Principle of Islamic Finance Essay

Submitted By Lion-Heart
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special focus report

winter 1998-1999

a publication of the financial services capital markets group of tannenbaum helpern syracuse & hirschtritt llp

Principles of Islamic Finance
Consider for a moment about operating and practicing law in a jurisdiction and under a financial system where there is no separation between church and state. Most if not all of us operate in a western oriented system where the banking and financial systems operate laissez-faire, with minimal government interference and certainly little if any religious interference or control.
Certainly, many of us who are Americans take for granted the notion of separation of church and state. Not so with regard to the subject of this paper - Islamic based financing. Like many of you, I operate in a law firm that concentrates in financial service matters. At Tannenbaum
Helpern, we represent numerous hedge funds, insurance companies, banks, fund sponsors, investment advisors. And the list goes on. A segment of the practice is related to funds which are designed for sale into the Islamic regions of the world, for consumption by investors who strictly follow the tenets of Islam, and the teachings of the Koran.
In this area, there is no separation of church and state – the financial system is very much controlled by and operated in accordance with Islamic principles of finance, not western principles of finance. And this means the hedge funds and deals in
In this issue: general are structured to fall
Rules of the Game . . 2 within the strict teaching of
Prohibited Transactions . 2
Islamic religious principles, in
Riba . . . . . . . 3 adherence with the so called
Dividend Cleansing . . 3
Ijara Leases . . . . 4
Shari’ah, meaning “the way.”
Western Leases . . .
Murabaha . . . . . 4
Profit Sharing . . . . .6

So, this paper is necessarily a discussion that is more grounded in

© 1998 Tannenbaum Helpern Syracuse & Hirschtritt LLP

To Our Clients and Friends:
There are several regions of the world that require specific knowlege in designing investment products. The U.S., for example, certainly has all sorts of regulations with which to comply, as does each state. Foreign countries have their own rules as well.
One region that holds particular challenge is the Islamic regions, namely the Middle Eastern countries and Southeast Asia. In these areas the religious rules govern the others. In designing investment products, therefore, it is essential to have an understanding of the basic principles of Islamic finance. We hope you enjoy this special focus report GlobalNote. which is devoted entirely to those basic principles. Please call for further information about how this topic might apply to you. We can assist in developing investment products for this region.
Michael G. Tannenbaum

GlobalNote special report

OPEC started in the tenets of the Koran than the about 1959. The Jedda based IsMagna Carta, but in that distinction lies the intellectual stimula- lamic Development Bank was founded in 1975. Russia’s tion. Meshkombank was established in
Why is this important to those Kazakstan in 1996, and in the same of us who practice law in the year, the Islamic Bank for Finance and Investment was established in area of financial services?
Yemen. Citibank
"Many sponsors followed suit
A s and advisers are with the City-Isthe bank robber lamic Investment
Willie Sutton said as gravitating toBank.
to why he robs wards Islamic
AMRO followed banks: That’s where regions for inves- and the list goes the money is. Since tors because on. Goldman the great growth
Sachs through J. over the last 30 that’s where so
Aron in London years or so of the oil much money is is a major player dollars in the rethese days." in this area. gions of the world
that adhere to Islamic principles, that’s where one Benson is