Islamic Finance Term Paper

UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
MASTER OF BUSINESS ADMINISTRATION

GROUP ASSIGNMENT
SEPT – DEC 2013

TOPIC: ISLAMIC FINANCE

PRESENTED BY:
NAME REGISTRATION NO
NDIRANGU MERCY D61/60537/2013
KIIO PETER D61/61023/2013
AGAO EMILY D61/79814/2012
MUTUKU ESTHER D61/80221/2012
OCHOLA JOSHUA D61/79312/2012
MUHALIA JOHN D61/67666/2011
MAURICE OJOW D61/75719/2012
NICODEMUS KIPTOO D61/76091/2012
MOHAMMED CHUTE

OCTOBER 2013

TABLE OF CONTENTS

LIST OF ABBREVIATIONS 3
INTRODUCTION 4
1. BACKGROUND AND EVOLUTION OF ISLAMIC FINANCE 5
2. THEORY REVIEW OF ISLAMIC FINANCE 7
2.1 Shariah 7
2.2 Monetary and Macro Theory 8
2.2.1 Behavior of Credit Markets 8
2.2.2 Risk-sharing 9
2.2.3 Equity Considerations 10
2.3 Banking Theory 11
2.4 Islamic Financial Transactions 14
2.4.1 Bai’al’inah (Sale and buy- back agreement) 14
2.4.2 Bai’bithaman ajil (Deferred payment sale) 14
2.4.3 Bai’muaijal (Credit sale) 14
2.4.4 Mudarabah 15
2.4.5 Murabahah 15
2.4.6 Musawamah 15
2.4.7 Bai Salam 16
2.4.8 Hibah (Gift) 16
2.4.9 Istisna 16
2.4.10 Ijarah 17
2.4.11 Ijarah thumma al bai (Hire Purchase) 17
2.4.12 Ijarah-wal-iqtina 17
2.4.13 Musharakah (Joint Venture) 18
2.4.14 Qard Hassan/ qardul Hassan (Good Loan/ benevolent loan) 18
2.4.15 Sukuk (Islamic Bonds) 18
2.4.16 Takaful (Islamic Insurance) 19
2.4.17 Wadiah (safekeeping) 19
2. EMPIRICAL EVIDENCES 20
2.1 Differences between Islamic Finance and Conventional Banking 20
2.2 Relationship between Islamic Banking & Economic Growth 20
2.3 Relationship between Liquidity Risk Management and Financial Performance of Islamic banks 21
2.4 Effect of foreign presence on Islamic bank’s performance 22
2.5 Efficiency in Islamic Banking 23
2.6 Comparison of Technology between Islamic and Conventional Banks 23
2.7 Impact of monetary policy shocks on the conventional and Islamic banks in a dual Banking System 23
2.8 Islamic Banks and Financial Stability 24
3. UNRESOLVED ISSUES IN ISLAMIC FINANCE 25

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