International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CHAPTER 13

Islamic Banking and Finance

Ibrahim Warde

The Fletcher School, Tufts University

Allah has allowed trading and forbidden riba (usury).

Koranic verse

The rapid growth of Islamic finance is testament to the diversity of global finance and the relevance of cultural and religious factors. Modern Islamic finance started in earnest in 1975 amid considerable skepticism about its viability. Today, assets of Islamic institutions exceed $1.3 trillion, and most large Western financial institutions are involved in one way or another in the Islamic sector. Some, like Citigroup and HSBC, are major players. There is even a Dow Jones Islamic Market Index tracking hundreds of companies, from both inside and outside the Muslim world, that are compatible with Islamic law. Following the 2008 global financial meltdown, Islamic banks emerged relatively unscathed and this, in turn, elicited a great deal of interest in Islamic finance.

All these developments may seem puzzling. Indeed, it is often said that the Islamic world has a hard time integrating in the global economic system. More specifically, how could practices rooted in the Middle Ages thrive in the age of technology-driven global finance? How could institutions suspicious of interest operate within a global, interest-based financial system? And how could a phenomenon often considered to be a facet of political Islam experience its most rapid growth just as political Islam is under siege?

This chapter will:

• Summarize the fundamentals ...