Islamic Banking and Finance

Islamic Banking and Finance

New Perspectives on Profit Sharing and Risk

Edited by Munawar Iqbal and David T. Llewellyn

Islamic Banking and Finance discusses Islamic financial theory and practice, and focuses on the opportunities offered by Islamic finance as an alternative method of financial intermediation. Key features of profit-sharing (as opposed to debt-based) contracts are highlighted, and the ways in which they can facilitate improved efficiency and stability of a financial system are explored.

Chapter 1: Introduction

Munawar Iqbal and David T. Llewellyn

Subjects: economics and finance, financial economics and regulation, islamic economics and finance, money and banking, social policy and sociology, migration


Munawar Iqbal and David T. Llewellyn The Islamic financial system has a centuries-old history. As noted by Chapra and Khan (2000), ‘From the very early stage in Islamic history, Muslims were able to establish a financial system without interest for mobilising resources to finance productive activities and consumer needs. The system worked quite effectively during the heyday of Islamic civilization and for centuries thereafter.’ However, as the centre of economic gravity shifted over the centuries to the Western world, Western financial institutions (including banks) became dominant and the Islamic tradition remained dormant. In recent years, however, there has been a significant revival of interest in developing a modern version of the historic Islamic financial system in the wake of Muslims’ desire to stay clear of interest, which is prohibited according to the Islamic Shariºah. Some countries (notably Iran, Pakistan and Sudan) are attempting complete elimination of the role of interest from their financial systems. Other countries have allowed the establishment of Islamic banks alongside what will be termed ‘conventional’ banks. There are now more than 200 Islamic financial institutions around the globe working under different economic and social milieux. Even in secular countries where legal systems do not allow establishment of Islamic banks, Muslim communities have found alternative provisions within the law to establish substitute institutions to fulfil the financial needs of Muslims in accordance with their faith. Bagsiraj (Chapter 9, this volume) offers a valuable survey of the experience of Islamic financial institutions in the secular system of...