Money related Building and Assessment of New Instruments.


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2. Meaning of Financial Engineering. Monetary building can be characterized as
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Money related Engineering and Evaluation of New Instruments Dr. Munawar Iqbal Chief of Research (Islamic Banking and Finance) IRTI, Islamic Development Bank DLC Lecture November, 2004

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Definition of Financial Engineering Financial building can be characterized as \'the configuration, improvement, and the usage of inventive money related instruments and forms, and the plan of imaginative answers for issues in fund\'.

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Need for Financial Engineering in Islamic Finance Until now, the Islamic money related apparatuses have basically been constrained to established modes created hundreds of years back. They were produced to address the issues of those social orders. While they may serve as valuable rules for contemporary Islamic contracts, there is no motivation to be confined just to those. Budgetary markets are turning out to be increasingly advanced, and aggressive. Keeping in mind the end goal to abuse the quick changing business sector environment and face expanding rivalry, budgetary building and development is basic.

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Scope for Financial Engineering in Islamic Finance Financial requirements of both people and organizations have changed. Engineers in cutting edge money have composed a few new routes, for example, contracts, choices, subsidiaries, supporting, protection annuity arranges, charge cards and so on., to address those issues. We should inspect what necessities are being satisfied by these instruments. In the event that the necessities are real (Islamically), then we should either adjust them for our motivations or design Islamic options for them.

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Scope for Financial Engineering in Islamic Finance-Cont. In the light of the standards of maslaha and istihsan , a "requirements methodology" to monetary building is attractive, obviously inside the known standards of Islamic money. In such manner, the case of sound\' salam is essential to recollect. All in all, it is not permitted to offer anything, which is not in one\'s ownership. In any case, if there should be an occurrence of salam , the Prophet (pbuh) permitted such deal in view of "need" of the general population, yet set down clear standards to ensure the interests of both sides.

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Scope for Financial Engineering in Islamic Finance-Cont. The procedure of adjustment is all around perceived in Islamic fiqh and has never ceased. In any case, its velocity should be significantly upgraded. Established contracts have been altered in various cases to address current issues. One strong case is the start of Islamic depending on the premise of al-mudarib udarib rule, which gives that a mudarib (specialist) may himself select another operator to really maintain the business. Another is the act of murabahah , through which the bank purchases merchandize upon the guarantee of another gathering to buy it from the bank at a higher cost.

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Scope for Financial Engineering in Islamic Finance-Cont. The guideline of al-mudarib udarib basically takes into account sub-contracting. On the off chance that the rule is worthy, there is no motivation to confine it just to mudarabah . Contracts can likewise be planned on the premise of different standards, similar to al-muajjar uajjir , al mustasna\' ya stasna\' , and so on. At the end of the day, the first contractee may mastermind to satisfy the commitments under the agreement through outsiders. That the guideline is worthy from an Islamic perspective is not faulty.

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Scope for Financial Engineering in Islamic Finance-Cont. While it is conceivable to adjust established contracts to suit advanced conditions, a much more extensive degree for budgetary building exists in growing new contracts. These agreements could be half and halves of old contracts or might be completely new. The extension for money related building, and so far as that is concerned for advancements in different fields, is very wide. It is imperative that the errand is offered over to those specialists who know the requirements and comforts of the exchange.

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Two sorts of Ahkam Ibadat and Muamalat The general key if there should arise an occurrence of ibadat is that nothing is that a demonstration is ibadah just when allowed by God.

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The Doctrine of Original Permissibility in the event of muamalat, the general central is that of ibaha, i.e. everything is allowed unless unmistakably denied by God. We call this the Doctrine of Original Permissibility . For disallowances, Shariah gives general rules to be watched. The understanding of these rules in each age is done through the procedure of ijtehad .

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Guidance From Quran on Business Dealings: يا أيها الذين آمنوا لاتأكلوا أموالكم بينكم بالباطل إلا أن تكون تجارة عن تراض منكم. ) سورة النساء، الآية 29 (. "O Ye who accept! Gobble not up your property among yourselves unduly. Give it a chance to be exchange amongst you by shared understanding". This verse is maybe the most imperative verse of Quran on financial matters . It lets us know both the do\'s and the don\'ts in business dealings. In the first place the don\'ts.

