Question

In: Finance

what are the practicabilities of Islamic finance in current finance market?

what are the practicabilities of Islamic finance in current finance market?

Solutions

Expert Solution

Islamic finance is governed by its own set of rules, the remarkable ones being:

  • No interest on money lent
  • No investment in gambling
  • No investment in business engaged into prohibitory activities
  • No speculation, not even in derivatives markets
  • Loans to be against real economic asset

Islamic banking has turned out to be quite a successful one specially in case of recent downturn, specially because of its principles. It turned out to be a very safe bet because it had least or almost zero exposure in the toxic assets because of its conservative principles.

However, the practicability of this Islamic banking is far and fewer:

  1. Lack of familiarity with Islamic Banking across the globe: Lack of awareness is limiting its growth.
  2. Not charging interest is contradictory to the basic principal of finance such as time value of money, reward for the risk taken, return, return expectation etc. It's very unlikely that Investors and lenders across the globe will accept and implement Islamic banking.
  3. There is no uniform and legal framework for the Islamic banking. They are regulated by various Shariah boards. Such Shariah boards have empirically given different opinion and prescribed different rules in similar situations. There is no uniform global code for Islamic Banking.
  4. Such a banking can't be run without government intervention. It's practically impossible to be run by private companies because if such a banking is not allowed to charge interest, how will the private companies / banks make money.
  5. The Islamic banking is still very primitive and not driven by technology. It lacks the convenience that conventional banking offers.

Because of these and many more other reasons, the Islamic Banking lacks popularity and acceptability.


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