Manal Abdi

3/15/2016
Book Review
Islamic Finance Principles and Practice, by Hans Visser

The book I am reviewing is Islamic Finance Principles and Practice, by Hans

Visser. Hans Visser, Professor Emeritus of Money and Banking and International
Economics, Faculty of Economics and Business Management, VU University,
Amsterdam, the Netherlands. This book is a clear text based on Islamic finance, it
provides as a guide to the subject. The strength of this book is the accuracy of facts at
which Islamic financial institutions operate. Despite having no background in fiqh, Visser
is able to introduce Islamic financial principles to a skeptical audience. As pointed out by
Professor Visser that Islamic finance constitutes a platform for Muslims to practice Islam
in the modern world and to distinctly display their identity without isolating themselves
from the rest of the world, Islamic finance has appeals to both Muslims and non-Muslims
in terms of approval and the intellectual discourse.
In addition, Visser emphasizes that Islamic finance is not just about prohitations,
but about how to conduct relations in a business setting in accordance with religious
teachings. Visser stresses that Islamic finance does not need an Islamic legal system as a
pre -requisite for enforcement. Further, new financial instruments have been actively
developed by Western financial institutions. The International Monetary Funds (IMF)
interest in forging cordial relations with the Islamic world also speaks of the growing

acceptance of Islamic finance by the international community.

The book has eight chapters. Chapter 1 outlines the motivations for the
establishment of an Islamic financial system. Islamic finance and economics are assigned
to the domain of ethics and morality and seen as paving the way for the development of a
fairer economic order. Islamic finance is a way to put Islamic principles into practice.
Islamic economics was founded around the time of Sayyid Abdul Maududi ( 1903-79). In
fact the separation of Pakistan from India brought about the growth of an economy based
on Islamic principles. An important factor that motivated the development of Islamic
views was the fact that Islam was seen backwards by the European civilization. Islam
was not taken seriously and viewed as a religion that could not co exist with modern
views and science.
The second chapter explores the different sources of Islamic law, both secondary and
primary. However, Islam derives most of its rulings from the Quran. The Quran is
considered a holy book revealed to prophet Muhammad by God through the angel
Gabriel. The second most used source is called the Sunnah, which are sayings and hadith
carried out or spoken by the prophet Muhammad and narrated/recorded by his
companions. So both the Quran and Sunnah are primary sources. There exist two
secondary sources, law: ijma (consensus) and qiyas (analogy). The primary and
secondary sources together make up usul al-fiqh or roots of law in Sunni Islam.
It also highlights the different ways of interpreting the Sharia law. Sharia law is the
Islamic legal system derived from religious rules of Islam , Quran and Hadith. The
duties for all Muslims consist of the five pillars which are; Shahada, prayer(salat), charity

(zakat), fasting (sawm) and pilgrimage (haj).

Chapter 3 examines Islamic finance against the backdrop of an Islamic economy.
Islamic economics as a branch economics is based upon the principles of the oneness of
God (tawheed) and brotherhood, fair payment for labour and redistribution of private
wealth (zakat). As previously mentioned Zakat is one of the five pillars of Islam. The
Arabic word zakat means cleanliness and purity. It is the idea that by giving charity one is
cleansing the soul. There exists two different zakat's; zakat al fitr and zakat al mal. Zakat
al fitr is required upon everyone and is given after the month of Ramadan/breaking of the
fast. Zakat al mal is a tax and is 2.5 percent per number of assets. Riba is another serious
concept discussed in chapter three. Riba is a concept in Islamic banking that refers to
charged interest. Any form of charged interest or Riba is strictly forbidden and prohibited
in Islam. Riba is prohibited based on numerous versus in the Quran that explicitly forbid
Riba. In addition to Riba, both gambling (maysir) and risks (gahrar) are forbidden as
well. This is because gambling and risk taking both involve deception and delusion.
However, in some cases risk cannot be avoided, thus the ruling is that major/excessive
risks have to be avoided.
The different financial instruments are presented in Chapter 4 with identification of those
widely acknowledged as halal and those which are questionable(Makrouh). Strict
observation of the Sharia would limit the variety of Islamic financial instruments
available.
Chapter 5 dwells on the characteristics of Islamic banking and the incorporation of
Islamic principles by banks. It explains how banks handle problems related to non

