This book is a comprehensive guide to quantitative methods, specifically as applied within the realm of Islamic finance. With applications based on research, the book provides readers with the working knowledge of math and statistics required to understand Islamic finance theory and practice. The numerous worked examples give students with various backgrounds a uniform set of common tools for studying Islamic finance.

In this volume, the authors make an important attempt to develop the building blocks of an Islamic financial system and elaborate on its implementation as a comprehensive system. They make a convincing case for the world to shed its reliance on debt, interest and leveraging, and revamp the global financial system to rely more heavily on equity financing, genuine asset securitization linking the payoffs of financial securities to the underlying assets. This would ensure promoting wider risk sharing and a more stable financial environment.

Over the past few decades, a consensus has emerged that expansion of credit and debt is detrimental to the stability of developing economies. For example, the IMF has advised its developing country members that in order to mitigate the risk of instability, such as occurred in the emerging markets in 1997, they should: Avoid debt-creating flows. 2. Rely mostly on foreign direct investment as external financing. 3. If they must borrow, ensure that their external debt is never larger than 25% of GDP and that their debt obligations are not bunched toward the short end of maturities. 4. Ensure that their economy is producing large enough primary surpluses to meet their debt obligations. 5. Ensure that their sovereign bonds incorporate clauses (such as majority action,initiation and engagement clauses) to make debt workouts and restructurings easier - that is, to ensure that there exist better risk-sharing mechanisms associated with their debt obligations to avoid moral hazard. 6. Ensure that domestic corporations have transparent balance sheets, follow mark-to-market accounting, and have financial structures that are biased more heavily toward equity and internal funding and are not heavily leveraged. 7. Ensure that their domestic financial institutions are regulated and supervised efficiently, are not highly leveraged, follow prudent credit policy and are highly transparent.

Islamic finance provides financial products, which comply with Islamic law (Shariah), largerly to Muslim investors and some Islamic products have even attracted conventional investors and borrowers. Despite growing interest in Islamic finance, a full-fledged Islamic financial system has yet to be established and demonstrated as the viable financial system in even a single country ...

Financial instability has been a recurrent phenomenon in contemporary economic history, affecting countries with varying intensity and resulting in massive unemployment and lost economic output. The financial crisis that broke out in August 2007 crippled the financial system of many advanced countries, and claimed as victims long-established banking and investment banking institutions that were deemed “too big too fail.” Capital markets were frozen, leading to stock market crashes worldwide, wiping out trillions of dollars in share values and in retirement investment accounts, and resulting in massive and persistent unemployment.

The main focus is on the question of the sources of financial instability which seems inherent in the conventional system. As a core component of this focus, the book will consider episodes of turbulence and instability in a historical context recalling the occurrence of such events from mid-19th century to the present. It will present various theoretical explanations along with solutions and alternative financial systems that avoid instability provided by various scholars dating back to mid-19th century to present...

Evidence has been mounting that the interest-based debt financing regime is under increasing distress. Evidence also suggests that financial crises—despite the various labels assigned to them: exchange rate crisis or banking crisis—have been debt crises in essence. At present, data suggest that the debt-to-GDP ratio of the richest members of the G-20 is expected to reach the 120% mark by 2014. There is also evidence that, out of securities worth US$ 200 trillion in the global economy, no less than three-fourths represent interest-based debt. It is difficult to see how this massive debt volume can be validated by the underlying productive capacity of the global economy. This picture becomes more alarming considering the anemic state of global economic growth. There is great uncertainty with regard to interest rates. Although policy-driven interest rates are near zero, there is no assurance that they will not rise as the risk and inflation premiums become significant. Hence, a more serious financial crisis may be in the offing and a general collapse of asset prices may occur. This paper argues that the survival of the interest-based debt regime is becoming less tenable, as is the process of financialization that has accompanied the growth of global finance over the last four decades. It further argues that Islamic finance, with its core characteristic of risk sharing, may well be a viable alternative to the present interest-based debt financing regime.