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Submitted by Mahmoud Fawzi on
I think that The last global financial crisis has not only shed doubts on the proper functioning of conventional “Western” banking, but has also increased the attention on Islamic banking Academics and policy makers alike point to the advantages of Shariah-compliant financial products, as the mismatch of short-term, on-sight demandable deposits contracts with long-term uncertain loan contracts is mitigated with equity elements. In addition, Sharia-compliant products are very attractive for segments of the population that demand financial services that are consistent with their religious beliefs. However, little academic evidence exists on the functioning of Islamic banks, as of yet. Islamic banking can be considered banking with a conscience. Islamic banks each have a Shariah board made up of Shariah scholars as well as financial experts who are responsible for determining what activities are and are not Shariah-compliant Islamic banking is based on two main financial principles. Firstly, investment is to be made in the private sector through interest-free financing. Secondly, the development of financial instruments is to be done on the basis of profit and loss sharing as well as sharing risks. Further, Islamic banking is built around Shariah, mainly prohibiting the charging of interest. Because Islam considers interest an unjustified increase of capital, with no effort made to earn it, it is considered of false value, and therefore is prohibited. However, there are many arguments about the prohibition of interest in Islam. The first argument is that interest rates have no moral foundation. The second is that abstinence from consumption is not a justification of rewards. Lastly, some argue that there are risks to justify the supplement of payment for capital lending if the loan is guaranteed. In addition to the prohibition of interest payments, Islamic law treats money strictly as a medium of exchange. In other words, money, in itself, does not have any inherent value, and therefore it should not lead to the production of more money. In Islamic banking, the creditor/debtor relationship is defined differently than in the secular financial world. The creditor, or provider, of funds who becomes a partner in a project assumes the risk activity with the entrepreneur and shares profits as well as losses. The creation of incremental wealth justifies the share of profit between the borrower and the lender of money, but does not guarantee a fixed return. In recent years, the number of Islamic financial institutions has grown significantly, and the demand for Shariah-compliant financial products has increased in drastic manners. Driven by the boom in oil and gas prices revenue, Islamic financial industry had evolved from a niche market to a global financial market. That boom has led to a huge growth for local Islamic financial institutions and even led international financial institutions to enter and compete in the market. This growth and increased demand requires innovation and product development of Shariah-compliant financial products, and increase the variety of offerings. Although there have been innovative initiations by Islamic financial institutions in several fields, like information technology, industrial projects, and even providing insurance against political risk, the industry still needs more innovative and sophisticated financial instruments taking advantage of western financial experience to streamline and standardize Shariah-compliant products.