What is Islamic Finance?
Islamic finance is a financial system based on the core principles of Islamic Law (Shariah) which intend to promote justice and equity in all proceedings. Modern financial systems incorporate several aspects that are deemed impermissible in Islam, this includes interest, ambiguity and speculation.
Why is the modern financial system impermissible?
Many financial transactions and processes rely on usury, which is a form of interest. Usury refers to all forms of interest that provide a predetermined, fixed rate of return to the lender and is viewed as inherently destructive for all as it encourages exploitation for the following reasons: there is an increased chance of acquiring debt with the use of interest on loans, which is likely to disproportionately affect those living on low incomes. Some examples of usury in our everyday lives include mortgages, student loans and credit cards but what is perhaps more surprising is how other religions also view usury as harmful. These religions include Hinduism, Christanity and Buddhism and it is estimated that approximately 73% of the world’s population subscribe to a religion that recognises the detrimental effects of usury!
Another feature is ambiguity – while every effort is made to ensure all customers understand financial transactions, there continue to be gaps in their understanding. This gap is often capitalised on, resulting in clients making many decisions that ultimately impair their finances further. However, Sharia principles encourage partnership between suppliers and customers that reduces economic inequality and exploitation.
The growth of Islamic Finance
Islamic finance has developed to become a leading sector within the finance world with Shariah-compliant assets estimated to be in excess of a staggering $6.7 trillion by the end of 2020.
Outside of the Muslim world, the UK has taken steps to create a favourable regulatory environment for Islamic finance and has suceeded in becoming the largest market outside the Muslim world.
However, a common misconception is that Islamic finance is just for muslims when in reality it has become a go-to option as it embodies several ethical elements which provide peace of mind for all customers. This interest was further sparked by the 2008 financial crash as people became more disillusioned and wary of banks and Islamic finance became a more ethical, transparent means of investment. For example, smaller businesses in developing countries may be ineligible for regular finance support from banks however the Islamic finance model is centred on partnership. This means that the banks take up more of this burden resulting in finance becoming accessible and a lifeline for underrepresented groups.
Around the globe, there is an estimated $1.6 billion Islamic finance providers and is rapidly expanding resulting in challenges. For example, Islamic Finance continues to be facing a skill shortage and is poorly understood resulting in regulatory confusion.
What can we expect from this sector?
The rapid growth of Islamic Finance has been undermined by a skills shortage as many people lack an understanding of Sharia principles and tend to have the preconception that you must be muslim to work in this area of finance.
Digital infrastructure and integration of core principles are likely to become more sophisticated resulting in the additional sharia compliant providers. For example, it is likely that previously side-lined financial arenas such as wealth management, investment and trade will become cornerstones within Islamic Finance.
According to IFN Islamic Finance, the United Kingdom has the most Islamic fintechs with 27 companies and therefore it is likely that Islamic finance services will become more accessible and expand. Over 20 banks in the UK offer Islamic services, however only five of these banks are fully Sharia-compliant, which suggests there continues to be a gap in providing authentic Islamic Finance service.