The Islamic financial sector is a special branch within the global financial industry which caters to Muslims all around the world. The total value of all Islamic financial assets worldwide was 4.5 trillion U.S. dollars. The fundamental principles are based upon Islamic law or the Shariah. The Islamic law divides the means by which corporations and lending institutions raise capital as permissible (halal) or prohibited (haram). It considers itself as a socially and ethically responsible investment form which avoids profiting of riba which is translated by the majority of Islamic scholars as interest, but some consider it more as usury. Islamic financial institutions avoid gharar which means investing in high risk or speculative ventures. In general, risk is to be shared in equal parts between all involved parties of a business venture. Furthermore, the investment in sectors contrary to Islamic morals is prohibited. This could relate to businesses involving alcohol, gambling (casinos) or pork.
Idea behind Islamic finance
The general understanding behind the Islamic financial sector comes down to the main idea, that money is seen as a measuring tool for value and not as an asset itself. Therefore, money should not be received as income just from money itself (as is the case with interest).
Islamic financial products are traded worldwide, even outside Muslim majority countries. The main trading hubs for Islamic financial products are located within Europe, London, and Switzerland. However, the Gulf Cooperation Council is the leading Islamic financial hub worldwide by value.
There are four main types of Islamic financial products, with Islamic banking leading in terms of total asset value. More than 1.3 trillion U.S. dollars of the Islamic banking assets are generated in the Gulf Cooperation Council region, followed by over 478 billion U.S. dollars’ worth of assets in the rest of the Middle East and South Asia. The institution of Islamic banks was established around the 1960s. The main components of Islamic banks are that they use Emirates Interbank Offered Rate (EIBOR); share risks and avoid high risks in investments and share profits and loss of enterprises they underwrite. They tend to offer musharakah – a form of joint ventures; lease-to-own financing; and Murabaha, in which the bank acts as an intermediate buyer and sells on profit through installments. Further Islamic banking products are Ijara (leasing) and Islamic forward products.
Islamic financial products
Islamic bonds or sukuk are a well-established financial product which is also traded in the London Stock Exchange. They are a financial certificate/bond which allows the issuer to sell those sukuks to investors in order to purchase assets, of which investors have a partial ownership. The sukuk issuer is contractually bound to buy back those sukuks at a future date as per value. The main difference between a sukuk and a conventional bond is the abstention from accumulating interest. The majority of worldwide sukuk bonds are issued in Asia.
The total value of takafuls worldwide are around 90 billion U.S. dollars. They are insurances which are in accordance with the Sharia. Members contribute money into a pool system to guarantee each other against loss or damage. Those insurances were introduced as an alternative to conventional insurances as they avoid interest, high risk investments and high uncertainties.
According to projects, the value of the entire Islamic finance sector will continue to increase over the next couple of years.
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