A bit of history
Islamic finance during the time of the Prophet Muhammad was characterized by real transactions such as sale on credit and renting, rather than through modern banking systems, which did not exist at that time. The Bayt al-mal (Government Treasury) played a role in managing funds and included a branch for lending and receiving repayments of interest-free loans. This system emphasized fairness and the prohibition of interest (ribâ) as stated in the Qur’ân (2:275): (1)
ٱلَّذِینَیَأۡكُلُونَٱلرِّبَوٰاْلَایَقُومُونَإِلَّاكَمَایَقُومُٱلَّذِییَتَخَبَّطُهُٱلشَّیۡطَـٰنُمِنَٱلۡمَسِّۚذَ ٰلِكَبِأَنَّهُمۡقَالُوۤاْإِنَّمَاٱلۡبَیۡعُمِثۡلُٱلرِّبَوٰاْۗوَأَحَلَّٱللَّهُٱلۡبَیۡعَوَحَرَّمَٱلرِّبَوٰاْۚفَمَنجَاۤءَهُۥمَوۡعِظَةࣱمِّنرَّبِّهِۦفَٱنتَهَىٰفَلَهُۥمَاسَلَفَوَأَمۡرُهُۥۤإِلَىٱللَّهِۖوَمَنۡعَادَفَأُوْلَـٰۤىِٕكَأَصۡحَـٰبُٱلنَّارِۖهُمۡفِیهَاخَـٰلِدُونَ﴿٢٧٥﴾
Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: “Trade is like usury,” but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever).
The Prophet Muhammad was the first to use the mudârabah (silent partnership) in trading with a wealthy woman named Khadijah (who later became his wife). At the time, Muslims practiced mushârakah (full partnership) when they operated large-scale commercial enterprises on the principle of sharing profits and losses. In addition, the Prophet Muhammad allowed people to use credit sales (bay’ salâm) to finance consumption or production without usury, and he encouraged Muslims (2) to provide benevolent loans (qard hasan). (3)
Of course, banks, as financial institutions, did not exist in this time. Indeed, in this regard Monzer Kahf, a scholar in Islamic Economics and Financial Expert, stated: (4)
“Banks as institutions date back to the sixteen century of the common era. This means that at the time of Prophet, peace and blessings be upon him, there were no banks. However, the main activities banks do is finance and finance is as old as the human society. Normal finance activities used to take place in all societies thousands of years before the time of the Prophet, peace and blessings be upon him, and during his time too. Financing during the time of the Prophet, peace and blessings be upon him, used to take place through real transactions namely: sale on credit, renting, and pooling resources together from several people to create a new project or venture.”
The Islamization of Arab countries during this period meant that Sharî’a law tended to spread rapidly, to the benefit of Muslims and non-Muslims alike. After Muhammad’s death in 632 AD, Islam spread widely throughout the Arab states and large parts of the non-Arab world. The Islamic State in this “golden age” dominated three continents: Asia, Africa and Europe. The Islamization of economic systems in the four centuries following Muhammad’s death concerned Morocco and Spain (to the west), India and China (to the east), Central Asia (to the north), Asia (to the north) and Africa (to the south). (5)
Actually, the first banks appeared in the Middle East after the death of the Prophet in suks(bazaars). They were known as serraf. The Crusaders learned about this financial in the year 1200 and took it to Europe back with them. The serrafsof Damascus, Baghdad, Cairo, Jerusalem, etc indulged in a variety of financial transactions such as: money exchange (sarf), deposit (wadî’ah), Sale on credit (bay’ bi ajâl), loan (qard), money transfer (suftajah), advance-payment forward sale (salâm bay’), etc. (6)
The extension of the tools of Islamic finance is also indicated by historical documents of contracts recorded between businessmen at the time, notably mudârabah a nd mushârakah. (7) The practices of Islamic finance remained virtually unchanged until the early 19th century. From the 19th century onwards, almost all Muslim countries came under the control of Western colonial powers (France in North Africa, Great Britain and France in the Middle East, Great Britain in the Indian subcontinent and Great Britain and the Netherlands in Asia), effectively dividing the Islamic world into numerous small states, (8) and that the existing Sharî’a-compliant financial system was effectively replaced by the capitalist system. From then until the second half of the 20th century, most Muslim economies were dominated by Western European economic systems and traditions. (9)
Today, the global economic and financial crisis has forced countries to find profound and urgent solutions to the deterioration of their macro-economic balances. Several sectors have been affected especially the financial sector in several Western countries. This led to the collapse and failure of several international banking groups. (10)
The latter perceive in the level of resilience demonstrated by certain Islamic banks following the subprime mortgage crisis, (11) the assurance of a system more resistant to turbulence and more efficient than the traditional banking system. (12)
Islamic finance first saw the light of day in the 1970s in petrodollar countries. But its foundations were laid much earlier, at the beginning of the century, when Muslim scholars and practitioners were looking for an alternative to the economic paradigms, namely liberal capitalism and communism. (13)
Islamic economics thus became acceptable and adopted by finance professionals, including non-Muslims. Thus, this concept (Islamic finance) is intended as a remedy to the requirements of international finance based on interest-based remuneration of loans by offering products legitimized by reference to Islam. It has easily integrated into the circuits of international finance through its spread in a large number of Arab and Islamic countries. (14)
In perspective, Islam has encouraged the believers to engage in fair trade back in the 7th century. Today, many international organizations call on governments and financial institutions to adopt and stand by the principles of fair trade for ethical reasons and equity purposes. In this respect, The Qur’ân states (4:29): (15)
یَـٰۤأَیُّهَاٱلَّذِینَءَامَنُواْلَاتَأۡكُلُوۤاْأَمۡوَ ٰلَكُمبَیۡنَكُمبِٱلۡبَـٰطِلِإِلَّاۤأَنتَكُونَتِجَـٰرَةًعَنتَرَاضࣲمِّنكُمۡۚوَلَاتَقۡتُلُوۤاْأَنفُسَكُمۡۚإِنَّٱللَّهَكَانَبِكُمۡرَحِیمࣰا﴿٢٩﴾
“O ye who believe! Eat not up your property among yourselves in vanities: But let there be amongst you Traffic and trade by mutual good-will: Nor kill (or destroy) yourselves: for verily Allah hath been to you Most Merciful!”
What is Islamic finance?
