‘Islamic finance’ is defined as finance that embodies the ethos and values of Islamic law.[1] It is much wider than the term ‘interest-free banking or finance’. Interest-free finance refers to a number of financial instruments and operations which try to avoid interest. However, Islamic finance does not only avoid interest-based transactions. It is also required to avoid Gharar (speculative behaviour), which is forbidden under Islamic law.[2] Moreover, parties are required to exchange benefits as profits without exerting unlawful pressure on the other party, and without applying fraudulent methods.[3] Other prohibitions under Islamic finance includes investments in activities related to tobacco, alcohol and drugs, speculation, gambling, pornography and weapons manufacturing. As a result of embodying all these principles, Islamic finance has been hailed as a “socially responsible” way of investment which provides safeguards for vulnerable populations. [4]
The global market capitalization of Islamic finance, covering its three main sectors (banking, capital markets and takaful – Islamic insurance) has been estimated at USD 1.89 trillion in 2016.[5] It is expected that its global assets will surpass USD 3 trillion by 2020.[6]
In 2014, the UK became the first country outside the Muslim world to issue its first Islamic bonds (known as Sukuk) worth of £200 million.[7]
References:
[1] Muhammad Ayub, Understanding Islamic Finance (John Wiley & Sons 2007) 73.
[2] ibid.
[3] Abdur Rahman Doi, Shari’ah the Islamic Law (Ta Ha Publishers 1984) 351.
[4] Magdy Martínez-Solimán, ‘Islamic Finance: An Innovative Avenue For Financing The Sustainable Development Goals’, UNDP Geneva (3 March 2017) <http://www.europe.undp.org/content/geneva/en/home/our-perspective/2017/3/3/Islamic-Finance-An-Innovative-Avenue-For-Financing-The-Sustainable-Development-Goals.html> accessed 31 May 2018.
[5] Islamic Financial Services Stability Report: Stability Report 2017 (IFSB Malaysia 2017) 7.
[6] Martínez-Solimán (n 4).
[7] ‘Government Issues First Islamic Bond’, Gov.UK, (25 June 2014) <https://www.gov.uk/government/news/government-issues-first-islamic-bond> accessed 31 May 2018.