Islamic Banking

Islamic Banking

Mervyn K. Lewis and Latifa M. Algaoud

The prohibition of interest is the feature of Islamic banking which most distinctly sets it apart from conventional banking. To Western eyes, this seems a strange restriction, but Christian countries themselves maintained such a ban for 1,400 years. Islamic Banking asks why Islam has been able to maintain its stand. The book explores the intricacies of Islamic law and the religious and ethical principles underpinning Islamic banking. It then considers the analytical basis of Islamic banking and financing in the light of modern theories of financial intermediation, and identifies the conceptual issues to be overcome.  

Chapter 9: Directions in Islamic Finance

Mervyn K. Lewis and Latifa M. Algaoud

Subjects: economics and finance, financial economics and regulation, islamic economics and finance, money and banking


TAKAFUL (ISLAMIC INSURANCE) In 1999, there were 34 Takaful companies providing Islamic insurance. Table 9.1 shows the countries in which Takaful companies operate, and the organisations engaged in Takaful business. Many of these organisations were established wholly or partly, by Islamic banks, and the table indicates the associated bank, along with the date of formation (where known). Some of the factors underlying the bancassurance trend in Western markets are relevant for this diversification, but in addition there are complementarities because Islamic insurance operates under a set of rules and shari’a supervision not dissimilar to that for Islamic banking. By establishing their own Takaful companies to serve the Muslim community, the Islamic banks, in effect, lend credibility to their banking operations. Problems with Conventional Insurance Unlike its banking counterpart, Islamic insurance has been largely neglected in the literature,1 for reasons which seem difficult to explain other than the specialised nature of insurance as a subject. From the viewpoint of Islamic law, there are three main problems with conventional, especially life, insurance.2 First, it violates the prohibition of gharar (uncertainty) since the benefits to be paid depend on the outcome of future events that are not known at the time of signing the contract. This prohibition in particular nullifies a conventional whole-of-life policy contract because this type of policy is based on a time frame, the lifetime of the insured, which is not known and cannot be known until the event (death) itself occurs. Second, insurance is regarded as maysir (gambling)...

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