Islamic finance is a banking system that operates without interest, adhering to Sharî’ah law principles. It emphasizes risk-sharing, ethical investing, and profitability without engaging in activities considered harmful or exploitative, such as usury. The fundamental characteristics often contrast with conventional banking, which typically includes interest-based transactions. (16)
Islamic finance refers to financial activities and products that comply with Islamic law (Sharî’ah), which prohibits practices such as usury (ribâ) and promotes ethical investments. (17) It encompasses a variety of financial transactions that aim to ensure justice and equity in economic dealings, focusing on moral principles in managing money, saving, and investing. (18)
Chloe Domat introduces Islamic finance in the following terms: (19)
“Islamic finance is a way of doing financial transactions and banking while respecting Islamic law or sharia. Islamic finance hardly existed 30 years ago yet today is a $3.96 trillion industry with over 1,650 specialized institutions located all around the world. Islamic banks are by far the biggest players in the Islamic finance industry and account for $2,7 trillion or 70% of total assets. According to a 2023 State of Global Islamic Economy report, total sharia-compliant assets are expected to grow to $5.95 trillion by 2026.”
Initially, Islamic finance was limited to the framework of opinions (fatwâs) issued by Muslim jurisconsults (shaykhs) specialized in the jurisprudence of economic transactions (fiqh al-mu’âmalât), which described what was permissible and what was not. Then in the second phase, writings on the subject tended to be critical of the communist and capitalist systems. It wasn’t until the third quarter of the last century that the foundations of Islamic finance (20) began to crystallize as a subject of study and as an industry. Then, the efforts of researchers in theology and economics focused on differentiating between those aspects of the traditional financial system that do not contradict the precepts of Islam, in order to retain them, and those aspects that constitute a violation of these precepts. This is based on the fundamental principle that permission is the rule in transactions, prohibition being the exception. (21)
To show the financial relevance of Islamic finance, Mumtaz Hussain, Asghar Shahmoradi, and Rima Turk write: (22)
“Islamic finance has started to grow in international finance across the globe, with some concentration in few countries. Nearly 20% 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 (IBs), however, is so far mixed. While these banks face similar risks as conventional banks (CBs) 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.”
Next, work was done to how to meet the needs expressed by customers of financial institutions, while respecting the fundamental principles of Muslim law, which led to the creation of a range of instruments and institutions. This, also, led to the emergence of an Islamic financial system and its own philosophy, a system with its own principles, values, mechanisms and institutions, each with its own way of operating. It was, in fact, Islamic banks that subsequently institutionalized the concepts of this type of finance. As it is not a divine system, it is dynamic and can evolve to keep pace with changes. (23)
Islamic financial institutions include Islamic banks, Islamic or Takâful insurance companies, Islamic investment funds and issuers of sukûks (the Islamic equivalent of bonds). At the end of 2010, there were over 300 Islamic financial institutions in over 75 countries worldwide. The assets under management exceeded one trillion dollars. According to a study published by Ernst & Young, (24) retail banks are the main vehicle for the Islamic financial industry managing 74% of Islamic financial assets, compared with 10% for sukuk issuers, 10% for investment banks, 5% for investment funds and just 1% for Takaful companies. (25)
The system is also equipped with control and regulation bodies. It is within this framework that Sharî’ah control bodies operate, as well as the various bodies for standardization, training, arbitration, rating, etc. Here are just a few examples AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), CIBAFI (General Council for Islamic Banks and Financial Institutions), IIRA (Islamic Rating Agency) or IICRA (International Islamic Center for Reconciliation and Arbitration). (26)
Islamic finance is part of the broader concept of Islamic economics, (27) an economic doctrine, which, like all other doctrines (capitalism, communism, socialism), differs in its own value system. It is this system of values, universal in the end, that sets Islamic finance apart. Indeed, in addition to meeting the regulatory requirements and regulatory constraints demanded by the laws in force (banking laws, security laws, etc.), Islamic financial institutions are required to comply with certain requirements and rules that have their origins in Muslim law or Sharî’ah law. Thus, Islamic finance is first and foremost an ethical form of finance. (28) A value system built on the need to avoid what is forbidden, on a balance between self-interest and public interest, but also on the values of fairness, transparency and sincerity… These values are of paramount importance and must be reflected in acts and transactions.
Islamic finance is marked by its prohibition of interest (ribâ) and its focus on ethical investment, (29) emphasizing social responsibility. It recognizes two primary modes of financing: participatory and non-participatory. Additionally, there are two main types of sukûk (Islamic bonds), which include sovereign issuances by states and corporate issuances by companies or banks.
The fundamental principles of Islamic finance
The prohibition of interest-bearing loans (ribâ) is not the only distinctive feature of Islamic finance. It is based on other equally important principles. This is, of course, a non-exhaustive list of principles, some of which are the offshoots of others.
Prohibition of lending at interest (ribâ)
Usury (ribâ) is expressly forbidden in the Qur’ân. The Prophet cursed those who take it, the giver, the drafter and the witness. It is therefore forbidden to demand a return from the simple act of lending. Interest is the price of the loan, whereas, fundamentally, the loan must not generate any profit. This prohibition applies both to contractual interest on the loan as it does for any other form of late interest or interest disguised as penalties and commissions. (30)
Prohibition of excessive risk (al-gharâr)
Operations and transactions must be conducted with the necessary transparency and clarity, so that the parties are fully aware of the value of their exchanges. For this reason transactions whose counter-value is not accurately known, those involving excessive risk, or where the outcome depends essentially on chance, are prohibited. In all cases, Islamic finance is linked to the real economy. All financial transactions must be backed by real, exchangeable assets. This principle, combined with the prohibition of excessive uncertainty means that, for example, derivative products are prohibited.
Profit and loss sharing
No single party can assume all the risk associated with a transaction. As a result, the other party cannot claim the privilege of transferring all risk to the other party. Return is a corollary of risk, and its main justification. It is for this reason you cannot commit to a fixed return on an investment, for example.
No selling what you don’t own
Ownership is the main justification for generating profit, either by holding it or by selling it. This justification is simply a translation of the previous rule, since owning an asset means that the owner has to bear risks that justify the profit, if any. Therefore, you cannot sell an asset you do not own (the only exception to this rule is the Salâm contract), or sell assets before owning them. This is why intermediation activities are highly regulated, with financing processes that are meticulously designed to comply with this rule. (31)
Prohibition of illicit activities
Islamic finance is ethical and responsible. (32) This means that it is forbidden to finance all activities and products that are contrary to Islamic morality: alcohol, drugs, tobacco, weapons… as well as consumer products prohibited by Islamic texts (pork and pork products).
