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Islamic Financial Industry Essay

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The answer for the first question as explained below:

There are some financial products used in Islamic banking and finance industry. The products or instruments, mainly derived from the Quran or prophetic traditions which related to business or interaction between individuals (muamalah), and some of the products are tailored made based on ulama interpretation (ijtihad) on several financial activities in the industry. A financial instrument is also a product, whose term and conditions define the risk-and-return profile of the instrument. This is also applied for Islamic financial instruments. According to Iqbal and Mirakhor (2011), in Islam, an Islamic financial product is considered lawful and legal by the sharia if the terms of the product are free of any prohibition.

The Islamic financial instruments or products applied in the industry could be categorized based on the aim and function of the instruments. This division based on Iqbal and Mirakhor (2011) opinion. In general, there are four types of the Islamic financial products, namely transactional products, financing products, intermediation products, and social welfare products. …show more content…

According to Dar and Presley (2001), there are seven causes of the absence of PLS. The first reason that PLS contracts are inherently vulnerable to agency problems as entrepreneurs have disincentives to put in the effort and have incentives to report less. The unwillingness to bear risk and the tendency to exclude others from sharing profits resulted in a few implementation of PLS. The second reason is PLS contracts require well-defined property rights to function efficiently. Thirdly, Islamic banks and investment companies have to offer relatively less risky modes of financing as compared to mudaraba or musharaka, due to severe competition from conventional

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