Islamic Finance — New Or Old?

 

As I continue looking at the Islamic Fintech Finance Industry, interesting facts and answers to questions concerning the sector keep on presenting themselves. For instance, how old is the institution of Islamic Finance?

As I trawl through my go to site at the moment, GF Global, for all things concerning Islamic Finance, this piece caught my attention. Apparently, for hundreds of years, there was no need for Islamic finance , simply because there was no financial system to “Islamise.” Until the second half of the 19th century, the majority of the Muslim population around the world was unbanked and the prohibition of interest was applied on transactions by tradition rather than by law or regulatory bodies.

It was during the colonial era, Western banks and financial institutions penetrated Muslim countries and imposed interest-based methods on the Islamic world. In the 1940s and 1950s, independence movements pushed for the revival of Islamic culture and religious scholars in countries such as India, Pakistan and Egypt started to condemn the use of interest by banks. They proposed to prohibit interest and replace it with Islamic risk-sharing. Localised Islamic finance experiments took place in the 1960s in Egypt and Malaysia.

The idea being, to provide an ethical alternative to the Western-dominated international financial system based on the Quran.

Islamic Debt Market

Islamic bonds also known as sukuks began to be issued in the late 1990s. Although they often serve the same purpose as regular bonds, they should be viewed as certificates of asset ownership rather than as debt obligations.

The trend really took off in 2006 when total sukuk issuance reached $20 billion. It peaked at $137 billion in 2012 before the pace slowed down. Last year, total Islamic bond issuance reached $95 billion, with a major contribution from Saudi Arabia and its first series of sovereign sukuks for a total of $17 billion.

Today, there are over 350 Islamic financial institutions spread over more than 60 countries and total sharia-compliant assets represent $2.2 trillion. Although Islamic finance is less than 1% of the global financial market, it is one of the fastest-growing segments. And the march goes on, while consolidating their existing markets, sharia-compliant entities have started to branch out into new territories, notably Sub-Saharan Africa and Europe.

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