Islamic Finance has become the fastest growing most dynamic sector of global finance.
Every western style financial product has its "sharia" ( i.e. Islamic law) compliant instrument: micro finance, mortgages, oil etc.
Islamic finance is innovative, flexible and potentially very profitable. Operating in seventy countries with about 500 billion dollars in assets it is poised to expand geometrically. Analysts project that this system will soon manage approximately 4 per cent of the world economy. Such figures explain the eagernesss of western banks to tap into "sharia" financial services. City group along with many other western banking retailers have opened islamic branches in Moslem countries.
At the end of 2004 the Islamic Bank of Britain, the first bank catering to a European/Moslem client base floated its shares on the London Stock Exchange. Western capitalism's three major global economic crises, the 1970s oil shocks, the late 1990s and 9/11 paved the way to the ascent of Islamic finance.
Unlike market economics Islamic finance centres on the religious tenets of Islam and operates in a way to keep Muslims compliant with "sharia", the religious law that comes directly from the Koran.
Religious Islamic activists, intellectuals, writers and religious leaders have always upheld the prohibition of "riba" the interest charged by moneylenders and denounced "gharar" which refers to a type of speculation. Under this belief money must not become a commodity in itself to create more money. Islamic finance thus shuns Hedge Funds and Private Equities because they simply multiply cash by stripping assets. Money serves as a means or instrument of productivity as originally envisioned by Adam Smith and David Ricardo. This principal is embodied in the "sukuks" - Islamic bonds. Sukuks always link to real investments - i.e. to pay for the construction of highways, etc. - and never for speculative purposes. This principal springs from the sharia ban on gambling as well as on the prohibition of any forms of debt and activities that trade risk.
At the end of the 19th century supporters and promoters of Islamic finance repeatedly expressed discontent with the western style banks that had penetrated Muslim countries. Several "fatwas" or religious decrees were issued to reiterate the tenet of the interest-based activities of the colonisers' banks proved incompatible with the sharia. Yet because Western financial institutions were the only banks active in the Moslem world, the faithful had to use them even if they performed poisonous practices based on prohibited activities.
From the mid-1950s to the mid -1970s economists, financiers, sharia scholars and intellectuals studied the possibilities of scrapping interest-rates and creating financial institutions centred on sharia-compatible alternatives to the riba.
In their mind the Islamic economic system would incorporate the "Zakat" - obligatory alms giving to help the poor - and other fundamental elements of the Muslim religion such as the funding of the Haj. The first project of applied Islamic economics came into existence concurrently in the 1950s in the countryside of Lower Egypt and in Kuala Lumpur, Malaysia.
Until the early l970s Islamic economics were essentially embryonic and were regarded with deep-sceptism. Western sceptism compounded daily because of the Muslim countries chronic lack of capital. They had no money to start an alternative banking system.
This scenario changed with the 1973/4 oil shock which generated a massive capital inflow into Arab oil-producing countries and with that the establishment of an international development bank for the Islamic region. At the core of sharia compliant economics there is an exceptional joint venture. Indeed this alliance emerged in the 1970s when rich Muslims and sharia scholars began working together. This unusual partnership is a phenomenon unique in modern economics.
A few visionary personalities Prince Mohammad al Faisal (son of the late Saudi King Faisal bin Abdul-Aziz), Saleh Kamel of Saudi Arabia, Ahmed al Yaseen of Kuwait and Sami Hamoud of Jordan, channeled some of the new wealth into the formation of a new breed of Islamic banks.
Partnership between leaders and clerics therefore serves as a root of Islamic finance. Individualism within Islam does not make sense because Islam, based on tribal culture, does not recognise it. Traditional tribal families creates a strong sense of belonging. The obligation to help those in need and the acceptance of religious leaders' authority are the pillars of Muslim culture. Sharia scholars transported these values into Islamic economics. These same principles allowed the Arab Bedouin to withstand the harshness of the desert for centuries. Cooperation was essential in such a hostile environment and is still a must in modern times.
Above all Islamic finance represents the sole global economic force that conceptually challenges rogue economics. It does not allow investment in pornography, prostitution, narcotics, tobacco or gambling. All these areas have blossomed thanks to globalisation outlaws under the indifferent eyes of the market-state.