However, these entities are governed both by Islamic laws and by the finance industry rules and regulations that apply to their conventional counterparts. Contrary to popular belief, Islamic finance or banking is not Just for Muslims. It aims to lay the foundations of an ethical and fair financial system, which consequently affects the socio-economic conditions of the market it is implemented in. Islamic financing, hence, can aptly service everyone irrespective of religious beliefs, wealth, ethnicity, caste or creed.
The most distinguishing feature of the Islamic economic system is the prohibition of interest. Usury, Interest and Rib are synonymous terms but they have different technical meanings. Usury refers to the consumption loans given on higher rates and thus causing exploitation of the borrower. Interest refers to the cost of using money in finance and economic theory. Islamic Banking and Finance in modern times has grown out of the Muslims’ desire to find out the ways and means of fulfilling their financial requirements in view of prohibition of interest.
Islamic financing is asset-backed and believes that only assets with an intrinsic value may be sold for a profit, instead of exchanging money, which is considered to have no intrinsic value, for interest. Each unit of money has the same value as the other of the name denomination, which is simply why there cannot be a profit on its exchange. Hence, Islamic finance lays its foundation on real, non-liquid assets; the exchange and sales of which result in fair’ profits. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called rib.
Generally, Islamic law also prohibits trading in financial risk (which is seen as a form of gambling). The modern Islamic finance industry is young; its timeline began only a few decades ago. But Islamic finance is evolving rapidly and continues to expand to serve a growing The core concepts of Islamic finance date back to the birth of Islam in the 6th century. Muslims practiced a version of Islamic finance for many centuries before the Islamic empire declined and European nations colonized Muslim nations.
The modern Islamic finance industry emerged only in the sass, in large part because of efforts by early 20th-century Muslim economists who envisioned alternatives to conventional Western economics (whose interest-based transactions violate Islamic law). Khan (1999), attempts to give an evolution of Islamic Finance using timeline examination. He posits that there are 3 distinct stages in the evolution of Islamic Finance. The first was from about 1970 to 1980.
At this point, the concept of Islamic finance was being translated into reality by a group of pioneering Islamic financial institutions, such as Kuwait Finance House, the Islamic Development Bank, Dallas Alberta, and Dear AY-Mall AY-Islam’. Mostly short-term, trade-related, low value- added, and documentation-related businesses were introduced. Serious industry and macroeconomic impediments prevented the further growth and evolution of Islamic finance at this time. The period of 1980 to 2000 witnessed Islamic finance evolving, gaining momentum as a growth industry, and establishing itself as a niche product.
We saw the tenures of deals stretching-?three-year, five-year, and seven- year deals being done-?a lot of covenant-based project finance, and Islamic trenches in big-ticket deals (e. G. , KEF structured a large deal with Citron on a large Kuwaiti project). A number of new products also came out, there was tremendous improvement in documentation capabilities, and we saw more assistant’, bat’ salaam, and ajar transactions. In this period, equity opened up as an asset class to Muslims, vying tremendous opportunities for Islamic financial investors. This period also witnessed the gradual liberalizing of the economies of the OIC world.
In the period of 2000 and beyond, we can look to a focus on infrastructure and venture capital, giving Islamic finance increasing mainstream relevance in the OIC world and a niche- product status in the rest of the world. From stage to stage, this is an industry that is in transition and is evolving along with the markets in which it operates. ‘DB, at 2000 World Bank meetings, announced the creation of the first Islamic countries’ infrastructure fund, a IIS$I . 5 billion fund targeted specifically at Islamic countries. This fund will hopefully increase the embedded capital of Muslim countries.
In the coming period, Islamic Finance will witness asset serialization, the creation of secondary markets, the manipulation of long-term funds, the creation of new and hybrid instruments, and the achievement of mainstream relevance for this growth industry. Islamic Banking was established to cater for the needs of Muslim customers, as Muslims are obliged to obey the Shari’s principles (Islamic Jurisprudence) in all aspects of life. Islamic banks operate worldwide in over 75 countries mostly in Middle East and Southeast Asia, with Bahrain and Malaysia as the biggest hubs.
