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Home » Islamic Finance Definition | Basic Concepts | Islamic Financing in the World

Islamic Finance Definition | Basic Concepts | Islamic Financing in the World

By Richard Daniels Reading Time: 3 mins
Updated August 2, 2017

Islamic Finance Definition

There is no single definition of Islamic Finance but it is widely used today to refer to financial and commercial activities that respect the principles of Islamic law and jurisprudence, more commonly referred to as Shari a “. Respect for such principles allows investing and making profits in accordance with the rules of Muslim law.

In general, the products and financial instruments compatible with the Shari an aim to offer a viable ethical alternative to the traditional finance tools.

The sources of the “Shari a”

The Arabic word “Shari a” literally means “the way”. Through principles and recommendations, Shari a defines acceptable behavior in all areas of Muslim life. It governs the moral, ethical, spiritual and social dimension of the private and public life of Muslims, including economic and commercial activities. Shari a refers to unmodified Islamic law. It is a legal system based on Muslim ethics, which can be interpreted and developed.

Shari a have two main Sources:

The Quran (the sacred text of Islam which accounts for the message of God as revealed to the Prophet Muhammad) and the Hadith (the Sunna text bodies, expressions, teachings and actions of the Prophet), these two sources constitute the essential basis for determining the conformity of any action with the rules and purpose of the Shari a. A key role is played by Muslim law scholars (Scholars) who specialize in Shari a, who interpret the principles that can be applied to modern financing techniques, while remaining faithful to the spirit of the traditional sources of The Muslim right. For this purpose, The Islamic finance sector has developed very rapidly in recent years.

Estimates of the size of this market vary from source to source and are often quickly outdated. Nevertheless, the rapid development of the industry and its influence on the financial market in general are now widely recognized. The proliferation of Islamic financial institutions around the world, as well as the growing number of conventional banking institutions that now offer compatible Shari a financing solutions, confirm the rise of the Islamic finance sector.

As regards Europe, the authorities have just taken a very important step in the process of recognizing Islamic finance by adopting tax and regulatory measures at the end of 2008 aimed at promoting this financing technique. In a context of current economic and financial crisis affecting in particular the real estate sector and significantly complicating access to so-called “conventional” liquidity, the arrival of Islamic banks in Europe can only attract investor’s interest in this sector Ethical finance.

Islamic Finance in the World

The outstanding amount of Islamic finance in the world is estimated today at 2000 billion dollars throughout the world. Where as in 2006 these figure was estimated between 600 and 800 billion dollars by 2020 the figure could double again and be increased to 4000 billion dollars according to experts.

The growth rate of about 15% per year was strongly supported by the incomes of the Persian Gulf countries and Southeast Asia, with strong economic development over the period 2003-2007.

The repatriation of Middle Eastern funds after the attacks of 11 September 2001 and the rise of the Islamic religious conscience in the world have contributed to the development of Islamic finance throughout the world.

Even if Islamic finance is strongly developed in some Muslim countries: Iran, Malaysia, Persian Gulf, Indonesia … Non-Muslim countries such as the United Kingdom, the United States, Japan, Due to the values ​​it carries Islamic finance is increasingly seen as a bulwark to the financial crisis. Islamic banks were totally spared by the subprime crisis in 2008. These operations of abusive speculation and securitization of debts are proscribed in Islam.

The sector is very promising and we can already predict a growing success around the world, and also in Europe. Here is a list of some Islamic banks:

  1. Al Rajhi Bank (Saudi Arabia),
  2. The Kuwait Finance House (Kuwait),
  3. The Dubai Islamic Bank (Dubai),
  4. The Abu Dhabi Islamic Bank (United Arab Emirates),
  5. And Bank Al Jazeera (Saudi Arabia).
  6. In Algeria, Al Baraka Bank is an Islamic bank.
  7. Meezan Bank is one of the Islamic banks of Pakistan.
  8. In Tunisia, Banque Zitouna is the only Islamic bank.
Author at Business Study Notes
Richard DanielsAuthor at Business Study Notes

Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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