Prohibition of deferred exchanges of standard currencies
According to an express saying of the Prophet, the exchange of standard values of the same kind (gold for gold, silver for silver, and consequently currency for currency) may only be exchanged (from hand to hand) and in the same proportions. This text is at the origin of the prohibition of forward exchange, for example.
Muhammad Aqib Ali, explains the above principles in the following terms: (33)
“Islamic economic and financial system is based on the idea of collective welfare which is driven by virtue and goodness of both worlds. This idea of Islamic economic system is greatly in contrast to the modern interest based economic system which is driven by the principles of capitalism, unbridled resource consumption and materialism. Islamic system of finance emphasizes risk sharing which provides Islamic financial methods like murabaha, mudaraba, ijarah, musharakah, salam and istisna – guided by the Islamic principles derived from Holy Quran and the Sunnah (sayings and acts) of the Holy Prophet (SAW) to eventually facilitate trade and business in the society and to consequently bring economic well-being and prosperity. This is incredible to note that Islamic sacred texts from the times when paper money was not even invented offered guidance on intricate financial issues. Besides this, Islamic principles also provide guidance on the architecture of a system that is economically just and fair and is based on the schema of socio-economic welfare of all and not just certain wealthy individuals or groups.”
Financing instruments
It assumes that the creditor (the bank) buys a given asset at a price known to both parties, on behalf of its customer. The creditor then sells the asset to the customer in return for payments, in instalments or otherwise, over a given period, at a price agreed in advance between the two parties higher than the purchase price. Although this financial product is very similar to a classic debt contract, it nevertheless differs in a number of key respects. In effect, the bank has become the effective owner of the underlying asset, the transaction is truly backed by a real asset. It is therefore not a loan, but a credit sale transaction (cash purchase and forward sale). (34)
Moreover, in this transaction, the bank bears the risks associated with holding the asset, and this is the main justification for its margin. Furthermore, there is no explicit reference to an interest rate. The creditor is remunerated by a mark-up on the purchase price of the good. The amount of the profit margin is fixed in advance and does not vary during the term of the financing. This is one of the most popular financial instruments used by Islamic financial institutions, as it is highly flexible. Traditionally used for trade financing, al-murâbahah is the basis for a wide variety of Islamic financial arrangements, from real estate financing to project finance.
Al-ijârah
In an ijârah transaction, the creditor (the bank) buys assets which it then leases to a customer who can benefit from the possibility of repurchase at the end of the contract. Ijârah is very similar in form and spirit, to a leasing contract. However, there are some important differences. For example, in the event of late payment, it is not possible to provide for the payment of interest on arrears, for example, because the fixed penalty is equivalent to an interest rate. But also, because Muslim philosophy rejects any provision in a financial contract which penalizes a debtor in good faith who is already in difficulty. Also, in an ijârah contract, payments cannot begin until the lessee has taken possession of the asset in question, whereas in a conventional leasing contract, payments may commence from the moment the lessor purchases the underlying asset. What’s more, in a conventional lease, the risk of destruction or loss of the asset may be borne by the lessor or the lessee (usually the lessee). In an ijârah contract, it is the lessor who continues to be responsible for the asset, except in the case of malice or negligence on the part of the lessee. Finally, in an ijârah contract, it is possible to determine the amount of each payment, not in advance, but at the scheduled delivery of the underlying asset. This flexibility makes this instrument particularly useful for project financing. (35)
As-salâm
The as-salâm sale is a forward sale, i.e. a transaction where payment is made in cashdelivery takes place in the future. In principle, Islamic finance prohibits the sale of a non-existent asset, as this involves chance (gharâr). However, to facilitate certain operations, notably in agriculture, exceptions have been made. This contract is alsoa solution for financing production inputs.
Al-istisnâ’
This financial contract enables a buyer to purchase goods and have them delivered to him on a forward basis. Unlike as-salâm, in this type of contract the price, agreed in advance, is paid gradually as the goods are manufactured. The actual terms of payment are determined by the terms of the agreement between buyer and seller (in this case, the bank). This structure is mainly used in the real estate, shipbuilding and aeronautics industries.
Participatory instruments
Al-mudârabah
This operation brings together an investor (rabb al-mâl) who provides capital (financial or otherwise) and an entrepreneur (mudârib) who provides expertise. In this financial structure, similar to the French limited partnership, responsibility for managing the business falls entirely to the entrepreneur. Profits are shared between the two parties according to an agreed upon arrangement in advance, once the investor has recovered his capital and the entrepreneur’s management fees have been paid. In the event of a loss, the investor/the entrepreneur loses only his remuneration (this is where the mudârabah differs from a limited partnership).
A variant of the mudârabah, the two-part mudârabah, enables Islamic banks toplay an intermediation role similar to that of conventional banks. In this structure, the banksimultaneously plays the role of investor and entrepreneur. On the liabilities side, as mudârib, it manages deposits entrusted to it by its customers. On the asset side, it makes the funds thusto other investors. In this type of financial contract, the borrower’sremuneration depends directly on the return on his investment project,which encourages the borrower to manage the funds entrusted to him in the best possible way. In other circumstances, the bankmay be the provider of funds (rabb al-mâl) and it is the customer who becomes the mudârib.The mudârabah is particularly well suited to financing innovative small businesses(particularly in the intangible sector) and is most closely akin to the concept of venture capital. (36)
Al-mushârakah
Al-mushârakah is the translation of “association”. In this operation, two partners invest togetherin a project and share the profits according to the capital invested. In the event of aloss, this is borne by both parties in proportion to the capital invested. The nature of thissimilar to a joint venture. There is no single form of al-mushârakah.Islamic law does not provide for all the details of this operation, but only specifies the mainprinciples. So, there are many different forms of al-mushârakah, and new variations could be devised.One interesting form is the degressive al-mushârakah: a transactionwhere the share of one of the partners in the association is gradually bought out by the other partners.While specialists agree that this instrument is probably the most faithful to the fundamental preceptsof Islam, in reality this financing technique is rarely used. It ismainly used for small-scale investment projects. (37)
Instruments for non-banking institutions
Sukûk
This is a financial product backed by a tangible asset with a fixed maturity that confers a right of claim on its owner. The sukuk (38) is thus a financial product similar to bonds. It has a fixed maturity and is backed by an asset that provides a return on investment. They are structured in such a way that their holders run a “credit” risk and receive a profit share from the underlying asset (which must be legal), rather than a fixed interest rate. (39) There are two types of sukûks: sovereign (issued by a government) and corporate (issued by a company or bank). The underlying products of sukûks can be represented by contracts such as ijârah, mushârakah or mudârabah. As sukûks are asset-backed by nature, they are able to finance infrastructure development, and many emerging countries are considering financing their projects by issuing sukûks. (40)
Takûful insurance
Takâful (41) derives from the Arabic verb kafâlah (to guarantee). It is an insurance concept based on cooperation and mutual aid between participants. It is also based on risk pooling, the absence of interest (prohibition of ribâ), profit and loss sharing (mudâraba), delegation of management by agency contract (wakâla) and the prohibition of illicit investments (harâm). In takâful insurance, a distinction is made between the funds of and member-policyholder funds. Shareholders must neither profit nor lose from insurance operations. In order to circumvent the prohibition on excessive risk-taking (al-gharâr) and the payment and receipt of interest (ribâ), the premium takes the form of a donation to the community of policyholders for their mutual benefit. These donations must cover all underwriting and management costs. The operator is merely a manager of the contributions community and must calculate all operating costs and pass them on to the fund. The takâful company undertakes to redistribute profits to its members. There are two acceptable options: to distribute to all, without exception, or to distribute to those who have had no claims (similar to a bonus). Shareholders are not entitled to a share of part of the underwriting profit. In the event of a loss, they must advance an interest-free loan to the member repayable from future underwriting profits.
