Islamic Finance and Economic Development: Risk, Regulation, and Corporate Governance

Preface

Islamic finance is introducing challenges to the global financial landscape. Islamic financial assets, despite the turbulence across all global financial markets, have grown from around US$55 billion in the late 1980s to around US$1.2 trillion in 2011.¹ They represent 0.5 percent of global financial assets. Deutsche Bank's Global Islamic Banking Report (November 2011) anticipates a 24 percent compounded annual growth rate (CAGR) in Islamic assets over the coming three years.

Islamic finance is built on different foundations from conventional finance. An institution offering Islamic financial services (IIFS) adheres to Shari'a-inspired principles and rules, which take precedence over profit taking. The building blocks of Islamic finance are: (1) promotion of fairness in transactions and the prevention of an exploitative relationship and of fraud; (2) sharing of risks and rewards between all parties involved in financial and commercial transactions; (3) a tangible economic purpose for each transaction, sometimes referred to as the principle of materiality; (4) the prohibition of interest; and (5) the prohibition of engaging in activities prohibited by Shari'a laws.

These characteristics, particularly the asset-backed nature of Islamic financial assets and risk-sharing arrangements, have played a major role in mitigating the impact of the 2008 global financial crisis on Islamic finance. These features ensure a tighter link between the growth of economic and financial transactions ...