After more than three decades of modern Islamic finance and banking , the world is seeing double-digit growth rates for Sharia-compliant assets. Islamic finance and Banking is currently being expanded beyond its historical borders of the Gulf region, where it began to emerge domestically in the 1970s as a result of the oil boom. This has driven Islamic financiers to look beyond historical boundaries to explore new territories, both within and outside the Arab world. It has finally emerged in many parts of the world as an alternative financing concept to the conventional orthodoxy of paying interest on borrowings and deposits.
An investing approach based on "Sharia" or Islamic law, Islamic finance has begun to spread all over the world. Modern Islamic financing techniques were developed in Muslim parts of Asia, notably Malaysia, but the boom since the mid-1990s has come from the large oil revenues flowing into the Gulf region. Now, the ideas and concepts of Islamic finance are attracting conventional issuers and investors seeking to tap into new investment opportunities.
What are the key principles of Islamic finance?
To be considered Sharia-compliant, a financial institution or transaction needs to meet the Koran's strict tenets against usury and uncertainty. The most important principle of Islamic finance is "riba," the ban on charging or paying interest. Sharia (set of guidelines as per the Quaran) doesn't consider money as an asset class because it is not tangible; therefore, it may not earn a return. Instead, Islamic law calls for a means of sharing the profits from a transaction or institution among participants - here, the client and financial institution or instrument. Secondly, Islamic law prohibits uncertainty of payout or gambling, but not risk as long as it is shared among all parties. No one participant should shoulder an unequal degree of risk. Thirdly, any Sharia-compliant transaction must be backed by a tangible and identifiable asset. Lastly, Islamic finance forbids investment in or dealings with those industries banned under the Koran: notably alcohol and brewing, tobacco, weapons and armaments, or pork-based products.
How are Islamic banks different from conventional banks?
The biggest difference between Islamic and conventional banks is that Sharia-compliant institutions do not pay interest on deposit accounts. The attraction for clients, however, is that Islamic banks usually also offer profit-sharing investment accounts (PSIAs) that are bound by a "mudaraba" contract. These PSIAs are a major source of funding for Islamic banks.
What are the key principles of Islamic finance?
To be considered Sharia-compliant, a financial institution or transaction needs to meet the Koran's strict tenets against usury and uncertainty. The most important principle of Islamic finance is "riba," the ban on charging or paying interest. Sharia (set of guidelines as per the Quaran) doesn't consider money as an asset class because it is not tangible; therefore, it may not earn a return. Instead, Islamic law calls for a means of sharing the profits from a transaction or institution among participants - here, the client and financial institution or instrument. Secondly, Islamic law prohibits uncertainty of payout or gambling, but not risk as long as it is shared among all parties. No one participant should shoulder an unequal degree of risk. Thirdly, any Sharia-compliant transaction must be backed by a tangible and identifiable asset. Lastly, Islamic finance forbids investment in or dealings with those industries banned under the Koran: notably alcohol and brewing, tobacco, weapons and armaments, or pork-based products.
How are Islamic banks different from conventional banks?
The biggest difference between Islamic and conventional banks is that Sharia-compliant institutions do not pay interest on deposit accounts. The attraction for clients, however, is that Islamic banks usually also offer profit-sharing investment accounts (PSIAs) that are bound by a "mudaraba" contract. These PSIAs are a major source of funding for Islamic banks.
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