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Sharia - or its financial section known as Fiqh al-Muamalat (Islamic rules on transactions) - allows financial intermediaries to engage in any type of economic activity as long as they don't charge interest (Riba) & shun businesses implicated in forbidden (Haraam) undertakings.
islamic bank of britain
Islamic banking - & to a bigger extent, Islamic finance - is deeply rooted in Islamic economics & quintessentially ruled by Sharia, a legislative corpus that encapsulates the religious precepts of Islam.
A derivative device is a product that derives its value from other financial instruments (known as the underlying), events or conditions. It is mostly utilized for hedging risk or speculating for profit. The recent turmoil in global capital markets & the following socioeconomic pandemonium owe much of their existence to a kind of derivative called Credit Default Swap (CDS).
Sharia strongly furthers risk sharing among investors & economic transactions collateralized by tangible assets such as land or machinery but outlaw derivative financial instruments.
Notwithstanding, a plethora of observers now contend that constraints within Islamic finance have successfully shielded Sharia-compliant institutions from the recent economic meltdown while keeping their coffers money awash.
Viewpoints alien to the Muslim world may find Sharia restrictions deleterious for sustained economic development because what Muslim jurisprudence defines as vice (betting, adult filmography, alcohol, etc.) not only plays a vital role in lots of countries' GDPs but is also an arguable social & temporal idea.
islamic bank of britain
UK-based International Financial Services London estimates that Sharia-abiding assets have grown by 35% to $951 billion between 2007 & 2008, although the industry "paused for breath" in 2009 amid the continuing economic lethargy.
Several factors support a feasible Islamic finance boom, including skyrocketing deposits from denizens of oil-rich populated countries, numerous infrastructure projects & the emergence of a large middle class.
Most of those banks & financial intermediaries are owned by native shareholders but growing swaths of the Islamic banking sphere are being populated by specialized sections of "ordinary" full-service Western banks.
According to Mohammad Abu Hammour, Jordan's minister of finance, the Islamic banking sector witnesses an annual growth rate of 10-15 % & there's currently over 300 Islamic banks in over 50 countries, with large concentrations noted in Iran, Saudi Arabia & Malaysia.
Islamic banking is highly profitable & the heightened foreign interest conspicuously corroborates the notion that the industry is bound to expand one time emerging nations within the Muslim world are willing & able to make use of their large money reserves to structurally create core sectors of their economies.
HSBC Amanah, the Islamic finance arm of HSBC, is an illustration of that trend.
Nevertheless, lots of pending issues are still crippling the Islamic finance sector & prevent it from exceeding the 1% share it currently holds in global banking business.
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The first relates to the necessity for Islamic banks to devise risk-hedging strategies - those engaging in cross-currency transactions - & instruments that are compliant with regulatory precepts. Specialists within the industry must be creative because derivatives, a major hedging device, are prohibited by Sharia. Progress in that area is still timid.
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