The Qur’ân, the main source of Islamic law, and the Sunnah, the transcript of the Prophet Muhammad’s deeds and sayings, are the two main religious sources of Islamic finance. The Sharî’ah, the Islamic law governing economic and social practices in particular, gives rise to the principles on which Islamic financial practices are based.
These practices are based on what is forbidden (harâm) and what is permitted (halâl). In theory, the sharing of profits and losses and the redistribution of wealth are recommended, the principle of equity (42) being the central pillar of Islamic financial practices. The following are prohibited or proscribed:
Charging predetermined interest (ribâ): money cannot be created without “work”. Consequently, the creation of wealth that is not based on a real transaction is prohibited;
Interest should not be confused with profit. The former relates to the creation of money ex-nihilo, while the latter is defined as a difference in value from “real” transactions, and is therefore permitted in Islamic finance; and
Hoarding, only precautionary savings intended for debt repayment or social needs are permitted.To respect this principle, many Islamic investors must invest in gigantic projects if they are unable to save. This is particularly true of certain Gulf countries, notably the United Arab Emirates (the Burj Khalifa tower in Dubai, or the project to build a replica of the Taj Mahal with a budget estimated at over a billion dollars…).
Financial and commercial activities or operations linked to the occurrence of random events, such as insurance contracts in conventional finance. Islamic finance authorizes only certain insurance contracts: life insurance based on the principle of precaution rather than uncertainty, and takâful insurance based on several specific principles.
Speculation (maysir) (43): all financial products whose underlying value is uncertain, such as futures contracts, swaps, options, etc., are prohibited. On the other hand, sales of goods or services that depend by nature on random events, such as agriculture, are authorized (negotiating the price of raw materials before the harvest, for example).
Investing in amoral activities: any transaction related to tobacco, alcohol or gambling, or any investment in an activity contrary to Sharî’ah principles, is prohibited.
The development of Islamic finance
The development of Islamic finance has gained significant traction globally, particularly in a few concentrated countries. It is rooted in Sharî’a (Islamic law) and emphasizes ethical investments and compliance with Islamic principles. The historical rise of the Islamic banking industry has shown notable growth and adaptation in the international finance sector, transforming traditional financing activities to align with Islamic economic principles.
The development of Islamic finance over the last two decades is one of the most interesting developments in the recent history of the global financial services sector. Institutions specializing in Islamic finance now recognize that their market is not confined to certain regions of the Muslim world, but is beginning to expand internationally. (44)
Modern Islamic finance dates back to the 1970s. Today, it remains highly concentrated in the Persian Gulf region and South Asia, but is now beginning to gain momentum in Europe and the United States, most likely as a result of the sharp rise in hydrocarbon prices.
To capture some of the abundant liquidity (45) from the Persian Gulf regions Persian Gulf regions, financial engineers have fine-tuned their offers to appeal to a strain of investors with high potential and specific convictions.
Today, Islamic financial institutions operate in over 75 countries. Financial assets that meet Islamic criteria have increased more than forty-fold since 1982 to exceed $1,000 billion in 2010 with a double-digit growth rate over the last five years. (46)
Despite the many innovations introduced by Islamic finance since its inception still has significant development potential, due to the following key factors:
The expansion of Islamic finance remains limited compared to conventional even in some Muslim countries;
The resilience shown by some Islamic banks in the wake of the subprime crisis;
The general awareness of the need for a financial system whose primary objective is to finance the real economy and limit speculative practices;
The ongoing search for new products to finance the economy. On the sustainable development goals and the role of Islamic finance, Habib Ahmed, Mahmoud Mohieldin, Jos Verbeek and Farida Aboulmagd argue: (47)
“The Sustainable Development Goals, the global development agenda for 2015 through 2030, will require unprecedented mobilization of resources to support their implementation. Their predecessor, the Millennium Development Goals, focused on a limited number of concrete, global human development targets that can be monitored by statistically robust indicators. The Millennium Development Goals set the stage for global support of ambitious development goals behind which the world must rally. The Sustainable Development Goals bring forward the unfinished business of the Millennium Development Goals and go even further. Because of the transformative and sustainable nature of the new development agenda, all possible resources must be mobilized if the world is to succeed in meeting its targets.’’
The roots and principles of Islamic Finance
The roots and principles of Islamic Finance are as old as the religion itself. For centuries, fiqh al- mu’amalât (48) has provided a structured framework for Muslim financial transactions, but it was only towards the end of the 20th century that the Islamic financial system has become developed sufficiently to be considered as a distinct model, allowing Muslims (and non-Muslims) to conduct financial activities in accordance with the precepts of Islam.
The first experience in this field dates back to the 60s, with the creation of the Mit Gamr savings banks in Egypt and the “Piligrim’s managment Fund” (49) in Malaysia. The aim of these institutions was to reduce banking exclusion and promote development of underprivileged sections of the population. Their activities, which were primarily development-oriented, were limited to the local level.
