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Friday, December 10, 2010

Islamic Finance: Overview and Policy Concerns

Shayerah Ilias
Analyst in International Trade and Finance

Islamic finance is based on principles of shariah, or “Islamic law.” Major financial principles of shariah are a ban on interest, a ban on contractual uncertainty, adherence to risk-sharing and profit-sharing, promotion of ethical investments that enhance society, and asset-backing.

While the Islamic finance industry represents a fraction of the global finance market, it has grown at double-digit rates in recent years. By some estimates, total assets held globally under Islamic finance reached $1 trillion in 2010. Islamic banks have appeared to be more resilient than conventional banks to the immediate effects of the international financial crisis and global economic downturn. Some analysts have attributed this to Islamic banks’ avoidance of speculative activities. However, the Islamic finance industry has not been completely immune to the general decline in demand and investor uncertainty. Global issuance of Islamic capital market securities (sukuk), a fast-growing segment of the Islamic finance industry, peaked in 2007 at $35 billion, declined to $15 billion in 2008 and then rose to $20 billion in 2009.

Islamic finance historically has been concentrated in Muslim-majority countries of the Middle East and Asia, but has expanded globally to countries with smaller Muslim populations. A number of European and other countries are working to reform their tax, legal, and regulatory frameworks to attract Islamic investments. There is a small but growing market for Islamic finance in the United States.

Through international and domestic regulatory bodies, there have been efforts to standardize regulations in Islamic finance across different countries and financial institutions, although challenges remain. Critics of Islamic finance express concerns about possible ties between Islamic finance and political agendas or terrorist financing and the use of Islamic finance to circumvent U.S. economic sanctions. Supporters argue that Islamic finance presents significant new business opportunities and provides alternate methods for capital formation and economic development.

Date of Report: November 30, 2010
Number of Pages: 12
Order Number: RS22931
Price: $29.95

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