MONEY AND BANKING – Global Islamic finance development
By Moyi Harry Ruben
Islamic Finance is emerging as a rapidly growing part of the financial sector in the Islamic and non-Islamic world. Islamic finance is not restricted to Islamic countries only, business needs to get profits and it has no religion. Islamic finance therefore, is spreading wherever there is a sizable Muslim community. According to some estimates, more than 100 financial institutions in over 45 countries practice some form of Islamic finance and the industry has been growing at a rate of more than 15 percent annually for the past fifteen years. The markets current annual turnover is estimated to be $ 80 billion, compared to a mere $ 5 billion in early 1985 and is projected to hit the $ 100 billion mark by the turn of the century.
The growing in Islamic finance initially coincided with the current account surplus of oil-exporting Islamic economy. But it continued growing in the face of eroding oil revenues reflected by the influence of other factors, such as the desire for sociopolitical and economic systems based on Islamic principles and stronger Islamic jurisprudence and its identity.
In addition, the introduction of broad macroeconomic and structural reform in financial system, the liberalization of capital movements, privatization, and the global integration of financial markets have pave the way for the expansion of Islamic finance. This brings us to the question: what is Islamic Finance? Islamic Finance practically predominates in the Muslim world throughout the middle Ages, fostering trade and business activities with the development of credit. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities in Islamic Financial commodity and financial markets even here in Juba.
In fact, many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen. In contrast, the term Islamic Finance System is relatively new, appearing only in the mid- 1980s. In fact, all the earlier references to commercial or mercantile activities conformity to Islamic principles were made under the umbrella of either interest free or Islamic Banking. However, describing the Islamic Financial system simply as interest Free system of finance, it does not provide a true picture of the system, as a whole. Undoubtedly, prohibiting receipt and payment of interest is the nucleus of the system, but it is supported by other principles of Islamic doctrines advocating the following: Risk sharing, individual’s rights, duties, property rights and the sanctity (Holiness and honesty of contracts)
Similarly, the Islamic financial system is not limited to banking but covers capital formation. The registration of business. These do not differ much with conventional system except mentioned above characteristics.
Capital Markets, and Types of Financial Intermediaries.
Interpreting the system as interest free tend to create confusion to some people, the philosophical foundation of Islamic system goes beyond the interaction of factors of production and economic behaviours. Whereas the conventional financial system focuses on interest, the Islamic system places equal emphasis on the ethical, moral, social and religious dimensions to enhance equality and fairness for the good of the society as a whole. The system can be fully appreciated only in the context of Islamism’s teaching on the word ethic, wealth distribution, social and economic justice, and the role of the state. Therefore, the basic Islamic Financial system principles can be summarized as below:
1.Prohibition of interest. Prohibition of interest (riba), a term literally means an excess and interpreted as any unjustifiable increase of capital, whether in loans or sales in the central tenet of the system. More precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of principal for example guaranteed regardless of the performance of the investment, is considered interest (Riba) and prohibited. The general consensus among Islamic Scholars is that Riba covers nor only Usury (money lending) but also the charging of interest as widely practiced in conventional banking. The prohibition is based on the arguments of social justice, equality and property rights. Islam encourages the earning of profits but for bids the charging of interest because profits, determined ex-post, symbolize successful entrepreneurship and creation of additional wealth, whereas interest, determined ex-ante, is a cost that is accrued irrespective of the outcome of business operation and may not create wealth if there are business losses. Social justice demands that borrowers and lenders share rewards as well as losses in an equitable fashion and that the process of wealth accumulation and distribution in the economy must be fair and representative of true productivity.
- Risky Sharing: Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share the business risks in return for the share of profits.
- Money as potential Capital: Money is treated as potential capital, that is it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital not when it is potential capital.
- Prohibition of speculative behaviours: An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, Gambling and any other risks.
- Sanctity of contracts: Islam upholds contractual obligations and the disclosure of information as a sacred duty. This feature is intended to reduce the risk of asymmetric information and moral hazard.
Islamic Financial Instruments are as below:
1.Sale, Trade Finance, and Investments
Therefore, Islamic windows in commercial banks is not a breach of any legal jurisprudence of any country. Business has no religion. The purpose of business is to add value to the owner, not to pray to the owner.
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