Finance & Banking

CAMBRIDGE PROJECT STANDARDISATION OF NOTATION IN ISLAMIC ECONOMICS, BANKING & FINANCE

In the August 2016 issue of ISFIRE, we started
with a one-pager to introduce standardisation of
notation in Islamic economics, banking and finance
(IEBF). This has emerged as a major project since
then, as a number of universities engaged in the
instruction of IEBF have started to adopt what
were initially named as ISFIRE Notes. So far, we
have issued 8 ISFIRE Notes:
• ISFIRE Note 1 on Bai’ (issued in February 2018)
• ISFIRE Note 2 on Riba (issued in June 2018)
• ISFIRE Note 3 on Murabaha (issued in August 2016)
• ISFIRE Note 4 on Salam (issued in October 2016)
• ISFIRE Note 5 on Mudaraba (issued in December 2016)
• ISFIRE Note 6 on Ijara (issued in February 2017)
• ISFIRE Note 7 on Musharaka (issued in February 2018)
• ISFIRE Note 8 on Istisna’ (issued in April 2018)
Frome January 2019, the project was transferred
to the newly set up Cambridge Institute of Islamic
Finance (Cambridge IIF) and the ISFIRE Notes were
renamed to Cambridge Notes. Hence, the new
note issued through this edition of ISFIRE will be
called Cambridge Note 9 on Sukuk.

WHY IS THERE A NEED FOR STANDARDISATION OF
NOTATION IN ISLAMIC FINANCIAL
EDUCATION?

There is no standard notation in the books written
on Islamic economics and finance. In the absence
of a standard, authors use their discretion to
notate different Islamic financial contracts. This
has not only created pedagogical confusion but
has also hampered true understanding of Islamic
financial contracts.
We believe that standardisation of notation will
help develop consistent pedagogical tools to be
used for education and training in IEBF. Once
Cambridge IIF has issued a sufficient number
of notes, we aim to hold a special workshop on
Standardisation of Notation in IEBF to finalise
all these notes into standards. In this respect a
Board on Standardisation of Notation in Islamic
Economics, Banking and Finance is under
formation. The interested individuals are invited to
submit their expressions of interests to Professor
Humayon Dar by emailing on hdar@cambridge-iif. com.

Cambridge Note 1 on Bai’

  1. (A.X.B; P) represents a spot sale contract
    between A (seller) and B (buyer) to buy/sell a
    commodity X for the price P. Both the object
    of sale, X, and price, P, must be exchanged on
    spot. A variant of this contract may be notated
    as (A.X.B; P|T0), explicitly mentioning the time,
    T0, when the exchange of object of sale and its
    price be affected.
  2. (A.X.B; P|T1, T0) represents a sale contract
    between A (seller) and B (buyer) to buy/sell a
    commodity X for the deferred price P|T1 to be
    paid by B at a later time T1, allowing the buyer
    to receive the commodity upfront at time T0.
    2a. (A.X.B; P|T1, T0) is essentially bai’ mu’ajjal or
    what is also known as bai’ bithaman ‘aajil, or a
    deferred payment sale contact.
  3. (A.X.B; P|T0, T1) represents a sale contract
    between A (seller) and B (buyer) to buy/sell a
    commodity X for the a price P|T0 to be paid
    upfront by B at time T0, allowing the seller to
    deliver the commodity during time period T or
    on a specific date at the end of T1.
    3a. (A.X.B; P|T0, T1) is essentially a salam contract
    as per Cambridge Note 3 on Salam.
  1. (A.X1,B; B.X2.A) represents exchange of an
    asset X between A and B, whereby A transfers
    ownership of an amount X1 of X to B, while B
    also simultaneously transfers and amount X2 of
    X to A; such that X1 = X2 or X1 ≠ X2.
  2. (A.X1,B; B.X2.A) is an agreement between two
    independent parties, A and B, which may lead
    to riba if A transfers ownership of an amount
    X1 of X to B who also transfers and amount X2
    of X to A; such that X1 ≠ X2.
  3. (A.X1,B; B.X2.A |T0) is an agreement between
    two independent parties, A and B, which may
    lead to riba if A transfers ownership of an
    amount X1 of X to B who also simultaneously
    (at time T0) transfers and amount X2 of X to A;
    such that X1 ≠ X2.
  4. (A.X1,B; B.X2.A |T0, T1) is an agreement
    between two independent parties, A and B,
    which may lead to riba if A transfers ownership
    of an amount X1 of X to B at time T0, and B
    transfers and amount X2 of X to A at another
    time T1; such that X1 ≠ X2.
  5. (A.X1,B |B.X2.A |T0, T1) is definitely and
    unambiguously a riba agreement between two
    independent parties, A and B, if A transfers
    ownership of an amount X1 of X to B in
    exchange for B transferring and amount X2
    of X to A, such that X1 ≠ X2, irrespective of
    whether T0 = T1 or T0 ≠ T1

