ISLAMIC FINANCE & CAPITAL MARKETS

Why Is Islamic Finance So Popular in the West?

Published

1 year ago

January 10, 2023

Editor

Spread the love

Islamic finance is a system of financial intermediation that is consistent with the principles of sharia, or Islamic law. At its core, Islamic finance prohibits the charging or paying of interest, which is considered usury (riba) and is haram (forbidden) under Islamic law. Instead, Islamic finance promotes the principle of risk-sharing, where profits and losses are shared among the parties involved in a financial transaction. Other principles of Islamic finance include the prohibition of speculative investments (gharar), the promotion of social justice and ethical investments, and the use of real assets as collateral.

In practice, Islamic finance takes several forms, including Murabaha (cost-plus financing), ijara (leasing), Mudharaba (profit-sharing), and Sukuk (Islamic bonds). These financial instruments are designed to align the interests of the lender and borrower and to promote economic growth and social development.

B. Explanation of the growing popularity of Islamic finance in the West:

Islamic finance has been growing in popularity in the West in recent years for several reasons. Firstly, the global Muslim population is projected to continue to grow in the coming decades, and there is increasing demand for financial products and services that are compliant with Islamic principles. Additionally, as more and more people in the West become conscious of the need for socially responsible and ethical investments, the principles of Islamic finance, which prohibit investments in certain industries such as tobacco and alcohol, and encourage investments in sectors such as healthcare and education, have become increasingly appealing.

Moreover, the global financial crisis of 2008 has led to a loss of trust in the conventional financial system and increased interest in alternative forms of finance such as Islamic finance. This interest has been further fueled by the success of Islamic finance in countries such as Malaysia and the UAE.

Western governments and businesses have also recognized the potential benefits of Islamic finance, including access to new markets, customers, and capital. As a result, several Western countries have taken steps to create an enabling environment for Islamic finance, such as by issuing Sukuk and by developing sharia-compliant financial products and services.

For these reasons, the popularity of Islamic finance continues to increase in the West, with more and more businesses, investors, and financial institutions exploring ways to participate in this market.

Understanding the principles of Islamic finance

A. Prohibition of interest (riba): One of the fundamental principles of Islamic finance is the prohibition of interest or riba. According to Islamic law, charging or paying interest on a loan is considered usury and is haram. This prohibition is based on the belief that money should not be used as a commodity to be traded for a profit, as it has no intrinsic value of its own. Instead, Islamic finance promotes the principle of risk-sharing, where profits and losses are shared between the lender and borrower.

B. Risk-sharing principle: Islamic finance is built on the principle of risk-sharing, where the lender and borrower share the risk of a financial transaction. This principle is reflected in the use of profit and loss sharing (PLS) structures, such as Mudharaba and musharaka, where the lender provides capital and the borrower manages the project, and profits are shared according to a pre-agreed ratio, but any losses are borne only by the provider of capital.

C. Prohibition of speculative investments (gharar): Islamic finance prohibits speculative investments, or gharar, which is an element of uncertainty or deception in a financial transaction. For example, contracts that involve excessive uncertainty or speculation, such as derivatives, options, and short selling, are not permissible in Islamic finance. This principle is aimed at protecting the rights of all parties involved in the transaction and promoting stability and fairness in the financial system.

D. Promotion of social justice and ethical investments: Islamic finance promotes the principles of social justice and ethical investments. This is reflected in its emphasis on the real economy, which is focused on tangible assets, and in its prohibition of investments in certain industries, such as tobacco and alcohol, that are considered harmful to society. Additionally, Islamic finance also encourages investments in sectors such as healthcare, education, and infrastructure, which promote social and economic development.

All these principles of Islamic finance are crucial components of its ethics, as it not only governs economic aspects but also social and moral aspects of it.

Benefits of Islamic finance for Western countries and businesses:

A. Attractive alternative to conventional finance for Muslims and non-Muslims: Islamic finance can be an attractive alternative to conventional finance for both Muslims and non-Muslims, as it is based on the principles of fairness, transparency, and risk-sharing. This is particularly appealing for those who are looking for a financial system that aligns with their values and beliefs, and for those who are looking for an alternative to the conventional financial system that has been affected by the global financial crisis.

