According to a US Treasury paper, Islamic Finance distinguishes itself from conventional finance in its ostensible compliance with principles of Islamic law, or Shari’a. The Islamic financial services industry, comprising Islamic banking, Islamic insurance (takaful) and the Islamic capital market is an area of growth which may appeal to those looking for socially responsible or ethical investments, as these products must comply with strict Shariah rules that have religious as well as ethical underpinnings.
In general according to IOSCO, the Shariah legal maxim in relation to commercial transactions and contracts state, "they are permissible unless there is a clear prohibition." In a nutshell, prohibited elements of a commercial transaction must first be removed for it to be Shariah–compliant. The major prohibited elements under Shariah are riba (interest), gharar (uncertainty), maisir (gambling), non–halal (prohibited) food and drinks and immoral activities.
The Middle East is perhaps the most emerging of all emerging markets. The unprecedented rise of commodity prices in the past decade has boosted the economy of the region. Mindful of the fact that oil will one day run out, decision-makers are diversifying the economy into other economic sectors including financial services. This has led to the expansion of islamic financial products now traded globally even though they were primarily taylored for domestic markets. Associated derivatives products are set to become one of the fastest and innovative sectors in emerging financial markets.
Islamic finance and banking cater for investors who want socially responsible or ethical investments. This investment style is often driven by personal preferences, taste, beliefs and faith. Upon the request of the investor, funds may only be invested in schemes or companies that promote a better protection of the environment or are consistent in their practice with certain principles. Islamic finance falls within this category. However there is a difference in that socially responsible or ethical investments are often niche markets while Islamic finance is now main stream with wider diversification opportunities. Islamic finance is based on the rules of "Shariah", known as "Fiqh al-Muamalat" (Islamic rules). Shariah governs all aspects of Islamic matters including faith, worship, economic, sociopolitical and cultural aspects of Islamic societies. Accordingly, the process and the end result of economic transactions must be consistent with the rules of "Shariah" which require certain types of activities to be either prohibited (usury, gambling, interest charges) or promoted (sharing of profits). Muslims undertaking financial transactions are encouraged to use financial instruments that comply with these rules. Non muslim investors may find the appeal of these instruments from an ethical standpoint or simply in the diversification opportunity they offer.
Institutions offering islamic products and services must also abide by Islamic Law. Modern banking in the islamic world is therefore a recent phenomenon and the majority of banks, financial services and lately stock exchanges only emerged after the oil boom of the 1970s. In the 1980s the Islamic financial services industry was focused on Islamic banking and Islamic insurance (or takaful). Since the early 1990s, the Islamic capital market has grown to become an increasingly substantial segment within the global financial market and has gained considerable interest as a viable and efficient alternative model of financial intermediation. The evolution of Islamic Finance in traced in a time line on page 16 of this document: IOSCO Islamic Capital Market: Fact Finding Report (2004)
Today there are more than 200 financial instututions offering a wide variety of products from insurance, savings and rating.
Chase Manhattan Bank N.A. | ABN Amro Bank | Deutsche Bank (Rep office) | Societe Generale
BNP Paribas | Commerz Bank
Citibank | HSBC | Standard Chartered Bank
Faisal Finance (Switzerland) SA, Geneva
Barclays Capital | HSBC Amanah | Citibank | Goldman Sachs (J. Aron & Co.)
Dow Jones Islamic Index Fund | HSBC | Standard & Poors