To this end, the consensus is that modern Islamic finance really came into being after the 1970s, following the creation of the Organization of the Islamic Conference (OIC), (50) which brought together a large number of Muslim countries. At the time, the challenge was to design a financial system that would respect the precepts of Islam and be compatible with the modern economic model. At the third Islamic Conference, held in Jeddah in 1972, a comprehensive plan to reform monetary and financial systems in line with Islamic ethics. (51)
In 1974, the OIC summit in Lahore voted to create the intergovernmental Islamic Development Bank (IDB), (52) which was to become the cornerstone of the Islamic banking system. The aim of this new institution was to participate by injecting or lending capital for productive business projects, and to provide financial assistance to member countries for their economic and social development and to establish and manage special funds for specific purposes. It has been authorized to accept deposits and mobilize financial resources in accordance with Sharî’ah law.
The IDB currently has 56 member countries, of which the largest holdings are Saudi Arabia (26.5%), Libya (10.6%), the United Arab Emirates (7.5%) and Kuwait (7.1%).
Dubai Islamic Bank (DIB) was founded in 1975. It is considered to be the first universal, non-governmental Islamic bank. Over the same period, the number of similar Islamic banks expanded rapidly: Kuwait Finance House in 1977, Banque Fayçal in Egypt in the same year, Islamic Bank of Jordan (1978) and the Islamic Bank of Bahrain in 1980. In addition, a group of specialized investment banks, including the Nassau Investment Company in 1977, the Sharja-based Gulf Investment Company also created in 1977 and Geneva-based Sharia Investment Services in 1980.
The 90s of the last century saw the expansion of Islamic retail banking and the birth of Islamic financial disintermediation, i.e. the transition from a debt economy to a financial market economy. During these years, Islamic financial institutions became increasingly structured, and their operating rules refined. Thus, in 1991, the main international standards organization for the Islamic finance industry was created: the Accounting and Auditing Organisation for Islamic Finance Institutions (AAOIF) (53) which will be responsible for developing the appropriate accounting standards for Islamic financial institutions.
According to the IMF (54) estimates, there are currently over 300 Islamic institutions operating in over 75 countries. According to the same statistics, the industry has grown at an average annual growth of around 15% over the past ten years. Their forecasts indicate that this trend is set to continue and even accelerate over the coming years, depending on the regulatory practices that are put in place. The rapid expansion of Islamic finance as an alternative model of financial intermediation reflects its ability to respond to structural changes in consumer and business demand, its competitiveness and its ability to withstand a difficult and changing environment. (55)
The dynamism of this market has been felt in the traditional centers of Islamic finance and in a number of other markets. According to Bank Negara Malaysia (Central Bank of Malaysia), the number of Islamic bank subsidiaries in Malaysia increased from 126 in 2004 to 766 in 2005 (+508%). Elsewhere, a significant number of new Islamic Financial Institutions (IFIs) (56) have been rapidly established in traditional markets for this industry, more specifically in the countries of the Gulf Cooperation Council (GCC). (57)
Islamic finance is also growing in new markets such as Syria, Lebanon, the UK, Turkey and Canada. In the UK, for example Islamic banks such as the Islamic Bank of Britain and the European Islamic Investment Bank. (58)
Islamic banking is experiencing significant growth, with projections showing an increase to approximately US$6.67 trillion by 2027. In 2023, Islamic banks achieved an 8% growth rate, and S&P Global Ratings anticipates high-single-digit growth for 2024-2025. (59) As acceptance of Islamic banking broadens, its expansion could accelerate further.
This development has generated a great deal of interest on the part of global players in conventional finance in developed economies, who have sought to increase their holdings in Islamic financial markets. With increased liberalization, the Islamic financial system has become more diversified and gained increasing depth. As a result, Islamic finance currently appears to be one of the most dynamic segments of the international financial services industry. Other countries are also beginning to take an interest in this sector, particularly in North Africa. (60)
The Islamic financial landscape has undergone a remarkable transformation, with a large number of players and a wide range of products and services. There are several possible reasons which explain the significant growth in Islamic assets. (61)
The first is the spiritual and religious revival that has created a growing appetite for Sharî’a-compliant products. The second reason is related to the emergence of considerable interest from the Gulf States, mainly as a result of rising oil revenues. A third reason could be the increase in banking competition in the Middle East. This competition has intensified and become more visible following the integration of these countries into the World Trade Organization (WTO). (62) This has prompted banks to seek an alternative by specializing as Islamic banks. Larger banks had the choice between converting to IFIs or open Islamic “windows” to diversify their portfolios and take advantage of this developing niche.
Today, Islamic financial institutions continue to consolidate their deposit base and the various operators are taking advantage of financial innovations to expand their product offerings. They are currently present in several regions of the world: Middle East, South Asia, Europe, America, North Africa, etc.
Islamic finance in Morocco
Products
The marketing of Islamic or officially “alternative” financial products (63) is a very recent development. Indeed, with a view to developing Islamic finance the Central Bank of Morocco joined the International Financial Services Board (IFSB) (64) in 2006. Furthermore, in September 2007, Bank Al Maghrib published the first directive on alternative products (RN 33/G/2007). This directive covers ijârah, mushârakah and murâbahah.
Challenges
The products authorized by the Bank Al Maghrib directive have broadened the range of products offered by Moroccan banks. This alternative form of financing will help to improve the bankability of the Moroccan economy. In theory, Morocco represents an ideal market for the development of Islamic finance under its official “alternative” name, given the very nature of the country. In addition to the religious argument, the Moroccan economy suffers from a low savings rate which prevents it from financing the level of investment needed to maintain strong, stable economic growth. (65) In addition to its low level, Moroccan savings is too short to finance long-term investment projects, as it is mainly made up of liquid assets and non-interest-bearing investments. (66) Islamic finance also represents an ideal opportunity to encourage investment flows, particularly from the Persian Gulf regions.
Combined with factors such as low incomes and the high proportion of illiterate people, the cultural factor, dominated by the religious aspect, explains the demand for this type of financing. This is why alternative products can be a powerful lever for mobilizing and allocating savings, with the competition in the financial sector and the easing of regulatory constraints.
Challenges to alternative finance
Like any nascent industry, Morocco’s alternative finance sector faces a number of challenges in order to grow. (67) To assert its place as a financing method able to compete with conventional means of financing, several avenues need to be explored:
Product labeling: The question that naturally arises concerns the body responsible for certifying products;
Transparency: Specific requirements on product transparency need to be incorporated into regulations to provide investors and savers with better information; and
Liquidity: this is a feature of all Islamic finance markets, which are shallower than conventional markets.The main instruments of Islamic finance
The translation of the fundamental principles of Islamic finance into instruments has led to the emergence of specific products and concepts. A distinction is made between financing instruments on the one hand, and participatory instruments on the other.