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What is Prohibited in Business Relations The verse precludes ALL illicit methods for riches creation. "Batil" envelops any method for obtaining riches that damages the privileges of: (a) God (b) Contracting Parties and (c) Third Parties

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Prohibitions-I First and preeminent those methods for riches creation are decided out that are proclaimed "illicit" by the Supreme Law Giver. Case of these are riba, gharar, qimar.

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Prohibitions-II The extent of the verse additionally incorporates every one of those exercises, which are pronounced "unlawful" by the state and its different echelons. Case of these are pay off, pirating, tax evasion.

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Prohibitions-III Ways of making riches that abuse the privileges of outsiders are additionally restricted. Case of these are making contamination, hindering basic entry ways and other negative externalities. Zoning directions by districts are secured here

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Kinds of Contracts Islamic contracts can be extensively characterized into two classifications: Charity (Tabarruat) and Exchange (Muawadat). In this address our advantage is in the last mentioned.

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Guidelines for Financial Contract Design Freedom in deciding the states of a contract inside Shariah rules. Preclusion of taking others\' property without compensation Conscious Agreement inside Shariah limits Mutual Benefit (Value Equivalence) Justice and Fairness (Elimination of Exploitative Clauses) Provision of Maximum Possible Information Honoring the Spirit of Contract

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What is Allowed in Business Contracts The Golden Principle of Free Choice المسلمون عند شروطهم إلا شرطا حلل حراما أو حرم حلالا " Muslims are allowed to decide the states of their agreements unless they make something taboo as admissible or something passable as prohibited " In Islamic hypothesis of agreements, gatherings are allowed to concur on any terms the length of known Islamic guidelines and standards are not disregarded.

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Financial Contracts: Special Conditions to be Observed Prohibition of Riba Prohibition of Gharar Prohibition of Gambling

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Prohibition of Riba Riba truly implies increment, expansion, extension or development. In the Shari " ah , notwithstanding, the term riba alludes to anything (huge or little), monetary or non-financial, in abundance of the vital in a credit that must be paid by the borrower to the bank alongside the important as a state of the advance or for an augmentation in its development. In this sense, Riba has the same significance and import as the contemporary idea of enthusiasm for understanding with the accord of all the fuqaha (law specialists).

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Prohibition of Gharar Gharar alludes to act and conditions in contracts, the full ramifications of which are not obviously known not parties. In financial speech it is near " Asymmetric Information. " It has two sorts: gharar yaseer (inconsequential) and gharar fahish (significant). The main kind is endured since this might be unavoidable without creating significant harm to one of the gatherings.

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Prohibition of Gambling (Maysar) يا أيها الذين آمنوا إنما الخمر والميسر والأنصاب والأزلام رجس من عمل الشيطان فاجتنبوه لعلكم تفلحون ( سورة المائدة، الآية90 (. O Ye who trust, Intoxicants and Gambling, (Dedication of ) stones, And (Dedication of) bolts, are a cursed thing, of Satan\'s workmanship: Eschew such (evil entity) , That ye may thrive. Betting sums to exchange of riches with no worth included.

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Some Relevant General Principles of Shari\'ah No agony no increase (Al-Kharaju Bil-Daman) Principle of Relief (Istahsan) Doctrine of Necessity (Dharoorah)

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The Four Cs of Islamic Financial Engineering notwithstanding the Doctrine of Original Permissibility and the Golden Principle of Free Choice and the discourse of the couple of disallowances, we can condense the rules for money related building in what we call "Four Cs of Islamic Financial Engineering". These are: Consciousness Clarity Capability Commitment

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C onsciousness That the gatherings ought to deliberately and readily concede to the states of agreement without impulse or coercion. A ramifications of this is any assention made in the condition of obviousness (like affected by intoxicants or forced by power ) is not substantial.

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C larity That the gatherings are completely mindful of the considerable number of ramifications of the conditions set down in an agreement. Any uncertainty (except for gharar yasir ) will make the assention invalid. A suggestion is to minimize unbalanced informatiom.

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C apability That the gatherings are sensibly sure that they are equipped for consenting to all states of the agreement. A ramifications of this is offer of any merchandise (or administrations) which are not claimed and controlled by t

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