Islamic finance market

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Islamic finance is also called Shari'ah-compliant finance, because its financial and commercial affairs conform to Shari'ah (Islamic law). These financial services abide by two major sources of inspiration: the Qur'an (the sacred book of Islam), and the Sunna (practices and traditions from the time of the Prophet Muhammad). Islamic finance is practiced by Muslims in the Islamic world, of course, but it is also expanding as an international financing practice in the global market.


Why should I be aware of this?

Islamic finance market is developing at a remarkable pace. Worldwide the number of Islamic financial institutions worldwide has risen from one in 1975 to over 300 today in more than 75 countries. Though concentrated in the Middle East and Southeast Asia (with Bahrain and Malaysia the biggest hubs), they are also appearing in Europe and the United States.

During the last two decades Islamic banking has emerged as a viable alternative to traditional commercial banking and there are more than 100 financial institutions working across the wotld. Estimated at US $ 100 billion, Islamic banking is poised to frow further.

One of the reasons for the recent growth in Islamic finance market is the strong demand from a large number of immigrant and non-immigrant Muslims for Sharia-compliant financial services and transactions. A growing oil wealth, with demand for suitable investments soaring in the Gulf region has contributed considerably to the growth.

All about Islamic finance market

Though it has grown substantially over the last three decades, Islamic banking remains quite limited in most countries and is very small compared with the global financial system. Islamic financial market has not been affected by the recent market meltdown. Nevertheless, building confidence in a new industry is fundamental for the development of Islamic finance.

Islamic financial market and its products are aimed at investors who want to comply with the Islamic laws (Sharia) that govern a Muslim's daily life.

The most distinguishing features of Islamic finance are:

  • riba (interest) is prohibited
  • profits and losses are shared by the capital provider and the entrepreneur; * transactions are backed up by material, not intangible assets
  • financing for businesses violating religious precepts (for example, alcohol or gambling) is prohibited.

A broad range of many financial services, such as fund mobilization, asset allocation, payment and exchange settlement services and risk transformation and mitigation, are offered by Islamic financial institutions, using financial instruments compliant with Sharia principles.

Intrerest prohibited

Though payment and receipt of interest are prohibited, all parties in a financial transaction can share the risk and profit or loss of the venture. Depositors earn dividends when the bank makes a profit or lose part of their savings if the bank posts a loss. Returns are linked to productivity and the quality of the project, thereby ensuring a more equitable distribution of wealth.

Overall, Islamic banks offer their depositors four classes of accounts: current, savings, investment, and special purpose investment accounts.

Debt instruments

Debt instruments include Murabaha, a purchase and resale contract in which a tangible asset is purchased by a bank at the request of its customer from a supplier, with the resale price determined based on cost plus profit markup; Salam, a purchase contract with deferred delivery of goods (opposite to Murabaha), which is mostly used in agricultural finance; Istisna, a predelivery financing and leasing instrument used to finance long-term projects; and Qard al-Hasan (benevolent loan), an interest-free loan contract that is usually collateralized.

Islamic bonds

Sukuk (or Islamic bonds) are the fastest-growing segment of the market, which has seen phenomenal growth in the past six years. By 2007, global volumes had reached USD97.3 billion, with the majority coming from Malaysia and the Arabian Gulf. The largest proportion of sukuk was issued in the financial services sector, accounting for 31% of total volume, followed by real estate with 25% and power and utilities with 12%.

Consumer segmentation

Islamic banking customer segmentations are done on the interpretation of what constitutes acceptable levels of Shariah compliance. There are two types of customers. One category is the more traditional and conservative customers, and the other seeks higher levels of Islamic assurance. Certain customer segments are willing to pay a premium for the most compliant Shariah products, whereas others will be more attracted to products that are only part Shariah compliant but offer a more competitive rate.

Sharing of profits

Islamic finance prohibits gambling as there are serious doubts among the Muslim masses about the permissibility of the activities on the stock market. They feel that the bulk of the activities on the stock markets do not serve any social or economic function but are merely speculative activities, resembling gambling.

Islamic finance believes in the efficient use of financial resources in the society in the form of surplus and deficit units. In a society there may be surplus and deficit households in terms of possession of financial resources. The Isamic contract of Mudaraba offers avenues of such cooperation, in which the owner of resources (Rabb al Mal) is the deficit unit. Under the contract the resources owned by the surplus unit are given to the deficit unit, as the profits generated from the financial activity are shared equally among contracting partners.

90 degrees

It’s time traditional banks seek to serve customers of Islamic banks as there are sufficient Muslim investors and borrowers in both Islamic and non-Islamic countries. Muslim populations in non-Muslim countries form a potentially profitable slice of a still relatively untapped market. This is corroborated by the growth of Islamic finance in the US, which has a population of over 7 million Muslims.

There are more than 14.74 million Muslims in Europe, of which 1.8 million are resident in the UK plus an additional 72 million in Turkey. There are 360,000 Muslim households in the UK. [1]


Conservative religious scholars reject derivatives because hedging practices are deemed speculative bets on currency and stock movements which violate the sharia ban on gambling. This lack of liquidity and risk management products in Islamic financial system is being seen as a disadvantage compared to conventional banks.

As more markets embrace Islamic finance, and the need for risk protection increases, there are growing attempts to find sharia hedging tools. The problem has magnified as derivatives have evolved from relatively simple contracts such as foreign exchange forwards to complex tools like credit default swaps, over-the counter-contracts between two parties that bet on whether a company will default on its bonds within a certain time. [2]


  • Islamic Finance Gears Up
  • What is Islamic finance?
  • Islamic Banking – a golden opportunity for European banks
  • Derivatives dispute divides Islamic finance market


  1. ↑ Dinar Standard
  2. ↑ The Economic Times