Overview of Islamic finance

Introduction

Islamic finance is one of the fastest growing financial services and it represents financial activities that are practice in accordance with the principles of Islamic jurisprudence. This prohibits unethical financial activities like speculation, gambling, interest bearing, uncertainty etc The Islamic finance system is predominantly known as Non interest or Alternative finance in Nigeria.

However, Islamic finance is not only limited to Muslims but to people of all faith and regions who seek an ethical and fair financial economy.

The major Abrahamic faiths of the world share mutual ethical concepts of Islamic finance and prohibition of interest as stated below;

Quran 2:278-279: “oh you who believe fear Allah and forgo what remaining of usury (Riba) if you are believers, if you will not, then know.

Deuteronomy 23;19 (English Standard Version) “You shall not charge interest on loans to your brother, interest on food, Interest on money, interest on anything that is lent for interest.

Islamic financial institutions have their financial and operational activates regulated and audited by a board of Islamic scholars and the local financial regulators.

Body

The modern Non interest finance commenced in Egypt over 50 years ago with the first interest free bank which was the Mit Ghamar Local Savings Bank in the Nile Delta of Egypt it was established in June 1963.The rapid growth and development of Non Interest Finance started after the 2008 financial crisis when the global economy realized the non interest finance industry resilient to the shocks of the global financial crisis compared to the conventional finance industry.As at May 2018, the Islamic financial service industry has 185 members of the Islamic Financial Service Board (IFSB) comprising of 75 regulatory and supervisory board activities, 8 International governmental organizations, 102 market players (Financial Institutions), professional firms, industry associations and stock exchange operating in 57 Jurisdictions.Source: Islamic Financial Service Board (IFSB)

 Islamic finance encourages Partnership, Mutual Cooperation, Social Welfare/Responsibilities, Entrepreneurship, E-commerce, Bond Issuances, Agency Banking; Digital Banking Services etc. This connects capital owners with the real economy activities.                                 

Fundamental Financial Activities in Islamic Finance

• Prohibition of Usury: Usury in simple terms is excess of unjustifiable increase in capital etc.

• Risk Sharing: The profit and losses are shared between the providers and users of capital.

• Prohibition of Speculative Activities: Hoarding, all forms of gambling(Maysir) and Uncertainty (Gharar) in dealings are not allowed.

• Sanity of Contracts.

• Permissible social responsibilities activities.

International Standards Setting Bodies

AAOIFI: Accounting and Auditing Organization for Islamic Financial Institutions.

IFSB: Islamic Financial Board

IIFM: International Islamic Financial Market

The Non interest financial sector is divided in to the following sectors below in the diagram, which has attracted different individuals, institutions and cooperative.

Conclusion

The Islamic finance industry total worth according to key industry stakeholder organizations (Banking, Capital Market and Insurance) was estimated to be USD 2.05 Trillion in 2017, marking an 8.3% growth in assets in USD Terms. Source: Market watch. April 8, 2020.

Suleiman Halima J.

Professional Non Interest Finance Enthusiast.