Islamic finance bodies have trillion-dollar potential but do you understand it?

April 6, 2010

* Analysis by: GLG Expert Contributor
* Analysis of: Islamic finance bodies have trillion-dollar potential - Moody's
* Published at: www.news.com.au

Summary

ISLAMIC financial bodies, which adhere to religious proscriptions against interest, have a market potential of at least US$5 trillion ($5.43 trillion), Moody's Investors Service said.

Its important to understand that Islamic Finance doesn't necessarily mean a new safe form of financing or investing.

Rather its an alternative source of funding respecting the religious beliefs and values of Islam.
Analysis

Islamic Shari’ah and its Objectives

Shari’ah principles underlying equity investments.
Prohibition of riba (interest). Investors may not deal in equity or monetary transactions involving riba. This includes interest leverage instruments and gearing. Nor may they invest in entities whose primary income is derived from interest (banks). Also prohibited are stocks guaranteeing fixed returns (preference shares).

Gharar (uncertainty accompanied by deceit), excessive speculation and maysir (gambling and leisure).

The business activities of the companies targeted for investment must fall within Shari’ah acceptable parameters.

The net assets of a company targeted for investment must not consist of highly liquid assets (cash; deposits and receivables).

Non-Shari’ah permissible income must not exceed certain specified thresholds.


What is Shari’ah?

Islamic laws are known in Arabic as "shari’ah”, this term includes laws of all aspects of life.

The two primary sources of Shari’ah are:

Al-Quran

Sunnah (prophet Muhammad’s way)

The other sources of shari’ah are:
Ijtihad – making decisions about existing financial issues
Ijma - consensus of the Muslim scholars on Islamic laws
Qiyas - analogical deduction
Uruf – approved custom (not contradicting with shari’ah)

The goals and objectives of shari’ah are important and are based around benefits to the individual and community. The primary rule is that everything in financial transactions is permissible unless there is a text of prohibition and so shari’ah laws function as a protection. This protection provides a real benefit, in terms of facilitating a higher uality form of humanity...

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