The demand for Shariah-compliant financial products is growing very rapidly which is expected to take the total assets of this sector up to USD 3 trillion by 2016, said a study conducted by the Swiss Bank group (Credit Suisse) and the University of Zurich.
Scientists working with the University of Zurich professor of economics, Ernst Fehr recently made a striking discovery; based on psychological experiments, they found religiosity to have a significant influence on economic action.
“The more religious a person is, the harder the person punishes unfair economic behavior of other market participants. This result may be surprising to conventional economists, but it is not to those who participate in Islamic finance,” the study said.
For almost four decades, the faith-based business branch has sought to combine the premises of Islam with those of the financial markets, aiming to establish fair ways of trading and investing, the study added.
Surprisingly, the unusual consolidation of financial and faith-based purposes has been richly rewarded. Islamic finance is today one of the fastest-growing business segments in the world, attracting investors worldwide. Its compound growth rate was 26 percent between 2004 and 2009, totaling a market value of USD 822 billion dollars by end of 2009.
“Islamic Finance performed comparatively well during the financial crisis, and its future growth rate seems unabated. Shariah-compliant assets are likely to triple within the next six years, expected to reach 3 trillion dollars by 2016,” explained the study.
Islamic Finance is the reconciliation of economic action with the Islamic legal practice of the Shariah (Islamic law). Based on a permanent exchange between banking experts and renowned Islamic scholars, a few basic concepts of prohibition have been defined throughout the past decades such as no interest, no speculation and gambling-like transactions and no “immoral” business branches.
The Dow Jones Islamic Market Index has outperformed MSCI World Index in recent years.
There are a number of equity indexes that screen companies with regard to their compatibility to Islam. Even though these indexes have to cope with a limited investment universe, the Dow Jones Islamic Market Index, currently the best-known Shariah-compliant equity index, has managed to outperform the MSCI World Index lately.
In the case of Sukuk (Islamic bonds), structured products and funds, most financial institutions cooperate with so-called Shariah boards, normally consisting of three Islamic scholars that evaluate and categorize every financial product as either Halal (pure) or Haram (impure).
Islamic Finance started off as a grass roots movement. In the beginning, many governments, even those of traditional Islamic countries, tried to avoid any entanglement with Islamic Finance. The reason was that they were scared to harm the country’s economic development by following a different way than developed markets. As a consequence, most governments refused to accept Shariah-compliant investment opportunities. However, due to the strong demand from Muslim clients, Islamic Finance emerged and the fear of an Islamic way of doing business proved to be unfounded.
Today, many countries are starting to rethink their attitudes toward Islamic Finance: Islamic Finance-friendlier policies are established, Islamic banking licenses are provided. Various global players have announced plans to enter the Islamic financial market during the course of 2011.
As a matter of fact, Shariah-compliance has become a unique selling point to many companies and countries in the Islamic, as well as in the non-Islamic world. What used to be perceived as a restriction to economic action has thus become a beneficial resource to modern finance.