Halal best Islamic finance companies-3

What is Islamic finance?

 Islamic finance is the stipulation of economic services that are acquiescent with Islamic  law. According to the IMF’s definition, Sharia does not permit the payment or collection of interest (usury), gambling (Egypt) or excessive uncertainty (Ghar). In practice, this means that common investment techniques such as short selling (betting against a security) are prohibited and all transactions must demonstrate a genuine economic purpose.

Two of the most important parts of the Islamic financial world are banking services and the sukuk market – the Islamic equivalent of the bond market. Between them, the two account for about 95 percent of the $1.8 trillion in Islamic financial assets (at the end of 2013). Dissimilar Islamic banks, conventional banks are funded by deposits (on which they pay no concentration) and profit-sharing speculation accounts that are indomitable by the bank’s productivity.

Similarly, while conventional bonds reflect a commitment by the borrower to return the principal amount plus an agreed rate of interest, the sukuk is structured so that the returns are linked to the underlying asset, replacing the lender. I receive a claim on an asset (rather than asset-backed securities).

Which major countries are involved?

The most important players are the GCC countries, which have the majority of assets. That said, this model is also catching on in countries like Malaysia, Indonesia, Turkey and Pakistan.

Indeed, some countries outside the GCC are experiencing the fastest growth. 2009-2013 below (via E&Y): Islamic Finance in the Middle East and North Africa

Naturally, the Arab world is the center of Islamic finance because of its large petrodollar population and Muslim majority. There are 190 Islamic banks in the Middle East and North Africa (MENA), excluding Iran. With more than 90% of the MENA region’s Shariah-compliant assets, the Gulf Cooperation Council (GCC) is the dominant force in the Islamic finance industry (see table below). 2018’s Global Top 100 Islamic banks includes 41 GCC-based Islamic banks.

Islamic Finance in Europe

In the repercussions of the 2008 emergency, Islamic fund developed as a moderately secure elective to the Western keeping money framework. Sukuk appeared like a great way to tap into unused markets, Islamic stores spoken to an opportunity to get to expansive sums of liquidity, and Islamic keeping money was a way to monetize neighborhood Muslim communities. London situated itself to ended up the center of Sharia-compliant fund in the Western world.

Today, the UK boasts five licensed Islamic banks, with more than 20 conventional banks offering Islamic financial products. Other European countries where Islamic finance took off include: Luxembourg, the first Eurozone country to issue a sovereign sukuk and home to 49 Sharia-compliant funds. Over the previous ten years, Germany has issued multiple Sukuk and established its first entirely Islamic bank (KT Bank AG) in 2015.

Switzerland that emphasizes Takaful, or Islamic Insurance, more. Another attractive market is France, which has the biggest Muslim population in all of Europe. Authorities have worked hard to promote Islamic banking there, including Christine Lagarde, the former French finance minister and director of the IMF, but banks have mostly failed to react out of concern that such a worries about affiliation with Islam during a period when terrorist acts have targeted the nation. It will harm their reputation.

Islamic Finance in America

 While some US banks have started to sell Sharia-compliant goods elsewhere in the world, these offerings are extremely specialized. The last continent where Islamic financing is starting to take off is South America. The first Islamic bank on the continent, Trust Bank Amanah, opened its doors in Suriname in December 2017.

How big is the industry?

According to Ernst & Young, between 2009 and 2013, commercial banks’ total Islamic finance assets grew by 17 percent, reaching $778 billion. Of this, Gulf Cooperation Council (GCC) countries have about $517 billion, ASEAN countries have $160 billion and South Asia has $23 billion. The rest of the world (mainly Turkey) makes up the remaining $78 billion.

Despite the remarkable growth rate, the proportion of Islamic financial assets in global financial assets is still quite low, at less than 1%.

However, its double-digit growth is comfortably comparable to traditional banking and its reach is increasing in Africa, South Asia and Europe with the issuance of sukuk. Unfortunately, while the industry is growing, its profitability has so far lagged behind comparable traditional banking institutions.

 Between 2009 and 2013, the average return on equity among leading Islamic finance banks was 11.9%, compared to 14.5% for conventional banks. E&Y mitigates the inherent cost structure differences within participating banks rather than the inherent low profitability of these types of businesses. The bad news is that there will be difficult hurdles to overcome, which will require overcoming “depoliticization of Islamic finance” and “deep mistrust of the banking sector.”

The IMF also warns of the need to ensure an adequate regulatory framework around these fledgling enterprises due to the risks associated with the business model.These include handling the intricacy of the transactions and corporate structures necessary to issue sukuk, as well as controlling the risk of liquidity. The good news is that if these are accomplished, Islamic finance should maintain the rapid development it has been experiencing recently and the profitability difference with traditional banking should decrease, if not completely vanish.

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