SHAFAQNA- Flexibility and religious conformity have been the main drives that helped rocketing Islamic finance over the past decade to achieve a nine-fold growth, attracting more customers every day.
Flexibility and religious conformity have been the main drives that helped rocketing Islamic finance over the past decade to achieve a nine-fold growth, attracting more customers every day.
“Despite being governed by strict religious principles, Islamic finance remains highly flexible and less risky,” Kuwaiti economist Hajjaj Bukhdur told Agence France Presse (AFP) on Sunday, November 23.
“These have helped it to expand fast and meet various forms of demand,” he added.
Islamic financial institutions grew nine-fold to $1.8 trillion between 2003 and last year.
The fast-growing industry has doubled in size over the past four years and is now worth more than $2 trillion, with demand forecast to soar to new heights.
For many Muslims, the religious aspect was a main reason that pushed them to try Islamic finance.
One of those Muslims was Ahmad Salim who was told by a Muslim scholar that Islamic Shari`ah law forbids paying interest.
Following his advice, the white-collar worker returned a $35,000 loan just two days after he received it from a conventional bank in Kuwait.
“A cleric told me it is not permissible under Islam to take loans from a non-Islamic bank because they charge interest,” he said.
A few days later, he arranged for a loan from an Islamic bank after paying a $700 service charge.
Along with religious conformity, the Islamic finance industry has been growing due to its flexibility, link to real economic activity and its ban on transactions involving speculation or uncertainty, experts say.
To meet ever-increasing demand, Islamic finance has developed numerous products compliant with Shari`ah law, from loans for cars and houses to funding for major infrastructure projects.
Islam forbids Muslims from usury, receiving or paying interest on loans.
Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
Some experts refer the huge growth of Islamic finance to Islamic banks outperformed their conventional counterparts during the 2008 global financial crisis.
“Islamic banks generally escaped the worst effects of the 2008 financial crisis because they were not exposed to subprime and toxic assets,” World Bank managing director Mahmoud Mohieldin said in a recent research note.
The industry, however, was badly hit by the second round of the crisis which affected real estate and other sectors in the Gulf region.
“In the Gulf, both Islamic and conventional banks and companies were hit equally by the crisis. Some Islamic investment companies were forced out of the market,” Saudi economist Abdulwahab Abu-Dahesh said. Islamic finance’s link to solid assets is seen as one of its major strengths.
“They do not deal in derivatives or speculation,” said Abu-Dahesh, a former senior economist with a conventional bank.
Spanning over 70 countries, around 40 million of the world’s 1.6 billion Muslims are now clients of the Islamic finance industry, which has surged in popularity since its days as a small niche market in the early 1970s.
The International Monetary Fund (IMF), the World Bank, and other global economic bodies estimate that the assets of Islamic financial institutions grew nine-fold to $1.8 trillion between 2003 and last year.
Forecasters, including Standard and Poor’s, expect the industry to be worth $4 trillion by 2020
Skeptics claim that the booming industry owes its success to religion, but others say it also makes financial sense.
“I have been dealing with Islamic banks for the past two decades for purely economic reasons and good profit,” said Amin Mahmoud, a private sector manager.