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Library » Islamic Financial Systems

Islamic Financial Systems
Jun 1997, Iqbal, Z.

This paper describes basic principles, market trends, issues and challenges of Islamic finance.

This paper states that Islamic finance is emerging as a rapidly growing part of the financial sector in the Islamic world. Islamic finance is not restricted to Islamic countries, but is spreading wherever there is a sizeable Muslim community.

The paper states that:

The growth of Islamic finance coincided with the accounting surplus of oil-rich Islamic countries.
Factors that have aided its growth include:
- The desire for socio-political and economic systems based on Islamic principles,
- Introduction of broad macroeconomic and structural reforms – in financial systems, the liberalization of capital movements, privatization and the global integration of financial markets.
Islamic financial system:
- Advocates risk sharing, individuals’ rights and duties, property rights and the sanctity of contracts,
- Emphasizes ethical, moral, social and religious dimensions, to enhance equality in society,
- Closes the door to the payment of interest and precludes the use of debt-based instruments.
The basic instruments that Islamic finance offers are: cost-plus financing, profit sharing, leasing, partnership and forward sale.
Banking is the most developed part of the Islamic financial system and includes ‘specialized’ Islamic banks and ‘Islamic windows’.
Islamic funds include equity, commodity and leasing.
The limitations of Islamic finance include lack of:
- A uniform regulatory and legal framework,
- A single, sizeable, organized financial center,
- Innovation,
- Uniformity in the religious principles.

The paper concludes that Islamic finance promotes entrepreneurship and risk sharing and therefore, microfinance is a strong candidate for Islamic finance.

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Journal Title:
Finance & Development

Publisher(s):
World Bank