The last few decades have witnessed the rapid growth and development of Islamic finance. Consequently, Islamic finance has emerged as one of the fastest growing industries. It has expanded to all corners of the globe and received wide acceptance by both Muslims and non-Muslims alike. The rapid evolution of Islamic finance has resulted in the dramatic transformation of the industry, from being focused on conventional financial practices, based primarily on interest and excessive risk-taking activities to having promulgated Islamic standards that are free from riba and other unethical financial dealings.
Islamic finance refers to methods of undertaking banking and financial transactions that are in conformity with the precepts of Islamic law, also known as Shari’ah. Based on the Shari’ah, Islam has formulated comprehensive principles and ethics governing how businesses and economies should be run and how banking and finance is to be operated. Thus, Islamic banking and finance differ significantly from conventional finance, not only in terms of the business practices, but above all, the values which guide the whole operations and outlook of Islamic banking and finance. The values which are expressed are not only concerned with the minutiae of its transactions but also in the breadth of its role in realizing the objectives of the Shari’ah (also popularly known as Maqasid as-Shari’ah).
Although some of the mechanics of contemporary banking and finance may be perceived as alien to Islam, the Shari’ah principles outlining Islamic economics and financial transactions are not new at all. These principles were mandated in the Holy Quran and the Hadith of the Prophet (peace be upon him) in the seventh century. These principles define what is true, fair and just, the nature of business and corporate responsibilities and the priorities that should be given to society. Hence, a deep understanding of Shari’ah principles and objectives will drive an intense commitment of every individual and organization to justice, brotherhood and social welfare. This will inevitably lead to a society where every member will cooperate with each other and even compete constructively, as success in life is to obtain the ultimate happiness in the hereafter.
So far, Islamic finance has remained resilient, despite the current challenging global financial environment. Initial reports show that in the aftermath of the financial meltdown observed on Wall Street and the overall global financial crisis, the future looks bright for Islamic finance. According to the figures from the Dow Jones Islamic Market Financial Index, which measures the performance of around 70 Shari’ah-compliant stock markets around the world, the index lost just 2.74% in September 2008 a month where conventional stock markets saw a fifth of their value chopped off, as Wall Street went into meltdown and the credit squeeze claimed a number of high profile victims. Triggered by the subprime mortgage crisis in the US, beginning around July 2007, the meltdown has taken down financial giants one by one – Bear Stearns, Lehman Brothers, Freddie Mac and Fannie Mae, Merrill Lynch, AIG and Washington Mutual. And the list keeps on growing. Some observers relate the ability of Islamic banking of escaping the crisis partly to its heavy reliance on property investments and private equity.
However, the true strengths of Islamic finance are derived from the Islamic law or Shari’ah principles. In fact, these principles are the key pillars of Islamic finance that have contributed towards its overall stability and resilience. Islamic financial institutions all over the world are largely untouched by the current crisis, mainly due to the nature of Shari’ah-compliant finance, which prohibits them from engaging in debt trading activities (bay’ al-dayn) and speculative financial transactions that are undertaken by conventional banks.
Furthermore, the Shari’ah injunctions require that the financial transactions be accompanied by an underlying productive activity, thus giving rise to a close link between financial and productive flows. In other words, the entire Islamic financial system is based on asset financing, since Islamic financial institutions are not allowed to make profit out of lending money; rather invest in the assets required. This is one of the main reasons why Islamic finance and Shari’ah-compliant stock markets are likely to be in a stronger position to weather the effects of the credit squeeze. Even during the Asian financial crisis of 1997, the Islamic financial system performed better than its conventional counterpart.
The message of Islamic finance is therefore very clear. Yes, you can earn money, but money is to be earned in a manner that conforms to the principles of fairness and justice, as deeply inscribed in the Shari’ah. Unlike capitalism, Islamic finance places emphasis on overall social and economic good, and not greed and individualism. Against this backdrop, there is a need to further promote Islamic finance as an acceptable alternative to conventional finance. The present problem of capitalism and the increasingly uncertain global environment calls for a paradigm shift in the way the current financial system operates. While advocating a market style economic order, the new paradigm requires a high content of ethical spirit in financial behavior and this is undoubtedly offered by the Islamic financial system. In the coming years, the greater global participation in the Islamic financial development process would enhance the potential role that Islamic finance would have in contributing towards greater global financial stability in the international financial system.
This book is a collection of my personal articles that brings together previously published papers on the topic of Islamic finance. Most of the articles of this book are taken from my research articles that were written and published in various international academic refereed journals. Altogether, 10 articles are included, covering diverse issues and areas in Islamic banking and finance. It is hoped that the writings would contribute to create greater awareness and comprehension about the philosophy and practice of Islamic finance.