Cambridge Note 3 on Murabaha

  1. (A.X.B; PMUR ,∏MUR , T) represents a classical
    murabaha arrangement between A (seller) and
    B (buyer) to buy/sell a commodity X for the
    murabaha price PMUR and murabaha profit of
    ∏MUR for T as the date of payment of price.
  2. (A.X[1].B; PMUR, ∏MUR, T) represents a
    commodity murabaha arrangement between A
    (financier) and B (financee) arranged by a single
    commodity broker 1; whereby PMUR is the
    murabaha price, ∏MUR is the murabaha profit,
    and T is the duration of the financing period
    (in years, months, or days, etc.).
  3. (A.X[1.2]X.B; PMUR, ∏MUR, T) represents a
    commodity murabaha with two commodity
    brokers, 1 and 2.
  4. (A.X[1].B; PMUR, ∏MUR, T, D(.), R(.)) represents a
    commodity murabaha arrangement between
    A (financier) and B (financee) arranged by a
    single commodity broker 1; whereby PMUR is
    the murabaha price, ∏MUR is the murabaha
    profit, and T is the duration of the financing period (in years, months, or days, etc.); D(.) and R(.) represent default and rebate clauses, respectively, such that:

Default Penalty = a Xi ; and
Rebate amount = b Xj

whereby Xi = amount outstanding at the time of default; Xj = amount outstanding at the time of early settlement date; and 0 ≤ a ≤ 1 and 0 ≤ b ≤ 1.

  1. (A.X[1].B; PMUR, ∏MUR, PMURIK, T / N, PEX)
    represents a commodity murabaha based
    Islamic mezzanine financing arrangement
    between A (financier) and B (financee)
    arranged by a single commodity broker 1;
    whereby PMUR is the murabaha price, ∏MUR is
    the murabaha profit, PMURIK is the payment
    in kind (one-off balloon payment at the end
    of the financing period) and T is the duration
    of the financing period (in years, months, or
    days, etc.); N is the number of shares that B
    promises to sell to A in the event of default for
    an agreed price PEX.

Cambridge Note 4 on Salam

  1. (A.X.B; PSAL|T0, T1) represents a classical salam
    contract between A (seller) and B (buyer) to
    buy/sell a commodity X for the salam price
    PSAL|T0 to be paid upfront by B at time T0,
    allowing the seller to deliver the commodity
    during time period T1 or on a specific date at
    the end of T.

2. ([A.X.B; PSAL1|T0], [B.X.C; PSAL2|T1], T2)
represents a salam-parallel-salam
arrangement, involving three independent
parties, A, B and C, whereby A sells a
commodity X to B for a salam price, PSAL1|To
,paid by B upfront at T0, to receive the delivery
during time period T2 or on a specific date
at the end of T2. The salam-parallel-salam
arrangement also involves B selling the
commodity X to another independent party C
that pays salam price, PSAL2|T1, to B at the time
of entering into the salam contract, i.e., at T1 . (A.X.B.X.C; PSAL1|Ti , PSAL2|Tj , T) represents a three-partite salam-parallel-salam contract, whereby A sells a commodity X to B for a salam price, PSAL1|Ti , paid by B upfront at Ti ,and B sells on the commodity X to C for a salam price, PSAL2|Tj , whether Ti = Tj or Ti ≠ Tj; the deliveries take place during time period T or on a specific date at the end of T. This is a null and void contract that does not fulfil the requirement of independence of the two salam transactions.

Cambridge Note 5 on Mudaraba

  1. (A.K.B; ∏, α; -∏, 1; T) is a simple mudaraba
    contract between a Party A (capital provider)
    and a Party B (the managing party) in such a
    way that A receives α percentage of the profit,
    ∏, if any. K is the capital contribution (money)
    by A; while T is the mudaraba time period. In
    case of loss, i.e., -∏, A shall have to bear it with
    α = 1.
  1. A.K.B; ∏0, α; ∏1, 0; -∏, 1; T) is a mudaraba
    contract that stipulates that the capital
    providing party (Party A) will receive α
    percentage of the profit if the realised profit is
    up to a threshold level of profit, ∏0; any profit
    over and above this threshold, i.e., ∏1, will be
    retained by the managing party, i.e., the share
    of A will be zero (0). However, in case of the
    loss, -∏, A shall have to bear it with α = 1.
  1. If a mudaraba contract is notated with (A.K.B;
    α, T), it shall always be deemed as a short
    version of (A.K.B; ∏, α; -∏, 1; T).