Financing instruments
Al-Murâbaha: This involves the creditor (the bank) purchasing a given asset at a price known to both parties on behalf of its customer. The creditor then resells the asset to the customer in return of payments, in instalments or otherwise, over a given period, at a price agreed in advance between the two parties higher than the purchase price. Although this financial product is very similar to a classic debt contract, it nevertheless differs in a number of key respects. In effect, the bank has become the effective owner of the underlying asset, the transaction is truly backed by a real asset. It is therefore not a loan, but a credit sale transaction (cash purchase and forward sale). Moreover, in this transaction, the bank bears the risks associated with holding the asset, and this is the main justification for its margin. Furthermore, there is no explicit reference to an interest rate. The creditor is remunerated by a mark-up on the purchase price of the good. The amount of the profit margin is fixed in advance and does not vary during the term of the financing. This is one of the most popular financial instruments used by Islamic financial institutions, as it is highly flexible. Traditionally used for trade financing, al-Murâbaha is the basis for a wide variety of Islamic financial arrangements, from real estate financing to project finance. (68)
Al-Ijârah: An Ijârah transaction consists of the creditor (the bank) purchasing goods that it rents to acustomer who can benefit from the possibility of repurchase at the end of the contract. The ijârah is very close,in form and spirit, to a leasing contract. However, there areimportant differences. For example, in the event of late payments, it is not possible to provide for thepayment of late payment interest, firstly, because the fixed penalty is similar to an interest rate.But also, because Muslim philosophy disapproves of any provision in a financial contractthat penalises a debtor in good faith who is already in difficulty. Also, in an ijârah contract, paymentscannot begin before the lessee has taken possession of the property in question,while in a traditional leasing contract, payments can begin from the momentthe lessor purchases the underlying asset. In addition, in a conventional lease, the risk ofdestruction or loss of the asset can be borne by the lessor or the lessee (usually; it is the lessee). In an ijârah contract, it is the lessor who continues to have responsibility for theasset, except in the event of malice or negligence on the part of the lessee. Finally, in an ijârah contract, it ispossible to determine the amount of each payment, not in advance, but on thescheduled date of delivery of the underlying asset. This flexibility makes this instrument particularly useful in the case of project financing.
As-Salâm: The as-salâm sale is a forward sale, i.e. an operation where payment is made in cash while delivery is made in the future. Islamic finance prohibits, in principle, thesale of a non-existent good because it involves chance (gharâr). However, to facilitate certainoperations, particularly in agriculture, exceptions have been granted. This contract isalso a solution for financing production inputs.
Al-Istisnâ: This financial contract allows a buyer to obtain goods that are delivered to him in a forward delivery. Unlike the salâm, in this type of contract, the price, agreed in advance, is paid graduallythroughout the manufacture of the good. The concrete terms of payment are determined by theterms of the agreement between the buyer and the seller (in this case the bank). This, financing structure is mainly used in real estate, shipbuilding andaeronautics.
Participatory instruments
Al-Mudârabah: This operation brings together an investor (rabb al-mâl) who provides the capital (financial or other)and an entrepreneur (mudârib) who provides his expertise. In this financial structure, close tothe organization of the limited partnership (69) in France, the responsibility for managing the activityfalls entirely on the entrepreneur. The profits made are shared between the two stakeholdersaccording to a distribution agreed in advance after the investor has recovered his capitaland the entrepreneur’s management fees have been paid. In the event of a loss, it is the investorwho assumes the entirety, the entrepreneur only loses his remuneration (this is where the mudârabah differs from the limited partnership).A variant of the mudârabah, the two-part mudârabah, allows Islamic banks toplay an intermediation role close to that of conventional banks. In this structure, thebank plays the role of both investor and entrepreneur. On the liability side, as mudârib, it manages deposits entrusted to it by its clients. On the asset side, it makes thefunds thus collected available to other investors. In this type of financial contract, theborrower’s remuneration depends directly on the performance of his investment project, which encourages him to manage the funds entrusted to him as best he can. In other circumstances, the bankcould be the funder (rabb al-mâl) and it is the client who becomes mudârib. Mudârabah is particularly suited to financing small innovative businesses(particularly in the field of intangibles) and is most similar to the concept of venture capital.
Al-Mushârakah: Al-Mushârakah is the translation of “association”. In this operation, two partners invest togetherin a project and share the profits according to the capital invested. In the event of a loss, this is borne by both parties in proportion to the capital invested. The nature of this issimilar to a joint venture. There is no single form of al-mushârakah.Islamic law does not provide for all the details of this operation, but only specifies the mainprinciples. So, there are many different forms of al-mushârakah, and new variations could be devised.One interesting form is the degressive al-mushârakah: a transactionwhere the share of one of the partners in the association is gradually bought out by the other partners.While specialists agree that this instrument is probably the most faithful to the fundamental preceptsof Islam, in reality this financing technique is rarely used. It ismainly used for small-scale investment projects. (70)
The principles of Islamic finance
The principles of Islamic finance are rooted in Islamic law (Sharî’ah) and emphasize ethical, (71) equitable, and socially responsible investing. Here are the key principles:
Prohibition of ribâ (usury/interest): Earning interest on loans is strictly prohibited in Islamic finance. Instead, profit should be earned through legitimate business activities and risk-sharing.
Risk-Sharing: (72) Financial transactions should involve risk-sharing between parties. This principle promotes cooperation and helps mitigate uncertainties in economic activities.
Ethical Investment: Investments must align with Islamic values and avoid businesses that deal in harâm (prohibited) activities, such as alcohol, gambling, and pork.
Asset-backed Financing: Transactions must be backed by tangible assets or services. This ensures that financial activities are linked to real economic activities, promoting stability and transparency.
Transparency and Accountability: Islamic finance requires clear contracts and transparency in dealings to ensure fairness and avoid exploitation.
Prohibition of gharâr (excessive uncertainty): Contracts should avoid excessive uncertainty or ambiguity, promoting clarity and explicit terms in agreements.
Social Welfare: Islamic finance encourages practices that contribute to social welfare and the common good, aligning financial activities with ethical and moral considerations.These principles aim to create a financial system that is just, fair, and conducive to economic development while adhering to Islamic ethics.
