Islamic Financial Systems

This paper states that Islamic finance is emerging as a rapidly growing part of the financial sector in the Islamic world. Islamic finance is not restricted to Islamic countries, but is spreading wherever there is a sizeable Muslim community.

The paper states that:

• The growth of Islamic finance coincided with the accounting surplus of oil-rich Islamic countries;
• Factors that have aided its growth include:
  • The desire for socio-political and economic systems based on Islamic principles,
  • Introduction of broad macroeconomic and structural reforms in financial systems, the liberalization of capital movements, privatization and the global integration of financial markets.
• Islamic financial system:
  • Advocates risk sharing, individuals' rights and duties, property rights and the sanctity of contracts,
  • Emphasizes ethical, moral, social and religious dimensions, to enhance equality in society,
  • Closes the door to the payment of interest and precludes the use of debt-based instruments.
• The basic instruments that Islamic finance offers are: cost-plus financing, profit sharing, leasing, partnership and forward sale.
• Banking is the most developed part of the Islamic financial system and includes 'specialized' Islamic banks and 'Islamic windows'.
• Islamic funds include equity, commodity and leasing.
• The limitations of Islamic finance include lack of:
  • A uniform regulatory and legal framework,
  • A single, sizeable, organized financial center,
  • Innovation,
  • Uniformity in the religious principles.

The paper concludes that Islamic finance promotes entrepreneurship and risk sharing and therefore, microfinance is a strong candidate for Islamic finance.