Page 250 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

232 Dubai & Co.

bought and sold must be clearly understood by both parties.
Conventional insurance contracts are deemed to have an excessive
amount of uncertainty, and therefore a Sharia-compliant system
called takaful has been developed to meet needs similar to those
covered by conventional insurance products.
The core principles of Islamic finance are in fact consistent
with the traditional teachings of other religions, and especially
of the other Abrahamic faiths. Judaism and Christianity both also
considered usury and interest unjust for most of their histories. 24
The Islamic financial industry has much in common with the fields
of “ethical investment” and “corporate social responsibility,”
both of which are growing in popularity worldwide. People
increasingly realize how important it is to be mindful of the source
and purpose of their wealth. In fact, we could say that Islamic
finance is the largest and most influential branch of “ethical
investment” worldwide.
One of the most common Islamic financial instruments is
called a Murabaha—a cost-plus sale in which one party buys some-
thing and sells it to someone else for a profit. This simple arrange-
ment is used commonly, and unlike conventional finance it links
lending to an asset and attaches ownership risk to the asset. Other
common financial structures are Ijara, or leasing, and Mudaraba
(investment partnership). In Mudaraba, investors provide capital to
a manager, who contributes his or her time and efforts in exchange
for a portion of the return. The practice of Musharaka (profit-and-
loss-sharing partnership) is viewed by many as the purest form of
finance—all parties share the underlying risk. It is also probably the
most difficult financing mode to implement. On the investment
side, products include equity investment, Murabaha-based instru-
ments, and a product called Sukuk, which acts similarly to conven-
tional bonds but involves the financing of identifiable assets. 25
While Islamic finance has arguably been in existence for cen-
turies, the first modern Islamic financial institutions took root in the
1960s in both Egypt and Malaysia. Early institutions were focused
on savings and community banking—Malaysia’s Tabung Haji, for
example, was established as a savings mechanism for Malaysian
Muslims who were planning for their pilgrimage to Makkah.
During the booms of the 1970s, Islamic finance gained momentum
in the GCC region. The Gulf states were becoming prosperous, had