- 2016 Size: USD 2 trillion
- Year-Over-Year Growth (2015-2016): 10%
- Projected Size in 2022: USD 3.8 trillion
Islamic finance, or sharia-compliant finance, refers to banking or financing activities that comply with the Shariah (Islamic law) and its practical application through the development of Islamic economics. The industry boasts over USD 2 trillion in assets with a growth rate of 10% between 2015 and 2016. Islamic finance has several key tenets such as risk sharing, being free of interest rates, and the prohibition of financing anything forbidden in Islam (to minimize potential harm to society).
Islamic banking represents a rapidly growing business. Shariah-compliant banks contribute around 80% of the Islamic finance industry, which is expected to grow to USD 2.7 trillion by the end of 2017 and over USD 3.8 trillion by 2022.
Though typically associated with its prohibition of interest, or riba as it is known in Arabic, Islamic finance is more directly focused on a fundamental belief that risks should be shared between those providing and using capital. Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haram (“sinful and prohibited”).
Scope of operations
There are several types of Islamic finance products. However, the most commonly-used are listed and briefly described below.
- Profit-and-loss sharing contracts (mudarabah): This structure method involves pooling investors’ money and assuming a share of the profits and losses, which is agreed upon with the depositors.
- Partnership and joint stock ownership (musharakah). Three structures are most common:
- Declining-balance shared equity: Commonly used to finance a home purchase, the declining balance methodcalls for the bank and the investor to purchase the home jointly, with the investor gradually transferring its portion of the equity in the home to the individual homeowner whose payments constitute the homeowner’s equity.
- Lease-to-own: This arrangement is similar to the declining balance structure described above, except the financial institution puts up most, if not all, of the money for the house and agrees on arrangements to sell the house to the homeowner at the end of a fixed term. A portion of every payment goes toward the lease; the remainder goes toward the purchase priceof the home.
- Installment (cost-plus) sale (murabaha): This is a structure where an intermediary buys the home with free and cleartitle to it. The intermediary investor then agrees on a sale price with the prospective buyer; this price includes some profit. The purchase may be made outright (lump sum) or through a series of deferred (installment) payments. This credit sale is an acceptable form of finance and is not to be confused with an interest-bearing loan.
- Leasing (‘ijarah/’ijar): These are the sale of the right to use an object (usufruct) for a specific time period. One condition is that the lessor must own the leased object for the duration of the lease. A variation on the lease, ‘ijarah wa ‘iqtina,provides for a lease to be written where the lessor agrees to sell the leased object at the lease’s end at a predetermined residual value. Only the lessor is bound by this promise. The lessee is not obligated to purchase the item.
- Islamic forwards (salamand ‘istisna): These are forms of financing used only for certain types of business. The method involves prepaid of items that are delivered at a definite point in the future.
Expected exhibitors: financial services companies, Shariah-compliance consultants, legal services providers, banks, standard-setting organizations, and investors