Since the mid-1970s, an industry growing at considerable pace in the Islamic world is gaining market shares all over the world in countries with sufficient Muslim populations. This “Islamic Finance” industry claims to act in line with the ethical and practical principles set forth in the Qu'ran and the Shari'ah, thus appealing to Muslim and non-Muslim clients alike who search for viable alternatives to conventional financial products. As explained, the first beginnings of this phenomenon can be traced well back into the 1970s when the first “Islamic Banks” started operating in Egypt and Jordan.
In the past decades, a vast amount of research has been published – empirical and theoretical – to review the impacts of Islamic Finance on the financial markets of the Islamic world. These works, to a great deal inspired by the enormous need of the industry for quantitative and qualitative research, all dealt with questions of comparative efficiency of conventional and Islamic Finance, the demand for Shari'ah-compliant financial products, the actual genuineness, or authenticity, of the industry, etc. However, only a very small portion of these research works dealt with the question whether or not the Islamic world actually needs Islamic Finance.
At first, this might seem as a trivial question (if there was no need for Islamic Finance, there would not have been this substantial growth). But at second thought, one realizes the associations that come which come with the question of raison d'être: Why did Islamic Finance emerge? Does it add an economic value to its markets? And most importantly, is it – so far – successfully reaching its goals? To my understanding, the works that deal with this big-picture analysis, are thin on the ground. Therefore, this work shall take a first step at putting Islamic Finance into the historical context it needs to be seen in, by compiling the manifold works into a cross-sectional approach to characterize the industry. The most salient aspects of the analysis here will be legal, historical, and economic ones, in order to grasp the 'big picture' of Islamic Finance.
Table of Contents
1 Introduction
2 What were the exact investment problems of conventional finance?
2.1 Financial operators before Islamic Finance (supply side)
2.1.1 The Islamic financial markets between 1850 and 1970 (roughly): structure and size
2.1.2 The role of the Shari'ah: prescription and reality in conventional finance
2.2 The consumers' preferences before Islamic Finance (demand side)
2.2.1 Defining the consumers of conventional finance and their difficulties with conventional finance
2.2.2 Which financing methods were common?
2.3 Pre-conclusion: What did the restraining impact of the Shari'ah and the consumers' religious mentalities on conventional finance exactly look like?
3 Did Islamic Finance provide solutions to the hitherto carved out problems?
3.1 What is Islamic Finance?
3.1.1 The concept of Shari'ah-compliance
3.1.2 What is the “Islamic world” - or: which countries are important to survey?
3.1.3 Islamic banking and Investment
3.1.4 Takaful or Islamic insurance
3.2 The market situation with Islamic Finance
3.2.1 Is Islamic Finance working on the markets? (supply side)
3.2.1.1 How ‘big’ is Islamic Finance? Structure and size of the markets
3.2.1.2 Is Islamic Finance working? The comparative efficiency of conventional and Islamic Finance
3.2.1.3 Is Islamic Finance really Shari’ah-compliant? The disputes around Islamic Finance
3.2.2 Who is interested? The demand for Islamic Finance
4 Conclusion
Objectives & Key Themes
This thesis examines whether Islamic Finance has effectively overcome the legal and social constraints that historically hindered conventional financial systems within the Islamic world. It explores the comparative efficiency, market penetration, and Shari'ah compliance of Islamic financial institutions to determine if they offer a viable, authentic alternative to Western financial models.
- The historical development of Islamic financial markets and the influence of Shari'ah law.
- Comparative analysis of efficiency between conventional and Islamic banking institutions.
- The impact of consumer preferences and religious sentiment on financial inclusion.
- Challenges related to product standardization, regulatory frameworks, and market scale.
Excerpt from the Book
2.1.1 The Islamic financial markets between 1850 and 1970 (roughly): structure and size
Muslims have, since the beginnings of Islam, been able to “establish a system without interest for mobilizing resources to finance productive activities and consumer needs”5, Pejman Abedifar et al. state in their joint paper on Islamic Finance. And indeed, financing in business or risk-sharing was in no way non-existent in the Islamic world over the course of history. There were systems of individually oriented contract laws, for instance between merchants and capital owners, that were based on individual financial intermediation, as Timur Kuran elaborates in his work on the economic development of the Middle East6.
But why is it then necessary to ask for the obstacles that conventional finance faced in Muslim countries? Why would someone have to introduce the idea of a distinctly 'Islamic' financial system? The reason could be seen in the change of the Islamic financial sector that began with the political and economic penetration of the Arab and South Asian regions by Western (colonial) powers7: Western financial institutions (especially banks) became dominant and the Islamic tradition remained dormant. Over the last 50 years or so, however, there has been a revival of interest in developing a modern version of the historic Islamic financial system.8
Summary of Chapters
1 Introduction: Provides an overview of the growth of Islamic Finance and defines the research question regarding whether it successfully resolves the limitations of conventional finance in Islamic markets.
2 What were the exact investment problems of conventional finance?: Analyzes the historical difficulties of integrating Western financial products into the Islamic world due to religious restrictions like the prohibition of riba.
3 Did Islamic Finance provide solutions to the hitherto carved out problems?: Explores the operational nature of Islamic banking and Takaful, assessing their comparative efficiency and their ability to function within a modern regulatory framework.
4 Conclusion: Synthesizes the findings, concluding that while Islamic Finance is not a total panacea, it serves as a complementary, increasingly efficient, and ethically resonant alternative to conventional finance.
Keywords
Islamic Finance, Shari'ah, conventional finance, riba, financial inclusion, Takaful, banking efficiency, Islamic banking, murabahah, mudharabah, musharakah, sukuk, financial markets, Middle East, economic development.
Frequently Asked Questions
What is the core focus of this research?
The thesis investigates whether the emergence of Islamic Finance provided a successful solution to the financial and social obstacles faced by conventional financial systems in the Islamic world during the 20th century.
What are the primary thematic areas explored?
The study centers on the historical impact of Shari'ah law, the comparative efficiency of Islamic versus conventional banks, and the role of consumer demand and religious mentality in shaping modern financial markets.
What is the central research question?
The author seeks to answer whether Islamic Finance effectively overcame the difficulties posed by Islamic law on conventional finance while maintaining financial inclusion without violating Shari'ah principles.
Which methodology does the author apply?
The work uses a two-step, cross-sectional analysis: first by historical analysis of the difficulties of conventional finance, and second by evaluating the performance and reputation of modern Islamic financial service providers.
What topics are covered in the main body?
The main body examines supply-side issues like market size and structure, the operational models of Islamic banks and insurance (Takaful), and demand-side analysis regarding consumer preferences and financial inclusion.
Which keywords best describe this study?
Key terms include Islamic Finance, Shari'ah-compliance, riba, financial inclusion, Takaful, murabahah, and banking efficiency.
How does the author define the role of the Shari'ah in finance?
The author characterizes the Shari'ah not as a static legal code, but as a framework of principles (prohibition of riba, gharar, maysir) that necessitates specific, often customized, contractual designs for financial products.
What conclusion does the author reach regarding the industry's current status?
The author concludes that while the industry has grown impressively and operates with comparable efficiency to conventional banks, it still faces structural challenges such as low product standardization and a lack of global scale.
- Citar trabajo
- Ulrich Roschitsch (Autor), 2016, Balancing Religion and Finance. Did Islamic Finance overcome possible difficulties that the Islamic law posed on conventional finance?, Múnich, GRIN Verlag, https://www.grin.com/document/340096