B. Provides access to new markets and customers: Islamic finance provides access to new markets and customers, particularly in the rapidly growing Muslim population. As the global Muslim population is projected to continue to grow, this presents a significant opportunity for businesses and financial institutions to tap into this market. In addition, Islamic finance can also help to attract non-Muslim customers who are looking for a more ethical and socially responsible financial system.

C. Fosters economic and social development: Islamic finance promotes the principles of economic and social development, as it encourages investments in sectors such as healthcare, education, and infrastructure. In addition, the use of real assets as collateral, and the prohibition of speculative investments and certain industries, promote stability and fairness in the financial system and contribute to the overall economic and social development of a country.

D. Encourages transparency and accountability: Islamic finance encourages transparency and accountability in financial transactions. For example, the principles of risk-sharing, and the prohibition of speculative investments, encourage a higher degree of transparency and accountability, as all parties involved in a financial transaction are required to share the risks and are held accountable for any losses. Additionally, the use of real assets as collateral, and the prohibition of speculative investments and certain industries, promote stability and fairness in the financial system and contribute to the overall economic and social development of a country.

All these benefits make Islamic finance an interesting alternative for western countries and businesses, as it not only generates a new market but also contributes to society and the ethical side of it.

The rise of Islamic finance in the West

A. Overview of the current market for Islamic finance in the West: Islamic finance has been growing in popularity in the West in recent years, with the market for Islamic finance in the West estimated to be worth around $20 billion. This market is still relatively small compared to the global Islamic finance market, which is estimated to be worth around $2 trillion. However, the market for Islamic finance in the West is projected to continue to grow in the coming years, as more and more Western countries and businesses adopt Islamic finance.

B. Examples of Western countries and businesses that have adopted Islamic finance: Several Western countries and businesses have adopted Islamic finance in recent years. For example, the UK has been at the forefront of the development of Islamic finance in the West, with London being hailed as the “Western hub” for Islamic finance. The UK government has also issued Sukuk, and several British banks and financial institutions have developed sharia-compliant financial products and services. Other Western countries such as the US, France, and Germany, also have developed a market for Islamic finance, while Luxembourg and Ireland also actively working on it.

In addition to governments, many western-based companies and financial institutions have started to offer Islamic finance products and services, to tap into the growing market.

C. Challenges facing the growth of Islamic finance in the West: Despite the growing popularity of Islamic finance in the West, there are still several challenges facing its growth. One of the main challenges is a lack of understanding and awareness of Islamic finance among Western policymakers, regulators, and the general public. Additionally, there are also regulatory and legal challenges, as the laws and regulations governing Islamic finance vary from country to country, making it difficult for businesses and financial institutions to develop and offer sharia-compliant products and services.

Another challenge is the lack of standardization, this includes a lack of standardization in the interpretation of sharia laws, which can make it difficult for businesses and financial institutions to develop and offer sharia-compliant products and services.

Lastly, there is also a shortage of qualified professionals with expertise in Islamic finance, which can make it difficult for businesses and financial institutions to develop and offer sharia-compliant products and services.

Despite these challenges, the market for Islamic finance in the West is projected to continue to grow in the coming years as more and more Western countries and businesses adopt Islamic finance.

Conclusion: A. Summary of the main points: Islamic finance is a system of financial intermediation that is consistent with the principles of sharia, or Islamic law. At its core, Islamic finance prohibits the charging or paying of interest, which is considered usury (riba) and is haram (forbidden) under Islamic law. Instead, Islamic finance promotes the principle of risk-sharing, where profits and losses are shared among the parties involved in a financial transaction. Other principles of Islamic finance include the prohibition of speculative investments (gharar), the promotion of social justice and ethical investments, and the use of real assets as collateral.

