Islamic finance based on sharia, or Islamic law, prohibits the payment of interest, or usury. Also prohibited are investments in certain industries such as those tied to alcohol, pornography, pork production, tobacco, and gambling. Bonds based on sharia, called sukuk, do not pay interest, but rather pay the investor based on the profit generated from the asset which underlies the bond. Islamic finance mandates a degree of risk sharing not found in traditional finance.
Islamic finance has been one of the fastest growing segments in the financial services industry. Fueled by increasing income streams in oil rich countries, a rise in Islamic faithfulness, and a growing middle class in Muslim countries, this segment of the financial services market is expected to continue to grow at record breaking levels. Based on sharia, or Islamic law, Islamic finance prohibits certain types of investments and the paying of interest. With the requirement that risk be shared among parties to a financial transaction, some have proposed that Islamic finance is a safer alternative than traditional Western finance and protects markets from economic failure.
Title: Islamic Finance: An Alternative in the Global Financial Market
Author: Charles A. Rarick
Published in: School of Management Purdue University Calumet
Length: 3 pages