matching information. Chapter 6 talks about Special sectors in Islamic finance namely;
insurance, home finance and investment. Exponents of Islamic finance regard
conventional insurance such as riba and gharar. Takaful (cooperative and mutual
insurance). Investments in common stocks, not preferred stocks, are acceptable so long as
they are Sharia-compliant as they involve profit-loss sharing between investors and the
firm. Chapter 7 highlights the problems encountered by fiscal and monetary authorities if
they decide to embrace Islamic principles. The ban on riba is problematic to these
authorities. New 240 Book Review modes of borrowing funds that do not involve
issuance of conventional bonds have to be devised. A Sharia-compliant equivalent of an
interest rate has to be developed as a monetary policy tool.
Finally in Chapter 8, successes and failures of Islamic finance from the
perspectives of conventional economics and Islamic scholars are addressed. More often
than not, the cost and quality of services matter as much as religious grounds in the
choice between an Islamic and a conventional financial institution even in Muslim
nations. From this easily comprehensible book, one is generally enlightened on a number
of interesting points about Islamic finance and they include inter alia all of the following.
Globally, the scale of Islamic finance is still relatively small. Though, worldwide, the
total assets of all Islamic financial institutions is astronomical, most of the largest banks
in the world would each individually have more assets than all the Islamic financial
institutions taken together.
So what does Islamic Finance bring to us? Islamic finance was brought about in
accordance with God's rule. It aims to deliver goods from an Islamic Point of view. In

fact, there are many pros and cons in relation to conventional finance. Amongst the pros
are; danger of insolvency, financial crisis, participation in financial system and
speculation. The cons are; risk for depositors, higher costs, principle agent problems and
their effects on growth, inadequate financing of SMEs. limited supply of consumer credit,
insurance with pitfalls, less scope for diversification and hedging and its effects on
growth.
Islamic finance is still at a emerging stage of development. In fact, conflicts arise
between Islamic principles and practices; as it is not always obvious as to what is
permissible and what is forbidden. Many Islamic principles are not straight forward and
thus there exists a big range for disagreement especially regarding Islamic Finance. Many
of the Islamic finance ideals have yet to gain acceptance amongst Muslims, especially the
young generation. In addition, in order for the Islamic Finance to gain credibility and be
acknowledged it must be established as an international level. . Islamic finance basically
revolves around the bans on interest (riba), gambling or speculation (maysir) and undue
risk-taking (gharar). Riba being a form of excess, involves undue appropriation of income
that violates the principles of tawheed and income distribution. The ban on riba is also
directed at preventing debt slavery. There is practicality and not always rigidity amongst
followers of the Islamic faith. For example, based upon darura (necessity), interest
payments are allowable under certain circumstances. With respect to gharar, futures,
forwards and other derivatives are an anathema.
The ban on maysir is based upon commutative justice as gambling is a zero-sum
game. It is the opinion towards profits and interest that distinguishes Islam from

capitalism and socialism. While capitalism accepts both profit and interest, and socialism
opposes both, Islam only agrees with the profit motive but not interest. As in the
conventional financial system, there is no shortage of serious moral hazard and other
agency problems in Islamic finance. Islamic financial assets such as profit-loss sharing
(PLS) accounts and murabaha credit are not consonant with the rules imposed by
regulatory agencies. For example, the capital adequacy standards of the Basel Committee
of Banking Supervision (BCBS) do not favor the PLS accounts.
The implementation of Islamic finance principles could be taxing, cumbersome
and pricier compared with conventional banking. Small and medium scale enterprise
(SMEs) could be disadvantaged International Journal of Institutions and Economies 241
by Islamic banking as overdraft facilities are not easily accessible to meet their working
capital requirements. By drawing parallels with Christianity, the book highlights that the
negative view against riba is not unique to Islam. Interest payments were also frowned
upon by the Church. Moreover, the Mediaeval Christian Church also had to grapple with
questions on what is acceptable and what is not.Visser further enters the subject of
political economy when he discusses the Muslim brotherhood in Egypt under Sayyid
Qutb to establish an Islamic State
In summary, the book provides a balanced perspective on Islamic finance and its
related products. Though the book is on Islamic finance, there is a good discussion on the
Islamic economy apart from a general introductory background on Islam. Religious terms
are clearly defined. Apart from numerous citations of past studies, it contains handy
website addresses that could facilitate further research into the realm of Islamic banking

and finance. As such, it is an essential reference for scholars, be they Muslims or nonMuslims, interested in the Islamic system as a possible alternative to the conventional
system.
Hans Visser presents us a great study on the foundations of Islamic finance and its many
recent developments. This book discuses many of the practices of Islamic finance and
targets the many tensions that arise between beliefs and the actual practices.
The author describes the forms Islamic finance has taken, analyzes the problems that it
faces, and confronts the practice of Islamic finance with the principles it is based upon.
He presents a composed discussion of the problems facing Islamic forms of finance,
including the question of how to reconcile activities such as liquidity management,
monetary policy and government finance with Islamic principles.
Islamic finance is an extremely pressing issue amongst the middle east and is in
significant occurrence, and this book will provide students with a basic understanding in
many aspects of Islamic Finance. It is also a good read for bankers and staff in various
financial institutions.