What are sukûk? (74)
Sukûk are Islamic financial certificates that are often referred to as “Islamic bonds.” They represent a share in an underlying asset or investment rather than merely denoting a debt obligation, which is in accordance with Islamic finance principles that prohibit interest (ribâ). (74) Here’s how sukûk work in Islamic finance:
Key Features of sukûk:
- Asset-Backed:
Sukûk are typically backed by tangible assets, projects, or services. This ensures that the investment is linked to real economic activity, adhering to the Islamic principle of promoting socio-economic development.
- Types of sukûk:
There are various types of sukûk, including:
Ijârah: Lease-based sukûk where the sukûkholders receive rental income.
Murâbahah: Cost-plus financing where the profit margin is specified; holders receive profit returns based on the sale of goods.
Mudârabah: Investment partnership where one party provides capital and the other provides expertise, sharing profits as agreed.
Mushârakah: Joint venture where all partners share profits and losses according to their investment ratios.- Risk-Sharing :
Sukûk promote risk-sharing between investors and issuers, as the returns depend on the performance of the underlying asset or project. This contrasts with traditional bonds, where investors simply earn interest regardless of the issuer’s performance.
- Monthly or Periodic Returns:
Sukûk holders typically receive periodic distributions as profits or lease rentals, which are predetermined and specified in the sukûk structure.
- Legal Structure:
Sukûk involve a complex legal framework, including the creation of special purpose vehicles (SPVs) (75) or trusts to hold the underlying assets and ensure compliance with Sharî’ah principles.
- Exit Strategy: (76)
Sukûk usually have a defined maturity date at which the principal is returned to the investors, provided the underlying assets remain intact.
Advantages of sukûk:
Diversification: Provides alternative investment options for both Islamic and conventional investors.
Liquidity: Certain sukûk can be traded in secondary markets, offering liquidity to investors.
Social Responsibility: (77) Many sukûk are linked to projects that promote social welfare or community development.Sukûk serve as a vital instrument in Islamic finance, enabling investment while adhering to Sharî’a principles. They provide financing for various projects while promoting ethical and responsible investment practices.
Ethical investment (78)
The significance of ethical investment in Islamic finance is rooted in the principles and values of Sharî’ah (Islamic law), which emphasizes social justice, equity, and the promotion of good while avoiding harm. Here are some key aspects highlighting the importance of ethical investment in Islamic finance:
Prohibition of Harâm Activities: Islamic finance prohibits investment in businesses that engage in harâm (forbidden) activities, such as alcohol, gambling, pork production, and usury. This aligns investments with moral and ethical values, ensuring that funds are not used to support harmful practices.
Social Responsibility: Investments in Islamic finance are meant to promote social welfare and contribute positively to society. Financial products and services aim to enhance the well-being of individuals and communities, supporting sectors such as healthcare, education, and sustainable development.
Risk and Profit-Sharing: Islamic finance promotes participatory modes of financing where profit and risk are shared between investors and entrepreneurs. This instills a sense of partnership and discourages speculative behavior, fostering a more stable and equitable financial ecosystem.
Transparency and Fairness: Ethical investment in Islamic finance requires transparency in contractual agreements and dealings. This ensures that all parties are treated fairly, fostering trust and integrity in financial transactions.
Economic Justice: Islamic finance aims to promote economic justice by ensuring that wealth is distributed fairly and that investments contribute to the socio-economic development of society. It seeks to narrow the gap between rich and poor by promoting inclusive economic opportunities.
Accountability: Islamic financial institutions are accountable to both their stakeholders and society. They must ensure that their activities align with ethical standards and social norms, reinforcing the need for ethical behavior in all aspects of business.
Sustainable Development: Ethical investing in Islamic finance often incorporates environmental, social, and governance (ESG) criteria, (80) aligning with global sustainability goals. This approach encourages investments that do not harm the environment and support sustainable practices.Thus, ethical investment is a fundamental aspect of Islamic finance, influencing decision-making processes and shaping the nature of financial transactions to ensure they align with ethical principles and contribute positively to society. (81)
As to what concerns ethical investment in Islam, Volker Nienhaus writes: (82)
“As its name suggests, Islamic finance is based on a religious worldview and is thus often considered to be ‘ethical finance’ per se. It is expected to observe the prohibition against interest (riba), uncertainty (gharar) and gambling (maysir), and it is supposed to tie financial transactions to activities in the real economy and share entrepreneurial risks. Proponents of Islamic banking claim that it is therefore superior to conventional finance regarding efficiency, justice and stability. The practice of Islamic banking, however, has reduced potentially substantial differences to actually subtle distinctions in the contractual basis of financial transactions. The replication of conventional products – including functional equivalents for complex structured products similar to those that contributed to the recent financial crisis – took place with the approval of prominent scholars on the Shari’ah boards of Islamic financial institutions. The said Shari’ah scholars see themselves more as legal advisors than as guardians of business ethics.’’
Conclusion: The potential contribution of Islamic finance to economic and social problems
The Islamic finance has become an economic reality of today’s world bringing sound financial alternatives that can undoubtedly solve some economic mishaps and problems of the current times. In this regard Ibrahim Wade argues quite rightly: (83)
“Islamic finance can no longer be dismissed as a passing fad or as an epiphenomenon of Islamic revivalism. Islamic financial institutions now operate in over 70 countries. Their assets have increased more than fortyfold since 1982 to exceed $200 billion. In 1996 and 1997, they have grown at respective annual rates of 24 and 26 per cent.1 By certain (probably overly optimistic) estimates, up to half of the savings of the Islamic world may in the near future end up being managed by Islamic financial institutions.”
And he goes on to say:
“Islamic finance is thus in many ways well suited to the global economy. This is all the more striking and paradoxical in that it is often said that Islam is incompatible with the ‘new world order’ that emerged with the end of the cold war. In addition, how could a medieval economic system be relevant in a world of revolutionary, technology-driven global finance? And how could an interest-free system fit within the broader interest-based financial system?”
