Contemporary Islamic Finance: Innovations, Applications and Best Practices

CHAPTER 1

Introduction

Islamic Finance in the World Economy

KAREN HUNT-AHMED

President, Chicago Islamic Microfinance Project Lecturer, DePaul University

The religion of Islam has existed for 1,400 years but Islamic economic theory and its financial institutions as an industry emerged only in the 1970s. Islamic banks are late twentieth-century institutions designed, against the backdrop of a global economy dominated by capitalist business practices, to help Muslims conduct business internationally while simultaneously upholding traditional Islamic values related to trade finance and currency movement. The basis for their existence is the Islamic moral prohibition on charging interest—interest is a central component of capitalist banking—yet Islamic banks conduct billions of dollars of business annually in the world economy and the de facto Islamic banking transaction is—in most cases—virtually identical to a capitalist banking transaction. The industry of Islamic Banking and Finance (IBF)¹ is the manifestation of attempts to apply Islamic law and Islamic economic theory to financial dealings.

An Islamic Financial Institution (IFI) refers to any financial institution that performs Islamic transactions derived from either Islamic law or Islamic economic theory. An Islamic Bank is an institution that performs conventional banking services² (or their Islamic equivalent) such as checking accounts, savings accounts, loans, and so forth. An IFI may or may not be a bank but an Islamic bank ...