The global Muslim population is projected to continue to grow in the coming decades, and there is increasing demand for financial products and services that are compliant with Islamic principles. Additionally, as more and more people in the West become conscious of the need for socially responsible and ethical investments, the principles of Islamic finance have become increasingly appealing. Western governments and businesses have also recognized the potential benefits of Islamic finance, including access to new markets, customers, and capital.

However, the growth of Islamic finance in the West is still facing some challenges such as a lack of understanding and awareness, a lack of standardization, and a lack of qualified professionals.

B. Future outlook for Islamic finance in the West: Despite these challenges, the market for Islamic finance in the West is projected to continue to grow in the coming years. As more and more Western countries and businesses adopt Islamic finance, and as the global Muslim population continues to grow, the demand for sharia-compliant financial products and services is also expected to grow. Additionally, as more and more people in the West become conscious of the need for socially responsible and ethical investments, the principles of Islamic finance will continue to become more appealing to a broader range of investors.

The future looks positive for Islamic finance in the West as more and more countries and businesses adopt it as an ethical alternative to conventional finance. The increasing demand for sharia-compliant financial products and services in the coming years will help the market to grow, and it is expected that the market size will reach a significant size in the next decades. However, it is important to address the existing challenges and to find ways to promote better understanding, standardization, and qualified professionals.

Spread the love

ISLAMIC FINANCE & CAPITAL MARKETS

HAQQ Network Advances Islamic Web3 with Gold Token and Real World Assets

Published

4 days ago

May 16, 2024

Editor

Spread the love

HAQQ Network Expanding Islamic Web3 Initiative With Gold Token and RWA” has taken a significant leap forward with the launch of its Gold Token in June, marking a critical advancement in the network’s broader ambition of tokenizing real-world assets (RWA). In a detailed blog post, Alex Malkov, the co-founder and CEO of HAQQ Network, highlighted the dual role of the Gold Token—not only as a stable store of value but as a pivotal element in the Islamic Interbank Market.

Tokenized commodities like the Gold Token promise a more streamlined and transparent approach than traditional asset exchanges. The Gold Token is not just a digital asset but is directly exchangeable for physical gold. HAQQ plans to expand this concept to include other investment commodities and potential securities.

Furthering its innovative strides, HAQQ Network also intends to tokenize Islamic financial products such as Sukuk, transforming them into blockchain-based tokens. This transformation enhances liquidity, accessibility, and efficiency, allowing for fractional ownership and broader distribution. Importantly, these tokens adhere to Shariah law, integrating compliance rules within the token’s smart contracts to ensure religious adherence.

Expanding its offerings, HAQQ has recently introduced VISA cards denominated in its ISLM token, explicitly targeted at EU residents. This development represents a significant stride toward bridging Islamic digital assets with mainstream financial services, offering EU users a platform to manage their finances according to Islamic principles.

Last year, the Islamic Coin project under HAQQ Network saw an impressive launch, garnering extensive coverage from leading crypto publications globally and major fintech outlets in the Middle East. The project built a robust community of over 1.5 million members and was backed by an advisory board that includes members from the UAE’s ruling families. The ISLM token raised substantial funds through private sales and secured investments, totalling over $400 million.

However, despite its successful launch and substantial technological foundation, Islamic Coin faced hurdles, including regulatory scrutiny and media misinformation. The Virtual Asset Regulatory Authority (VARA) initiated an investigation, but HAQQ Network cooperated fully, leading to the closure of the investigation without any enforcement actions.

Alex Malkov acknowledged the challenges posed by the VARA investigation but reiterated their commitment to transparency and combating misinformation and Islamophobia. This stance aims to foster a more inclusive and equitable financial ecosystem. Despite setbacks, Islamic Coin is now listed on major centralized exchanges such as KuCoin, LBank, XT, and MEXC and decentralized platforms like SushiSwap, Osmosis, and Uniswap. This has significantly boosted the token’s liquidity and visibility.

