Islamic Finance: Principles and Practice

Citation

Shubber, K. (2010), "Islamic Finance: Principles and Practice", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 3 No. 2, pp. 191-193. https://doi.org/10.1108/17538391011054408

Comprehensive coverage of the field with emphasis on brevity

It is probably fair to assert that this volume has been written primarily for non‐Muslims, in order to spell out the background to Islamic finance, as well as the nature of its chief components, including Sharia‐compliant insurance, home finance and investment.

The book will be instrumental to the non‐initiated, including students and researchers wanting to get acquainted with this area. Other groups falling in this same broad category include bankers, business‐people and government officials needing an introduction in this large and expanding field.

The book contains eight chapters plus four appendices at the end. The author begins with a brief overview of the field, pointing out that the precursor for the modern era of Islamic finance and economics was manifested by the writings Abu Al‐Ala Maududi at the time of the partition of India during the 1940s.

Indeed, the very argument for setting up the State of Pakistan rested on the need for Muslims to practise their religion, in both the spiritual and worldly spheres. The author goes on to mention other imminent scholars who polished this argument in the context of other Muslim nations, such as Sayeed Qutb (Egypt) and Muhammad Baqir Al‐Sadr (Iraq).

Once the origins of Islamic economics and finance are clarified, the book moves to the sources of Islamic law (Sharia). Primary sources include the Muslims' holy book (Quran), the Sunna (practices of the prophet) and hadith (sayings of the prophet and his companions). In addition, there are secondary sources, such as consensus, analogy and expert interpretation.

Comprehensiveness

A decided advantage of this text is its comprehensive coverage. For one thing, it looks at the views espoused by various sects of Islam, attempting not to ignore any major ones. Hence, the author draws on religious verdicts (fatwas) by prime scholars belonging to the four main Sunni schools of Islam (Hanafi, Shafee, Hanbali and Maliki), as well as those of the Shia and Salafi schools.

Moreover, the author employs comparisons at several junctures, citing for example the comparative views of Christianity and Islam over the charging and payment of interest, and points of difference between Islamic finance and conventional finance, e.g. within insurance and banking.

A chapter is devoted for a discussion of attempts to develop an Islamic economic system, touching on elements of both macro‐ and micro‐elements. In this context, the author looks at several pertinent Islamic notions as presented by scholars, including those of “brotherhood” among the humankind, fair remunerations of work and the ultimate prerogative of society to distribute private wealth.

In addition, this chapter considers the religious tax “zakat”, including the types of assets on which it is levied and the relevant circumstances where it is imposed. Also, the chapter presents detailed and illuminating expositions of two other major concepts, namely interest (riba) and risk (gharar), detailing how Islamic scholars of various faiths would deal with them.

Islamic instruments and banking

A further chapter considers financial instruments, while another is devoted to Islamic banks. Nine types of major financial instruments that are considered to be allowable (halal) are fully expounded. Among others, these include mudaraba (speculation), musharaka (participation) and murabaha (profit‐margin).

Another group of instruments are lumped under “grey areas” and given good coverage. Trading of debt at negotiated prices, as well as derivatives, are considered here – among others.

On banking, the author analyses how these financial institutions have attempted to incorporate Islamic principles. Here, the liabilities of Islamic banks are spelled out, as well as the types of assets they hold, and associated problems with the latter. The pages of this chapter include an interesting assessment of current practices of Islamic banking institutions, especially the emphasis on short‐term transactions, in addition to attempts over recent decades to set uniformly acceptable standards for them.

The author devotes two chapters for some special issues of topical importance, considering them objectively and at some length. These include insurance (takaful), home finance (mortgages), stock‐market investment, public finance and monetary policy, in addition to the thorny issue of regulation and supervision.

Critique

This is a well‐written book, and the author must be congratulated for the lucid style, objective analysis and the comprehensive treatment of different parts of the Islamic finance sector. The volume has a clear emphasis on explaining the underlying rationale for various rulings, while also alerting readers to the fact that Islam is not a monolithic religion, as differing interpretations and judgments have existed since immediately after the death of the prophet.

In consequence, there is no paucity of views or verdicts on many important matters, including the sheer acceptability of interest payments made by banking institutions. It is a credit to this book, in that it attempts to deal with the full spectrum of views and treatments presented by Islamic scholars.

These achievements are all the more impressive, against the relatively small size of the book. A further decided advantage of the text is the presence of conclusions at the end of each chapter.

Yet, this is essentially a descriptive text, without much by way of tables and diagrams. The author may decide to rectify this in future editions, by inserting detailed and quantitative tables or graphs on certain cardinal issues, such as the growth over time of assets managed by Islamic financial institutions, their numbers and distribution among countries/regions and criteria for permissible investments products.