Cambridge Note 6 on Ijara

(A, X, B; R = r1+ r2 + … + rt , T) represents a simple
ijara contract between A (lessor) who leases an
asset X to another person B (lessee) for a total
rental value of R to be paid in instalments of r1, r2, …, rt , for a period of T.

  1. (A, X, B; R = r1 + r2 + … + rt
    , T; P1, P2)
    represents an ijara wa iqtina’ contract between
    A (lessor) who leases an asset X to B (lessee)
    for a total rental value of R to be paid in
    instalments of r1, r2, …, rt, for a period of T;
    with an understanding that B will have to buy
    the asset for a price, P1, should it happens to
    default on rental payment during the term of
    the lease, and if that (event of default) does
    not occur B will buy the asset X at the end of
    the lease period for a price, P2.
  2. (A, Y, B; R = r1 + r2 +…+ r3 , T) represents an
    ijara mausufa dzimma contract between A
    (lessor) who leases an asset Y (which has yet to
    come into existence) for a total rental value of
    R to be paid in instalments of r1, r2, …, rt , for a period of T (which may coincide with the time

Cambridge Note 7 on Musharaka

  1. (A.KA.KB.B, Π, α; -Π, βi ; T) is a musharaka
    contract between a Party A and a Party B
    whereby both parties contribute capital, KA
    and KB, respectively, to a venture, in such
    a way that A receives α percentage of the
    profit, Π, if any, and B therefore receives (1-α)
    percentage of the profit, Π. In case of loss, i.e.,
    -Π, both parties shall bear loss in accordance
    withβi , whereby i = A or B; βA = KA/K and βB =
    KB/K, and K = KA + KB. T is the time period for
    musharaka; and α and β may differ.
  1. (A.KA.KB.B, Π, βi ; T) is a simple musharaka
    contract between a Party A and a Party B
    whereby both parties contribute capital, KA
    and KB, respectively, to a venture, in such
    a way that A receives βA percentage of the
    profit, Π, whether positive or negative, and B
    receives βB percentage of the profit. In other
    words, β = α.
  1. If a musharaka contract is notated with (A.KA.
    KB.B; α, β; T), it shall always be deemed as a
    short version of (A.KA.KB.B, Π, α; -Π, βi ; T).

Cambridge Note 8 on Istisna’

  1. (A.X.B; P1|T1, P2|T2, … Pn|Tn; ΡIST=∑n i=1 Ρi ,Tn)
    represents an istisna’ contract between A
    (seller) and B (buyer) to buy/sell a commodity
    X (which may be manufactured by A during the
    contract period) for total price of PIST, payable
    in instalments P1, P2, … Pn, until the time of
    the delivery Tn, by when the whole price must
    have been paid.
  1. ([A.X.B; P1|T1, P2|T2, … Pn |Tn ; ΡST1=∑n i=1 Ρi,Tn ], [B.X.C; P1|T1, P2|T2, … Pn
    |Tm; ΡIST2=∑m j=1 Ρi ,Tm) represents an istisna’-parallel-istisna’
    arrangement, involving three independent parties, A, B and C, whereby A sells a
    commodity X to B for price, PIST1, paid by B in instalments, to receive the delivery on a
    specific date at the end of T. The istisna’- parallel-istisna’ arrangement also involves
    B selling the commodity X to another independent party C that pays price PIST2, to
    B in instalments ∀ i ≠ j and/or PIST2≥PIST1, to receive the commodity X on a specific date at
    the end of T ∀ Tm≥Tn.
  2. A short version of the istisna’ contract stated in (1) can be written as IST(A.X.B; ΡIST=∑n i=1 Ρi ,Tn).
  1. A short version of the istisna’-parallel-istisna’ arrangement stated in (2) can be written as (IST1(A.X.B; ΡIST1=∑n i=1 Ρi ,Tn ), IST2(A.X.B; ΡIST2=∑m j=1 Ρi ,Tm).

