Islamic Finance

Introduction
Islamic finance involves structuring financial instruments and financial transactions to satisfy traditional Muslim structures 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.

Islamic Finance Rules

Islamic financial law forbid pay and receive interest which came from Qu'ran teaching. Sale and leaseback are classified as rent not as interest. The system is asset-based, with tangible assets or commodities at the heart of it. There are buyers and sellers, not borrowers and lenders. One of the core principles at the heart of Islamic economics is risk sharing. The bank and the people who put their money in it share any profit, or loss, from investments.

Gambling is strictly forbidden, the investment activities involving future contracts, option contracts, derivatives and securities are likely classified as gambling.

How does the bank make profit?

General banking Lends money to borrowers and collects interests. Islamic Banking Buy the assets or provide financial aid at markup price and collect money as instalment. Keeps money for customer and invests and shares the profit of gaining from investment with customers.

Borrows money from customers and use to invest and pay interest.

Advantage of Islamic Finance

Keep the purpose of money as intermediary for trading only Keep low inflation as there is no interest Share the risk between banks and customers Equality and sharing

Disadvantage
Hard to understand for people who get used to general banking. People get misunderstanding of religion Forbid money trading.

Expanding of Islamic Finance

Islamic economics is not the exclusive preserve of Muslims. UK has 8th largest Islamic finance sector according to the DTI. London is emerging as a major financial centre for Islamic finance. Islamic banking products are also widely used by non Muslims in Malaysia. "This is an alternative system that can be applied to everybody. Everybody can use it regardless of their religion," says Dr Brodjonegoro from the Islamic Development Bank. Major banks like Britain's HSBC and Citi of the US have set up Islamic banking subsidiaries that are flourishing. Some of the champions of the Islamic way want to see business expand beyond the natural market of Muslim countries. They believe that now, more than ever, there is a market for non Muslims who share in the values espoused in Islamic economics. But there are some who fear that by expanding the Islamic way is becoming less Islamic.