I-MAG Magazine

  • Increase font size
  • Default font size
  • Decrease font size

Islaamic Financing: An Economic Boom

E-mail Print PDF
User Rating: / 4

The essence of every industry and company lies within finance. Due to the great influence from globalisation, Islaamic finance has grown exponentially in recent times. This has caused a great influx of interest in the subject. It is a vital issue since it highlights an aspect that is a part of every individual’s daily livelihood; money.

There has been controversy in regards to whether contemporary Islaamic financeis truly abiding by Sharee‘ah or is it just another business tactic. Attention to this has been manifested due to the similarities in practicality between conventional financing and some contemporary Islaamic financing institutions.

There may appear to be a finelinedrawn to distinguish the two. Both methodologies will certainly consist of many similar characteristics due to their nature as financial instruments. However, there are fundamental differences that set them apart. These basic attributes should be distinguished in order to make clear what can be categorised as Islaamic. This topic can be very intense therefore we will only brush upon the basic principal’s that led to the development of Islaamic finance.

There are two major prohibited facets; Riba and ’garar. Riba basically can be defined as interest. This is any thing that is collected or retrieved in excess of original amount exchanged. There are assortments of verses from the’Qura~n and’hadeeths that reiterate this concept such as:

Muslim narrated on the authority of Aboo Sa‘eed Al’kudry]:
“Bilaal visited the Messenger of Allaah (P.B.U.H.) with some high quality dates, and the Prophet (P.B.U.H.) inquired about their source. Bilaal explained that he traded two volumes of lower quality dates for one volume of higher quality. The Messenger of Allaah (P.B.U.H.) said: “this is precisely the forbidden Riba! Do not do this. Instead, sell the first type of dates, and use the proceeds to buy the other.”

Unlike Riba that is clearly prohibited, ’garar is permissible to a certain extent. ’Garar refers to selling risky or ambiguous products. There are many rulings in Islaam in regards to its extent of its allowance. During the time of the Prophet (P.B.U.H.), it was mentioned in the following ’hadeeth by A’hmad and Ibn Maajah narrated on the authority of Aboo Sa‘eed Al’kudry:
“The Prophet (P.B.U.H.) has forbidden the purchase of the unborn animal in its mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.”

From a financial perspective this can be applied to investments that are unreasonably risky such as forward, future, options, and other derivative securities. Insurance companies also have many characteristics that are prohibited by garar due to their equivocal nature. These rulings were put into place to protect the needs of an individual and the society as a whole.

Now that we covered the underlying significance on why [Islaamic bankingis necessary, we can take a look at its evolution from one bank to becoming an international trend flared by globalisation. During the last three centuries finances and economies were greatly influencedand occupied by the West enforcing conventional westernised ideologies of financialmarkets.

What caused the spread of Islaamic finance? Firstly, the outbreak of free om for development caused Islaamic countries to have the opportunities to establish their own system that coincides with their values and beliefs. Though, nationalism played a key role in the accelerated economic movement, religion was a significant force that made many turn to Islaam for guidance.

The theory of Islaamic economic system was outlined throughout the ’Qura~n and the Sunnah since the establishment of Islaam. However, speculating on what initiated the recent international disposition, it can be credited to the first official theological movement that appeared in 1940 through 1960. This was intended to actually develop a whole economic system rather than just gearing toward Islaamic finance.

In launching the economical process, there were main ideas that were emphasised on such as Islaam’s guidelines on modern consumption, assisting the unfortunate, avoiding waste, promoting business enterprises, justice, fairness and many more importance issues.

Capitalism and socialism was denounced. Sharee‘ah scholars and Muslim economists with the help of businessmen worked together in developing blueprints of the ideal Islaamic financial institutions. The first actual modern application was in Egypt by A’hmad Annajjaar. The seventies was the decade that Islaamic financing became open to the world and many institutions opened such as the Dubai Islaamic Bank (l975), the Faisal Islaamic Bank of Sudan (l977), the Faisal Islaamic Bank of Egypt (l977), and the Bahrain Islamic Bank (l979). The trend even spread over the Asia-Pacificwith Philippine Amanah Bank and Bank Islam Malaysia Berhad.

The first one that was established in west was in 1978, the Islaamic Finance House of Luxemburg. This of course was a breakthrough creating endless financial opportunities for Muslims around the world. The decade of the 1980’s was the period where the subject received a lot of academic attention. Islaamic economies began to emerge as a part of business educational programs. With the breakthrough of technology, the world began learning about the subject and soon developed an outburst of knowledge sharing through internet, conventions, media, and of course the spread of the industry.

These launched academic outlets caused a wealth of knowledge to disseminate on a world wide scale. As for the 1990s it was a period of further developments. Sharee‘ah compliant mutual funds were created developing a new outlook for investment in the Muslim world. These funds were designed only to accept companies that abide by Islaamic guidelines. The next vital step that was taken was the creation of the Dow Jones Islaamic Index established by various well known scholars.

Of course, with these advancements, it created a need for technology catered to Islaamic processes for these financial assets. Hence, this is one of the factors causing Islaamic finance to have a strong influence with globalisation. As for private sector, Islaamic] banking became a booming industry. By 21st century there were 200 Islaamic financial institutions with assets over $160 billion, deposits of above $100 billion, and more than $8 billion in capital.

The Gulf region and the Middle East consisted of 40% and the other 40% was in southern Asia. As for the remainder 20% it lied in Europe, the Americas, and Africa. Most of these banks are considered relatively small in assets when compared with conventional financial institutions.

What is the actual benefitreapedfromthese developments? Well firstly,ittargets conserving an economical atmosphere that revolves around justice and fairness for individuals and the society as a whole. It helps maintain stability by acquiescing an undertaker’s loan repayment to correlate with the actual revenue earned, which allows lenders to earn profityetatthe same time permit borrowers to be profitable.

It is more efficient in a sense it evaluates profitability of potential borrower projects rather than merely looking at credit ratings. In conclusion, Islaamic finance will helpnullify inflation and depend less on speculation causing a healthy financial market and overall economy.

Dania Al-deen -
Dania Zafar Futhl Al-deen is an honours undergraduate college student in international business and finance with a minorin government world affairs in the USA.Read More >>

Articles by this Author:

The History and Islaamic Purification of 'Haj
’Haj (pilgrimage) being a significant entity of the foundation of...
Last Updated on Sunday, 27 July 2008 10:57  

Read I-MAG

The image “http://www.i-mag.org/images/stories/pdf_icon.png” cannot be displayed, because it contains errors.Download PDFs

The image “http://www.i-mag.org/images/stories/issuu_icon.jpg” cannot be displayed, because it contains errors.Flash at ISSUU

The image “http://www.i-mag.org/images/stories/scibd_icon.jpg” cannot be displayed, because it contains errors.Flash at Scribd

 The image “http://www.i-mag.org/images/stories/text_con.gif” cannot be displayed, because it contains errors.Text (HTML)

Read by Section

Artistic Sections:


Intellectual Sections:


I-MAG Extra


No authors available