Islamic finance: principles, performance and prospects.

Abstract

The global market for Islamic financial services has shown strong growth in recent years and has demonstrated remarkable resilience following the global financial crisis in 2007. Although Islamic financial assets currently make up only a fraction of the world’s financial assets at 1 percent, many Islamic banks have experienced double-digit growth rates in recent years, surpassing their conventional peers (ATKearney, 2012). Indeed, global Islamic financial assets have tripled since the start of the economic slowdown in 2007 (TheCityUK, 2015) and are forecast to reach $4 trillion by 2020 (Karim, 2012). Islamic finance is a distinctive financial arrangement that follows Shariah (Islamic laws) as the core value system. Through the use of financial instruments that adhere to Islamic principles and comply with Shariah rules, Islamic financial institutions seek to promote inclusive growth, equitable risk-sharing, social justice and a fair distribution of wealth. As such, Islamic finance and Islamic financial institutions can be regarded as an ethical alternative to conventional banking and financial systems. Several principles differentiate Shariah compliant finance from conventional finance. Essentially, Shariah prohibits riba (usury) which is generally understood as interest or excessive interest; gharar (risk or uncertainty) which is generally understood as excessive risk due to uncertainty; maisir (gambling); and the financing of activities deemed incompatible with Shariah (such as drugs, alcohol, pornography and pork) (Wilson and Abdul Rahman, 2015). At the same time, Shariah promotes the principle of profit and loss sharing and the principle that all transactions must be backed by a real economic contract that involves a tangible asset.