Page 106 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

90 PART I Background and Context

Europe. Strikingly, her perception of Islamic finance had nothing to
do with banking, investments, or commercial financial services. 2
It’s often noted that Islamic finance, which more precisely can be
called Shariah-compliant financial services, is a fast-growing sector
with increasing importance on the global stage. Major financial insti-
tutions, including HSBC, Citibank, Deutsche Bank, UBS, Standard
Chartered, and dozens more, have introduced Islamic products and
services and see such business lines as key potential engines of
growth. Major business publications feature stories on “Islamic
finance” with increasing frequency, and financial professionals are
coming across the term more often. In fact, a Harvard Business Review
piece on the rise of Islamic finance as a global player was featured in
3
the journal’s “Breakthrough Ideas” issue in 2008. The term is quickly
becoming a part of the lexicon of global business.
Despite the heightened profile of Islamic finance, misunder-
standings and misconceptions of the term abound. Some people
mistakenly think that Islamic finance includes all banking and invest-
ments undertaken by Muslims, even though the bulk of such activity
is in fact undertaken through conventional (not Shariah-compliant)
ways. The Islamic finance sector therefore makes up only a very small
portion of Muslims’ overall financial activities. Frequently, I have
been asked how a financial institution can earn a profit and still be
deemed “Islamic.” A colleague who leads the Islamic finance pro-
gram at a leading university is often approached by students who
interpret the Islamic finance program as being a scholarship fund.
Those with greater exposure to the sector sometimes focus solely on
the prohibition of interest (one key principle of Islamic finance) and
miss the broader ethical and economic frameworks. Furthermore,
observers often note the similarities between Islamic offerings and
their conventional counterparts and conclude that there is no “real”
difference between Islamic finance and conventional banking. 4
Although this is often a fair criticism, it generally overlooks key pro-
cedural and structural differences—differences that have an impact
on Shariah compliance even if pricing and economic outcomes are
identical.
This chapter provides a brief overview of the Islamic finance sec-
tor, introducing it to nonspecialists. The focus is on Islamic finance as a
commercial phenomenon that is of increasing importance to the global
financial system. We do not seek to provide a comprehensive primer
on the principles, structures, and technical aspects of Islamic finance—
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there are other books available that do so. Instead, we present the