Critical Issues in the

Politics of Global Finance

WEEK 9:
ISLAMIC FINANCE
 Introduction
2

1. Welcome to the week on

Islamic finance.
 Outline
3

1. Introduction
2. Tutor Comments
3. Main Points and Next Time
 Tutor Comments 1
4

1. Islamic finance sector worth about $1.3 trillion in 2010,

out of total of $175 trillion for global financial markets.
2. Broadly, Islamic financial institutions set apart from
conventional institutions by basis in Islamic law in terms
of objectives and operations.
3. A risk-sharing philosophy dominates Islamic finance:
the lender must share in the borrower’s risk.
4. Given this view fixed interest that guarantees a return to
the lender is seen as exploitative of the borrower,
unproductive and wasteful.
5. Conventional finance has a simple bottom line of profit
maximization, but Islamic finance is guided by other
goals.
 Tutor Comments 2
5

1. Islamic banks focus on key principles:

 finance should be related to the real
economy;
 be governed by risk sharing;
 interest-based lending should be replaced
by equity, sale or leasing;
 speculation should be avoided; and
 haram or forbidden activities (eg. alcohol)
should not be financed.
 Tutor Comments 3
6

1. Seems to be a split between the mainstream of

Islamic finance, which is Sharia-compliant but
otherwise imitates conventional finance, and Islamic
finance which is actually constituted by Sharia.
2. Sharia-compliant Islamic finance is focused on
financial innovation to abide by the letter of Islamic
law, rather than embracing the broader ethical and
social objectives of Sharia.
3. Given disintermediation and the reduction in the role
of interest as the objective of conventional banking,
could it be that Islamic finance is increasingly seen as
just another area for fee earning by the mainstream
banking industry?
 Seminar Questions
7

1. What are the key characteristics of Islamic finance?

2. Will Islamic finance become more important in
future?
3. Does Islamic finance represent a challenge to
global finance, or just another way to make money?
 Exercise
8

1. You and your team work in a major financial

institution. You have been asked to write a report
on Islamic finance as a field for profit-making.
2. In your report please identify the changes
required to be Sharia compliant.
3. Also identify what is consistent between the
institution’s conventional product and the new
Islamic product.
4. Conclude by determining whether the
introduction of Islamic finance to the institution is
a fundamental or incremental change.
 Main Points and Next Time
9

1. Islamic finance may be merely a new

product line for global finance.
2. A truly ethical Islamic finance seems a
distant possibility.
3. Next time we consider the possibility
of regulating global finance.