the Liquidity Management Centre (LMC) of Bahrain are the two primary IMMs. While the former seeks to serve the domestic market, the latter commits to helping to meet the needs of regional and international liquidity markets. Additionally, some authorities provide specialized products to aid in the management of short-term liquidity on the domestic market. The Salam Sukuk issued by the Bahrain Central Bank (formerly the Bahrain Monetary Agency) is an illustration of this. An investment product based on Wakalah, namely agency in investing, has been introduced among the stakeholders in some jurisdictions—particularly in the Middle East—where there are no Islamic liquidity instruments. A bank with a surplus will designate a bank with a deficit to manage the surplus funds placed with the latter under this product. Only assets that have the potential to provide a specified rate of return for the primary or "surplus" bank may be purchased by the agent. A deficit bank would typically attain the rate that is being imposed on its investment. This product could help the deficit bank by providing money for its short-term deficit management while simultaneously serving the commercial demands of the surplus bank. Islamic Finance - Islamic asset-backed securities and Sukuks
The ICM is a market for long-term securities that offers future income based on assets. The Sukuk is one of these instruments, which normally denotes proportionate undivided ownership of the asset and is anticipated to generate a return for Sukuk investors. Sukuks are participation certificates issued to investors with an equal unit value and are denominated in money. Each Sukuk represents a pro rata share of the income produced by these assets as well as a proportionate share of ownership of the underlying asset. A Sukuk offers a functioning substitute for the market for traditional corporate and governmental bonds. The pool of asset-backed receivables or assets that make up the Islamic asset-backed security are backed by obligors who are not connected to the issuer. The originator or obligor will be required to sell the established assets to the SPV/issuer under this structure. A special purpose vehicle (SPV) was established as a bankruptcy remote corporation to hold assets in the interest of investors. In the event that the originator were to be declared bankrupt, the creditors would not have any recourse against the SPV. On the premise that these assets can produce cash flow and future revenue, the asset in this situation could be receivables or a physical asset. This asset must be sold using a real sale concept that forbids recourse against the creator. Asset-backed securities are the consequence of a real transaction in which the originator's asset, such as account receivables, is transferred from the originator's book to the issuer/SPV. Later, the coupon associated to the securities issued to the investors will be paid using the cash flow generated by the asset. The two types of Sukuks—asset-based and asset-backed—are fundamentally based on a securitization method known as Tawriq, or Taskeek in Arabic. Securitization, to put it simply, is the process of combining assets and putting them into marketable securities. The names "Islamic bonds" and "Islamic notes" refer to securitization of receivables or future financial obligations in specific countries, such as Malaysia. Islamic Finance - Islamic Mutual Funds
Islamic investment funds Shari'ah-compliant securities are managed in accordance with Shari'ah principles and are included in Islamic mutual funds or Islamic unit trust funds. In order to make sure that investment operations and portfolios are managed in accordance with Shari'ah principles, Islamic mutual funds frequently consult with Shari'ah experts. These funds are only invested in listed, Shari'ah-compliant stocks and Islamic fixed-income securities. The fund's investment strategy will play a significant role in determining the asset allocation's percentage. In addition, there are specialized Islamic funds that often invest in asset classes other than listed shares, such as leasing funds, Murabahah funds, and private equity funds. |
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