Cambridge Note 9 on Sukuk

  1. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti |i = 1,2,3,…n) is
    a sakk issued by an issuer A on asset to be
    bought by investors B, with a notional price of
    N. The return on the sakk will be determined
    by the net revenue Ρ, generated by the asset
    X by way of dealing with a party C. The issuer
    will ensure that Ρ is equivalent to an amount
    added to notional N in such a way that Ρ =
    αN ∀ 0>α>0. The sakk is issued for a time
    period T and the return may be distributed in
    instalments on dates ti. The notional N must
    be returned at the end of the sukuk period T.
  2. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti |i = 1,2,3,…n) is a general notation for sukuk and may be specified for different types of sukuk.
  3. For example, for sukuk al-ijara, (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti |i = 1,2,3,…n) will represent a sakk issued by an issuer A on an asset X to be bought by investors B, with a notional price of N. The return on the sakk will be determined by the rental Ρ, which will be generated by leasing the asset to the party C involved in the structure (normally an obligor).
  1. The relationships between A, B and C will be determined by sale contracts (C.X.A; P|T0) and (A.X.C; P|Tn ) as per Cambridge Note 1 on Bai’, and lease contract (A, X, B; R = r1 + r2 + rn , T) as per Cambridge Note 5 on Ijara.
  1. Thus, a sukuk al-ijara may be notated like ((A.X.B, C; N, α, Ρ|Ρ = αN; T, ti |i = 1,2,3,…n)| (C.X.A; P|T0), (A, X, B; R = r1 + r2 + rn , T), (A.X.C; P|Tn ); Ρ = R)).

BOOK
REVIEW
Financial and Accounting
Principles in Islamic Finance
AUTHOR: DR. SAMIR ALAMAD
PUBLISHER: SPRINGER
ISBN: 978-3-030-16299-3

Hardly a month passes without a new book
on an aspect of Islamic economics, banking and finance
coming into the market. The quality and academic rigour
of these books vary significantly. ISFIRE editorial team
chooses only those books that go through a screening
process for us to make a meaningful comment.

Springer has recently published a book entitled,
Financial and Accounting Principles of Islamic Finance,
written by Dr. Samir Alamad. This is a good contribution
to the already existing stock of literature on accounting
and financial reporting for Islamic banks and financial
institutions. The book is comprehensive in coverage, as it
starts with some fundamental concepts in Islamic finance
(e.g., the treatment of time value of money in Islam) and
provides a detour of historical evolution of money and
finance before focusing on the contemporary accounting
treatments of Islamic financial contracts.

The author is a well-known practitioner of Islamic
banking and finance, with his current role as Head of
Shari’a Compliance & Product Development at Al Rayan
Bank PLC in the United Kingdom. Therefore, the book
provides practical examples of accounting treatment of
Islamic financial products, in addition to focusing on the
solid theoretical foundations both from a conventional
viewpoint and in light of the standards issued by
Accounting & Auditing Organisation for Islamic Financial
Institutions (AAOIFI).

There is a good case developed for “faith-based” accounting,
which should help not only Islamic financial institutions but also
conventional faith-based organisations. It argues that a faithbased accounting system should help in presenting Islamic
banking and finance as a value-based financial system.

Starting with the time value of money in Islam and the
traditional paper-based money, the book continues to cover
modern digital currencies and cryptocurrencies. All of these are
discussed in the context of modern accounting treatments and
the Islamic perspective.

There are 14 chapters in total arranged in an order that is
reader friendly and should allow this to be used as a textbook
or a reference book in academic circles. It must be cautioned
that the book is not written in textbook format and that the
instructors will have to blend the material contained therein
with other resources. Other important books in the same genre
are:

• Principles of Islamic Accounting by Nabil Baydoun, Maliah Sulaiman, Roger Willett and Shahul Hamid Ibrahim, published by Wiley (2018)
• Islamic Finance: The New Regulatory Challenge by Simon Archer and Rifaat Ahmed Abdel Karim, published by Wiley (2013)
• Islamic Accounting by Christopher Napier and oszaini Haniffa, published by Edward Elgar (2011)
• Islamic Banking: Financial Reporting Perspective by Muhammad Hanif, published by CreateSpace Independent Publishing Platform (2011).

The book under review benefits from someone who has not
only deep understanding of accounting and financial reporting
standards but is also a renowned Shari’a expert.

For keen readers, it is recommended to also read the author’s
other book, Financial Innovation and Engineering in Islamic
Finance, also published by Springer (2017).

The book is available in both the print form and in a digital format.

Editorial Note: This is a preliminary book review and we intend
to publish a detailed book review in a subsequent edition of ISFIRE.
The scholars who wish to provide us their feedback on the book may
wish to get in touch with one of the members of the editorial team,
preferably Tabinda Hussain on thussain@edbizconsulting.com.

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