- Islamic Finance is on an upward trajectory as the industry is projected to surpass $3.7 trillion by 2024.
- In 2019, the number of commercial Islamic banks worldwide amounted to 428 banks, with the total assets of global Islamic banking amounting to about 1.99 trillion U.S. dollars, sharing about six percent of the total global banking assets. – Statista.
“Islamic finance is about community banking, it is serving the community, not the markets.” Iqbal Khan (CEO of Fajr Capital)
There are approximately 520 banks and 1,700 mutual funds around the world that comply with Islamic principles. Between 2012 and 2019, Islamic financial assets grew from $1.7 trillion to $2.8 trillion and are projected to grow to nearly $3.7 trillion by 2024, according to a 2020 report by the Islamic Corporation for the Development of Private Sector (ICD) and Refinitiv.
Islamic assets did manage to expand over 10% in 2020, despite the COVID-19 pandemic. With the exponential growth of the industry, economics enthusiasts and individuals all over the world seek extensive understanding of the topic, which can sometimes be confusing.
Introduction to Islamic Finance
The core of Islamic finance lies in the prohibition of ‘riba’ (paying or receiving interest), which is considered exploitative and against the principles of Islam. Its principles are rooted in fairness and ethical conduct. According to Islamic economists Choudhury and Malik, the elimination of interest followed a “gradual process” in early Islam, “culminating” with a “fully-fledged Islamic economic system” under Caliph Umar (634–644 CE). Activists and scholars such as Anwar Qureshi, Naeem Siddiqui, Abul A’la Maududi, and Muhammad Hamidullah, in the late 1940 and early 1950s believed commercial banks were a “necessary evil,” and proposed a banking system based on the concept of Mudarabah, where shared profit on investment would replace interest.
Riba and The Prohibition of Interest
The Quran explicitly prohibits riba in several verses. For example, Surah Al-Baqarah (2:275), states: “Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, ‘Trade is [just] like interest.’ But Allah has permitted trade and has forbidden interest.” Instead of charging interest, Islamic financial institutions provide financing through profit-and-loss sharing arrangements, where the profits and losses are shared between the lender and the borrower. This is done through various financial concepts, such as Mudarabah, Musharakah, and Wakalah.
- Mudarabah is a partnership contract between an investor (Rab al-Mal) and an entrepreneur (Mudarib), where the investor provides capital and the entrepreneur manages the business as well as labor.
- Musharakah is a partnership contract where two or more parties contribute capital to a joint venture and shares the profits and losses based on their agreed-upon ratios.
- Wakalah is a contract where an investor appoints a manager to invest their funds on their behalf.
Ethical investment
Islamic finance encourages socially responsible investments, avoiding industries that are considered harmful or prohibited in Islam, such as gambling, alcohol, and pork-selling industries. The principles of Islamic finance promote economic stability, ethical decision-making, and the well-being of society.
By adhering to ethical principles and prohibiting riba, it offers an alternative financial system that fosters economic justice, stability, and social welfare. As the industry continues to grow and innovate, Islamic finance has the potential to contribute significantly to a more inclusive and responsible global economy.
Over the years, the influence of Islamic finance has extended across European and Middle Eastern regions. However, despite its widespread growth, the understanding and awareness of Islamic finance in Southeast Asia remain relatively limited for now.
For those who wish to learn more about it, Iqbal Khan’s lecture from LSE might be helpful.
now-days I see interest loan everywhere and for everything. Big educational company like BYJU’S force poor & uneducated people to take interest loan so their child can study. Heck they are even offering loans to my father. But at the end Islam will win As it is written in the Al-Quran.