The Islamic economy in general and Islamic finance in particular could provide sound solutions to some of the problems of the world. This applies to all countries suffering from such problems as: unemployment, deteriorating purchasing power, development and infrastructure issues, and so on. (84)
First of all, Islamic financial institutions could provide a propitious framework for the resources, both internal and external. Indeed, internal resources were in the form of cash in safes, jewelry and real estate in the absence of instruments to match the convictions of a large segment of the population. In addition, investment formulas based on participatory techniques, such as al-mudârabah or al-mushârakah, are considerably more than traditional bank investments, particularly during periods of falling interest rates. Subscribing to sukûks with a serious issuer could guarantee a return well than that offered by money-market investments. Furthermore, the same sukûk mechanism could be used to mobilize resources for the State, private operators, banks, and thus finance large-scale projects: infrastructure projects, refineries, steelworks, car manufacturers, among others. Islamic investment funds are also an attractive framework for attracting resources, particularly from external lenders interested in investing. (85)
Secondly, Islamic financial institutions could be a lever for growth financing, for example by supporting innovative projects or those promoted by young promoters who do not have the necessary resources for self-financing. This is the case with the al-mudârabah instrument, where the lender acts as rabb al-mâl and the promoter as manager or mudârib. On the other hand, the insurance market has not yet reached the desired level of development due to secular obstacles. This market could be given a major boost thanks to the takâful solution. Other non-financial institutions, such as al-waqf (donation made in perpetuity charity), and zakât (almsgiving) would provide an excellent financing of the budget deficit, by taking partial responsibility for financing development. Indeed, by establishing a regulatory framework governing the collection of zakât and waqf resources, and above all by establishing rules for control and good governance, the possibilities of mobilizing resources through these funds will be increased. These resources could be channelled to support the State’s efforts to care for disadvantaged families, combat poverty, living conditions in the most disadvantaged regions, and even involvement in financing of public assets such as schools, universities and hospitals (following the example of foundations in the Western world). (86)
Islamic finance may be derived from the Muslim religion, but it can also be seen as a branch of ethical finance. It is based on values of responsibility, equity, social justice, sharing, mutuality and balance, all of which are largely universalizable. Over the past fifty years or so, Islamic finance has expanded and enriched considerably. Its rules have been adopted by financial institutions in most Muslim countries. Western banks operating in these regions also offer financial products in line with Islamic principles. A relatively recent discipline, it needs to make progress in homogenizing its rules and gaining in transparency to reach maturity.
The philosophy of Islamic finance is based on principles and values that emphasize ethical practices, risk-sharing, and social justice. It operates on the concept of “risk-sharing” or “profit and loss- sharing,” which distinguishes it from conventional finance. This system aims to promote economic welfare by ensuring that the financial transactions contribute positively to society and comply with Islamic law (Sharî’a).
On this particular aspect, Miloudi Kobiyeh argues: (87)
“Over time, each society builds up its own economic order, in which its values, its vision of the individual and society, and its attitude to money and its role in society. For Islam, economics and morality are inseparable. Their intertwining aims to ensure that money does not become an idol to be worshipped and tempted by temptation, but rather a good of which man is the guardian. This ethic means that money is not an end in itself, but a means to an end. The Koranic prohibition of ribâ, the Arabic word for usury and interest, has forged a philosophy that guides individual behavior in this area.”
A compendium of Islamic financial products:
Ijârah
This is a contract under which the bank buys a piece of equipment or a building for cash and then rents it out to its customer on an Ijârah basis for a fixed period. Ijârah differs from the leasing used by conventional banks in that the Islamic Bank only begins to collect rent once the equipment has been made available to the customer. In addition, the Islamic Bank advances the cost of major repairs, if any, and recovers them from future rental payments.
Ijârah wa iqtinâ’
Similar to ijârah, but includes a purchase option for the customer at the end of the contract.
Istisnâ’
A contract under which the bank agrees to manufacture or build a good for the customer, who undertakes to pay for it at pre-agreed times. The bank may sign another contract with a manufacturer or constructor with the same technical characteristics as the contract signed with the customer. In this case, the bank will pay a lower amount to the builder or manufacturer and require delivery before the date to which it has committed itself with its customer.
Mudârabah
Investment partnership. A financing technique used by Islamic banks in which the capital is provided entirely by the bank, while the other party manages the project. The profit is distributed between the two parties according to a ratio to be determined when the contract is signed. The financial loss falls to the owner of the capital; the manager’s loss is the opportunity cost of his own labor force, which has failed to generate surplus income.
Murâbahah
A form of financing that enables the customer to make a purchase without having to take out an interest-bearing loan. The bank buys a good and then sells it to the customer at cost plus an agreed profit margin. The murâbahah contract specifies the nature of the goods, the purchase price, exchange rates, the cost price, the profit margin, the selling price and the delivery and payment terms. Murâbahah may concern domestic or foreign trade operations.
Mushârakah
Investment partnership. The bank and the customer participate together in the financing of a transaction and jointly assume the risk in proportion to their participation. Profits or losses are shared between the customer and the bank on a basis agreed in advance by the parties.
Qard Hasan
Loan without interest or profit. More akin to a grant than a commercial loan. This technique is rarely used by commercial establishments. On the other hand, it can be used in specific situations (when an individual or company is in difficulty, or to encourage the development of fledgling sectors).
Salâm
Contract providing for prepayment of goods to be delivered at a later date. No sale is possible if the goods do not exist at the time of the contract, but this type of sale, which is the exception, is authorized provided the goods are defined and the delivery date fixed. This type of sale generally involves physical goods, to the exclusion of gold and silver, which are considered to be monetary assets.
Sukûk
Similar to an asset-backed bond, sukûk is a commercial paper that gives the investor a share in the ownership of an underlying asset, and provides an income stream in return. The issuing entity must identify the existing assets to be sold to sukûk investors, by transferring them to a special-purpose entity. The investors then enjoy the usufruct of these assets, in proportion to their investment. They generally bear the credit risk of the issuer, rather than the actual risk associated with the assets held by the SPV (Special Purpose Vehicle). Sukûk may be listed and rated according to the target market, but this is not mandatory. Sukuk are generally issued by corporations, certain financial institutions and sovereign states.
Takâful
Islamic insurance that takes the form of cooperative insurance with pooled funds, based on the principle of mutual assistance. In the takâful system, members are both insurers and insureds. Traditional insurance is forbidden in Islam, as it contains several harâm elements such as gharâr and ribâ.
Tawarruq
Reverse murâbahah. This is a financial technique used to obtain loan financing by purchasing in instalments an asset held by the bank. Applicants then authorize the bank to sell, on their behalf, their share in the property to a third party in a cash sale, and then deposit the proceeds of the sale in their account.
Wakâlah
The customer owns the invested capital, appoints an Islamic bank as agent and pays an appraisal fee to remunerate the bank for its work in managing the funds.