Moreover, HAQQ has launched a non-custodial wallet available on the Apple Store and Google Play, designed to attract non-crypto users with features like social login and device recovery. This wallet is trendy in regions such as Nigeria, Indonesia, and Turkey, providing secure asset management without intermediaries.

A noteworthy wallet feature of the “HAQQ Network Expanding Islamic Web3 Initiative With Gold Token and RWA” is staking, where ISLM holders can earn rewards while enhancing the network’s security and governance. Additionally, they can participate in ‘halal yield’ through liquidity pools on decentralized exchanges, adhering to Islamic financial principles and enabling Muslim investors to engage in the digital economy without compromising their religious values.

HAQQ Network’s dedication to merging Islamic finance with cutting-edge Web3 technology demonstrates its potential to influence the financial landscape significantly, adhering strictly to Islamic ethical standards

Spread the love

ISLAMIC FINANCE & CAPITAL MARKETS

What is Microtakaful and How Does It Work?

Published

2 weeks ago

May 6, 2024

Editor

Spread the love

By Hafiz M. Ahmed

In recent years, the concept of microtakaful has emerged as a significant development in Islamic finance, offering a Shariah-compliant insurance solution tailored to the needs of the less affluent segments of society. This form of microinsurance is designed not only to adhere to Islamic principles but also to provide financial protection to those typically underserved by conventional insurance systems. This blog post will explore what microtakaful is, how it operates, and its impact on communities.

What is Microtakaful?

Microtakaful is a form of Islamic microinsurance that offers Shariah-compliant insurance solutions to low-income individuals and communities. This system operates on the principles of mutual assistance and risk sharing, where participants contribute small premiums to a collective pool. The funds are managed according to Islamic law, ensuring no investment in prohibited activities, and profits and risks are shared among all participants.

Difference between Takaful and Microtakaful

Takaful and microtakaful are both forms of Islamic insurance, but they cater to different segments of the market and have distinct operational scales and objectives. Here are the key differences between the two:

Target Audience:
- Takaful is geared towards a broader audience, including businesses, middle to high-income individuals, and larger entities seeking Shariah-compliant insurance solutions.
- Microtakaful specifically targets low-income individuals and communities, offering them affordable insurance coverage to help mitigate financial risks associated with accidents, health issues, and other unforeseen events.
Scale and Scope of Coverage:
- Takaful policies generally cover a wide range of risks and can offer substantial coverage amounts, similar in scope and scale to conventional insurance policies.
- Microtakaful provides smaller, more limited coverage aimed at essential needs, reflecting the lower premium capacity of its clientele. The focus is on accessibility and essential protection rather than comprehensive coverage.
Premiums and Contributions:
- Takaful involves higher premiums reflecting the broader and more significant coverage it offers, and these premiums are also used to invest in permissible (halal) ventures according to Islamic law.
- Microtakaful requires very small, affordable premiums to ensure that the financially weaker sections of society can also access insurance. These contributions are pooled to cover the collective risk of the group.
Objective and Impact:
- Takaful aims to provide a Shariah-compliant alternative to conventional insurance, ensuring participants avoid Riba (interest), Gharar (excessive uncertainty), and Maysir (gambling).
- Microtakaful not only aims to be Shariah-compliant but also focuses on social impact by enhancing financial inclusion and providing safety nets to economically vulnerable groups.

How Does Microtakaful Work?

The operational model of microtakaful is fundamentally different from conventional insurance. Here’s a step-by-step breakdown of its mechanism:

Risk Pooling: Participants contribute small, affordable premiums into a collective pool, which is used to cover potential losses or damages. These contributions are considered donations and thus embody the Islamic principle of charitable giving and mutual assistance.
Takaful Operator: A takaful operator manages the pool. The operator is responsible for ensuring that the fund is used properly, adhering to Shariah principles, and overseeing claims and compensation. Importantly, unlike conventional insurance, the operator does not own the fund but acts as a custodian or manager.
Shariah Compliance: The operations of microtakaful are governed by a Shariah board, which ensures that all transactions remain free from interest (riba), uncertainty (gharar), and gambling (maysir). Investments made with the pooled funds must be in halal (permissible) ventures, avoiding industries like alcohol, gambling, and tobacco.
Surplus and Deficit Handling: Any surplus in the takaful fund (after claims and expenses) can be distributed to the participants as dividends or reinvested to increase the fund’s capacity. In the case of a deficit, the takaful operator may provide an interest-free loan (qard hasan) to the pool to cover the shortfall, which is subsequently repaid.
Claims and Compensation: When a claim is made, compensation is paid out from the collective pool. The focus is on solidarity and support among the members rather than on profit-making.

