Islamic finance to see rapid growth in Jordan (page 1 of 2)

Can you briefly explain what Islamic finance is?

In a nutshell, Islamic finance is an increasingly growing field in global financial markets with the principles of Shariah, or Islamic law, as the cornerstone guidelines that lay the foundations for such finance.

In particular, such principles forbid investors from taking or charging interest.

They dictate that money should be lent only on physical assets, bar speculation, and prohibit investing in pork, alcohol, gambling and pornography, or in investments that are associated with them.

In addition, Islamic finance is distinctly characterised by the presence of Islamic scholars, who are always appointed as reference points prior to engaging in any investment or financing vehicle.

What are the differences between Islamic finance and conventional banking?

Apart from the fact that Islamic finance is interest-free, Islamic bonds, otherwise known as Sukuk, derive their investment return from the assets used to back them.

This differs from your typical corporate bond, which pays a fixed rate of interest to investors, meaning that there would be no previously fixed yield on such bonds.

That would in almost all cases mean that the preference is towards real estate and commodities.

Equally important, the relationship in Islamic finance is based on the participation of risks and rewards, while establishing pre-agreed ratios.

In addition, the benefits derived from a transaction must be accompanied by the liability arising from potential losses. Islamic finance is also usually synonymous with a strict interpretation of its mechanics and the channels of finance, leaving little room for the most innovative financial products, although this trend has been changing in very recent times.

What are the advantages of Islamic finance for customers?

In addition to giving the Muslim customer the peace of mind he aims for by investing in a field that is based on Islamic principles, Islamic finance offers customers investment opportunities that have been establishing returns in the area of 15% to 17% annually since their recent surge.

The advantages can also be seen from an industry that already has assets exceeding $300bn, with products available in 76 countries.

Customers, with an investment appetite, can benefit from Shariah-compliant funds, equity and Sukuk, all of which are increasingly becoming common in global markets. The equity-based funds, in particular, have been performing well over the past five years, with growth rates in hefty double digits.

What do you think is the common misconception about Islamic finance, if any?

The common misconception is the limitation of Islamic finance in scope and magnitude. Specifically, customers believe that Islamic finance's role is only related to the issue of interest, which is an important principle, but only a starting point.

Accordingly, many customers think of Islamic finance as a means to secure interest free lending. Nonetheless, the features and channels that Islamic finance brings about are much bigger in scope and magnitude, with the crucial, definitive role of assets in finance.

Islamic finance starts with Murabaha and Mudaraba as traditional financial instruments, and goes on to define Sukuk, Islamic leasing functions, as well as offering investment vehicles, including Shariah-compliant, open-ended mutual funds.