Background: Islamic Finance

Mathematical finance, which is a study of mathematical concepts applied to financial markets, can lead to monocultural and mainly West-centric perspectives. As part of our Decolonising the Curriculum project, we aim to design and effectively deliver a more inclusive globalised curriculum. Therefore, we would like to mention the following non-Western model finance, namely Islamic finance, to open our field to greater diversity and wider analysis.

Introduction

Islamic finance (or Sharia-compliant finance) refers to financial activity that complies with Islamic law, often known as Sharia. In other words, it is a way to manage money based on some of the moral principles of Islam, and sometimes imposes prohibitions on activities in its own right, even if they are not illegal in the countries where Islamic finance is operating. Islamic finance can be thought of as a unique form of socially responsible investment.

Characteristics

  • Money concept: Islamic finance is based on the belief that money should not have any value itself, rather it is a way to exchange products and services that do have a value.

  • Riba: One of the distinct features of Islamic finance is the prohibition of riba (riba can be roughly translated as “usury”, unjust or exploitative gains made in trade or business. However, some Muslims dispute whether there is a consensus that interest is equivalent to riba.).

  • Businesses involve prohibited activities: Investing in activities that are considered to be haram (i.e., forbidden or proscribed by Islamic law), such as selling alcohol, pork products, weapons etc, is forbidden.

  • Maisir and Gharar: Islamic law strictly prohibits any form of speculation or gambling, (referred to as maisir), and participation in contracts with excessive risk and uncertainty (referred to as gharar).

  • Partnership: Islamic finance encourages partnership. More precisely, profit and risks should be shared between at least two parties where possible. This can be between two individuals, an individual and a business, or two businesses.

Importance

Islamic laws impose boundaries, limitations and restrictions on finance, which may conflict with the non-Islamic financial system. In order to not exclude individuals due to their cultures and religious beliefs, an Islamic financial system provides accepted financial practices of Islam.

The common practices of Islamic finance arise along with the foundation of Islam. As a centuries-old practice, it is gaining recognition in countries that do not have a predominantly Muslim population such as the UK, Hong Kong, China etc. Today, Islamic finance is a $2.5 trillion industry spread over more than 80 countries. Over the past decade, Islamic finance grew at an exponential annual pace of 10%-12% and is predicted to grow to $3.5 trillion by 2024. (For more see Islamic Finance: Just For Muslim-Majority Nations?)