Benefits of Microtakaful

Microtakaful has several advantages, particularly for low-income communities:

Accessibility: It provides financial security to those who may not afford or access traditional insurance products.
Community Empowerment: By promoting mutual assistance, microtakaful strengthens community ties and resilience.
Economic Stability: It helps stabilize the economic conditions of individuals and small businesses by mitigating risks and providing support in times of need.

Challenges and Future Prospects

Despite its benefits, microtakaful faces challenges such as low awareness, regulatory hurdles, and the need for more tailored products to meet diverse needs. However, the potential for growth is significant, especially in countries with large underserved Muslim populations. As awareness and understanding of microtakaful increase, it is expected to play a more prominent role in global Islamic financial services.

In conclusion, microtakaful represents a pioneering approach to financial inclusion, blending traditional Islamic principles with innovative risk-sharing mechanisms to protect the most vulnerable. Its expansion can lead to more equitable access to insurance and contribute to the broader economic empowerment of disadvantaged communities worldwide.

Spread the love

ISLAMIC FINANCE & CAPITAL MARKETS

IsDB Forecasts $15 Trillion Needed by 2040 for Global Sustainable Infrastructure

Published

3 weeks ago

April 30, 2024

Editor

Spread the love

By Aamer Yaqub

At the Islamic Development Bank’s (IsDB) 2024 Annual Meetings in Riyadh, President Dr. Mohammed Al-Jasser articulated a compelling vision for addressing the global infrastructure deficit, which demands an estimated $15 trillion by 2040 to meet burgeoning needs. This statement aligns with the headline: “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB”. This gathering, which also marked the bank’s Golden Jubilee, was themed “Cherishing our Past, Charting our Future: Originality, Solidarity, and Prosperity.”

Dr. Al-Jasser’s comments, as the Saudi Press Agency reported, emphasized the critical inadequacies of current public financing mechanisms in keeping pace with the escalating demands for sustainable infrastructure. He underscored the urgency of rethinking financing strategies to effectively support long-term investment in infrastructure, particularly in the world’s least developed countries.

These nations, hardest hit by resource depletion exacerbated by the COVID-19 pandemic, face a stark reality. The pandemic strained their development efforts and posed significant risks to their future growth and stability. Dr. Al-Jasser pointed out that these countries are at risk of enduring further economic and social degradation without immediate and decisive action.

Highlighting the unique position of Islamic finance in this scenario, Dr. Al-Jasser noted its suitability for funding substantial, long-term infrastructure projects. Islamic finance, known for being asset-based and embracing risk-sharing, dovetails with sustainable and environmentally responsible investing principles. This makes it an ideal approach to tackle these countries’ infrastructural challenges, ensuring that development aligns with ethical financing principles.

Dr. Al-Jasser called for a global mobilization to leverage the principles of Islamic finance to not only bridge the financing gap but also catalyze prosperity, solidarity, and equitable growth across the least developed nations. His vision extends beyond financial growth, aiming to foster enhancements in healthcare, education, and job creation, thus attacking the roots of poverty.

This focus on sustainable and responsible finance underscores a broader shift in global development priorities, where ethical considerations are increasingly becoming as significant as economic factors. Dr. Al-Jasser’s advocacy for a strategic reorientation in financing reflects a deep understanding of Islamic finance’s challenges and transformative potential in the contemporary global economy. This strategic shift is crucial as the “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB,” emphasizing the urgency and scale of the financial challenges ahead.

Spread the love