An Overview of Islamic Finance

Abstract

Islamic finance has started to grow in international finance across the globe, with some concentration in few countries. Nearly 20 percent annual growth of Islamic finance in recent years seems to point to its resilience and broad appeal, partly owing to principles that govern Islamic financial activities, including equity, participation, and ownership. In theory, Islamic finance is resilient to shocks because of its emphasis on risk sharing, limits on excessive risk taking, and strong link to real activities. Empirical evidence on the stability of Islamic banks, however, is so far mixed. While these banks face similar risks as conventional banks do, they are also exposed to idiosyncratic risks, necessitating a tailoring of current risk management practices. The macroeconomic policy implications of the rapid expansion of Islamic finance are far reaching and need careful considerations.

Banking Models and Monetary Transmission Mechanisms in Malaysia: Are Islamic Banks Different?

“…The significant presence of Islamic banks in Malaysia as well as in other parts of the world, coupled with the recurring global and regional financial crises, has captivated much interest in the Islamic banking business model. Under a dual-banking system, as practiced in Malaysia, the main interest 3 For a more complete treatment of the Islamic banking and the Islamic financial system, interested reader may refer to a recent IMF working paper by Hussain et al (2015). 4 The establishment of the BIMB marks Malaysia's adoption of a dual banking system, normally referring to a banking system where the Islamic banking business model and the conventional bank model coexist.…”

“… For a more complete treatment of the Islamic banking and the Islamic financial system, interested reader may refer to a recent IMF working paper by Hussain et al . (). …”

A Review of Islamic Investment Literature

“…Thus, Islamic investors are protected from excessive loss through the principles of equity, participation and ownership (Hussain et al, 2015). Thus, Islamic investors are protected from excessive loss through the principles of equity, participation and ownership (Hussain et al, 2015).…”

“…Sukuk ideally represent the ownership of an identified asset, whereas a bond is regarded as a pure debt responsibility between the issuer and the investor (Omar et al, 2013;Hussain et al, 2015). In principle, Islamic finance transactions have to be backed by the tangibility of an asset.…”

“…In view of this, Ayub (2007) revealed that, in principle, debt cannot guarantee any return, and therefore, it cannot be traded, except under the rule of Hawala (transfer of debt). Nowadays, Ijarah and Murabaha Sukuk dominate the market in most of the recent issuance (Hussain et al, 2015;Godlewski et al, 2016;World Bank and Islamic Development Bank Group, 2017). Ó 2018 The Economic Society of Australia benefit such as fixed returns and intangibles (receivables), which, in principle, have to be different from conventional bonds and debentures (Ayub, 2007).…”