Islamic finance is a financial system that is in accordance with the principles of Sharia, the sacred law of Islam. It is different from regular banking in that it prohibits earning of interest through the business of lending. It also prohibits direct or indirect association with businesses involving alcohol, pork products, firearms and tobacco. It also does not allow speculation, betting and gambling.
Islamic finance involves structuring financial instruments (also referred to as Sukuk) and financial transactions to satisfy traditional Islam strictures. It is a field of growing importance for conservative Muslims, especially in the Middle East, who are uncomfortable with Western-style bonds and banking that involve explicit payments of interest.
Why is it relevant?
One of the more unusual developments in finance in 2004 (or 1425, according to the Islamic calendar) was the introduction of the first fund of hedge funds compliant with the principles of Shariah, or Islamic law. If the announcement caught some in the investment community off guard, it was old news to those who had been following the evolution of Islamic finance.
With the recent failures and the high risk instruments being floated in the global markets, people are looking at a better regulatory framework. This is where Islamic Finance has suddenly garnered interest.
What makes it so relevant?
The CFA® Program Institute is stressing upon how Islamic Finance is bringing Ethics to the centre of Finance, this is a clear signal to most of the finance professionals that Islamic Finance is a highly ethical framework in the finance industry.
Where do I find more information?
You can read up more about Islamic Finance here –
- Islamic Finance in the CFA® Magazine
- A good voiceover presentation explaining Islamic Finance on Deloitte
- Islamic Banking on Wikipedia