Islamic Finance Essay Example | Topics and Well Written Essays - 1000 words

Islamic Finance - Essay Example The value and growth demonstrated by Islamic finance, in recent years, typifies the industry’s overall potential comparative to conventional finance. The growth of Islamic finance has been observed outside conventional Islamic markets in members of the Gulf Cooperation Council (GCC). This signifies the increased attention being paid to Islamic finance by policy markers, as well as other universal market participants. The point of this paper is to refute the argument that Islamic finance cannot serve as a viable alternative to conventional finance. To date, a number of non-traditional Islamic markets such as London and New York have shown increased appreciation for the value of Islamic finance. In fact, London and New York launched indices in their FTSE and Dow Jones indices with a view to offer a benchmark for equity prices attributable to investments in Islamic financial companies (Warde 141). Governments such as the UK government continue to play a major role in extending th e scope of Islamic finance by extending support, for instance, by prohibiting the imposition of double stamp duty on Islamic mortgages (Warde 54). This is indicative of the fact that modern governments and private institutions are becoming increasingly aware of the viability of Islamic finance as an alternative to conventional finance. ... Typically, Islamic finance offers financial products rooted in the doctrines of Shariah or Islamic Law (El-Gamal 94). Most of these products are offered to Muslim investors while some Islamic products also attract conventional borrowers and investors. Islamic finance centers primarily on the principles of Islamic, and as a consequence, it encompasses a two-tier system. Firstly, the banking system accepts bankers’ deposits primarily for safe-keeping purposes without the accrual of any return while demanding 100% reserves. This means that, under Islamic finance, the payment system of the economy is protected from risks. Additionally, the system also limits the capacity of the banking system to create credit, thus hindering the necessity for deposit guarantee attributed to the conventional reserve system (Iqbal, Mirakhor, Askari and Krichene 196). The second primary component of Islamic finance is the fact that investment factors that act as classical financial intermediaries tha t channel savings to appropriate investment projects, as well as events where investment deposits are deemed as equity investments, without guarantees at maturity are subject to profit and loss sharing (Warde 128). Depositors are essentially considered as investors and the collection of assets managed by the financial institution appear on the assets segment of the balance sheets. The primary difference of between the conventional financial system and financial intermediation inherent in Islamic finance is that while depositors accrue fixed and pre-determined liabilities in conventional finance, those in Islamic system are party to both profits and losses accrued by the financial institution’s assets (El-Gamal 133). This signifies that Islamic finance does away with the old