Friday, November 21, 2008

The Rising Islamic Finance

Islamic Finance: A Guide for International Business and Investment (November 2008). This new book produced in association with the Institute of Islamic banking and Insurance, London, and released this week, provides valuable information to international investors and finance professionals about opportunities in the Islamic Finance sector, which is steadily growing at an annual rate of 10 to 15% and commands investments of nearly $800bn.

Islamic financing, still in an early developmental stage, departs from conventional financing in three fundamental ways. First, Islamic financing refrains from investing monies in interest-bearing instruments. This is so because the Quran prohibits charging interest on loaned monies. Second, Islamic financing refrains from investing in speculative investment products, such as options, futures, and derivatives. Third, Islamic financing refrains from investing in companies that manufacture or distribute socially harmful products, which may include weapons, liquors, and contrabands. Although these principles carry several exceptions, Islamic financing is markedly distinguishable from conventional financing. "And, at a time, when derivatives-based markets have failed, Islamic financial instruments, based on the firm establishment of underlying assets are going to be ever more popular."

The book introduces Islamic Finance, explains investment products including mortgages, trade finance, investment banking, Islamic insurance, and explores important regulatory issues. AK-IF


Jason Kilborn said...

I read somewhere recently that Islamic finance requires that all loans be collateralized; that is, no unsecured lending (even if without interest). Is this true, or is it just a misinterpretation of what "lending" tends to mean in Islamic finance (that is, an equity/partnership stake in some asset, like a house or a business)?

Liaquat Ali Khan said...

Islamic law allows secured transactions, but all loans are not required to be collateralized. Equity/partnership stake is another way to invest monies. Of course, loans without any interest or profit, called qardi-hasana, are permitted to help the needy. A qardi-hasana is not the same as charity, since the borrower is required to pay back the loaned amount.

Jason Kilborn said...

This is fascinating! So as I understand it, Sadaqa (charity) is required as one of the pillars of Islam, so I would expect a good bit of this type of "financing" in the Islamic world. But quardi-hasana strikes me as an oddity that few "lenders" would embrace. Is lending without interest at all common? I understood that Islamic "lending" really took place in the form of equity stakes and an expected return on that equity. I would be really suprised to learn that no-interest lending was at all common, as opposed to pure Sadaqa.

Liaquat Ali Khan said...

Sadaqa is not obligatory but zakat is. Both are forms of charity. Sadaqa is optional, though strongly recommended. Zakat is mandatory and one of the five pillars of faith. Sadaqa is over and above zakat. Qarad hasana is also a form of charity, except that qarad (loan) must be paid back, but sadaqa is not. In our Topeka Islamic center, we give qarad hasana to the needy, who would not accept sadaqa for a variety of reasons.