The Foundations of Islamic Banking

The Foundations of Islamic Banking

Theory, Practice and Education

Edited by Mohamed Ariff and Munawar Iqbal

After barely half a century of experience, Islamic banking has become established as a niche industry across the world, offering new and sophisticated financial products designed to be compliant with Islamic legal principles and common law. This comprehensive book explores the theory, principles and practices underpinning this rapidly expanding sector of banking.

Preface

Edited by Mohamed Ariff and Munawar Iqbal

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

Extract

In just under half a century as at 2010, an idea that started as interest-free banking has now transformed itself into modern niche banking called Islamic banking with about 500 organisations describing themselves as practicing this new form of pricing monetary transactions using profitsharing or fee-based contracts instead of the conventional interest-based contracts. The total assets of Islamic banking is estimated to be about US$3–4 trillion as at 2010 – just about 3 per cent of conventional banking assets – held in about 370 banks spread across 76 countries. These banks have expanded the single banking product offered 50 years ago, the twotier lending certificate called the two-tier mudaraba, i.e. the depositor’s money, which a bank agrees to off-lend as production loans to firms for a profit share to depositors. Nowadays these new niche banks manage a large number of so-called Islamic banking products, which are structured on the principles of (i) avoiding interest, (ii) sharing risk, (iii) securing profit-sharing or fee-based contracts that meet the demands of customers, who have eschewed interest-based financial transactions in preference of profit-shared transactions. This form of finance also avoids funding productions of: alcohol and pork meat for human consumption; gambling; prostitution. An additional 150 registered entities manage Islamic mutual funds, where the client’s money is invested in shares of companies that are carefully vetted to ensure that these companies do not engage in prohibited economic activities (production of pork; gambling; prostitution; money lending on interest). Yet more companies are offering risk transfer (takaful...