ISLAMIC FINANCE

Islamic Finance Overview: Islamic finance involves structuring financial instruments and financial transactions to satisfy traditional Muslim strictures against the payment of interest and against engaging in gambling. It is a field of growing importance for conservative Muslims, especially in the Middle East, who are uncomfortable with Western-style bonds and banking that involve explicit payments of interest.

Sharia: Islamic law. Islamic finance thus often is also called sharia-compliant finance.

Sukuk: Sukuk are financial instruments that serve much the same purpose as debt, but which are structured to avoid the payment of interest.

Riba: Interest, which strict Muslims avoid paying or receiving.

Ijara: Sale and leaseback transaction employed to generate income that can be classified as rent, rather than as interest.

Gharar: Gambling, which strict Muslims also avoid. Certain highly speculative investment products, such as some futures contracts, option contracts, derivatives and securities linked to market indexes, can run afoul of the prohibition against gambling.

Takaful: Sharia-compliant insurance, structured as mutual aid and risk sharing. Estimates vary, but as little as 4% of the insurance sold Muslim countries istakaful or sharia-compliant.

Tawarruq: Translates as "turns into silver." A method used by Islamic banks to make loans and avoid the appearance of collecting interest on them. The bank sells a hard asset (such as a non-precious metal) to a client at a marked-up price, but does not collect payment until a future date, which is effectively the maturity date of the loan. The client immediately sells the asset back to the bank at a lower price, and collects the money immediately. The client's future payment to the bank thus includes the return of this cash amount plus a markup that is, effectively, a payment of interest. An increasing number of Islamic scholars are criticizing tawarruq transactions as thinly-veiled interest-bearing loans.

Variations in Islamic Finance: Islam is decentralized, with at least two major subgroups (Sunni and Shia), with various national differences within them, and with no centralized, unified hierarchy among the clergy. Thus, developing sharia-compliant financial instruments and structures that are acceptable to all shades of opinion among Muslims is difficult. For example, Muslim clergy and scholars in East Asia, most notably Indonesia and Malaysia, tend to be less strict in their interpretations than their counterparts in the Middle East.

Scope of Islamic Finance: According to a special report, "The Future of Islamic Finance," in the December 8, 2009 issue of the Financial Times:

• Sharia-compliant financial instutions: 1,124
• Assets in Islamic finance: between $822 billion and $1 trillion
• Increase in such assets in 2009: 29%
• Worldwide Muslim population: approximately 1.6 billion
• Percent who use banks: approximately 14%
• Islamic mutual funds: 473
• Islamic money market funds in this total: 79
• Islamic real estate funds in this total: 28
• Assets in Islamic mutual funds: $35 billion

THANKS TO : ABOUT.COM