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This chapter has introduced the basic foundational principles and economic value proposition of Islamic finance. It has provided a brief look at the variety of Islamic finance institutions that are operating globally. The recent statistics on the Islamic finance industry exhibit exemplary growth and penetration in the Muslim as well as non-Muslim customer base in banking, investments, and insurance. In later chapters, the product structures on which these institutions operate will be explained in more detail.

Self-Assessment Quiz

1.Riba encompasses usury as well as:

(a)Any stipulated amount charged over the principal amount in a loan contract

(b)Any profit or mark-up in the credit sale of commodities

(c)Any amount of profit in a commercial contract

(d)All of the above

2.The economic rationale of prohibiting Gharar is to avoid:

(a)Uncertainty in the contract

(b)Adverse selection

(c)Any party gaining some additional return

(d)Both (a) and (b)

3.Prohibition of Maysir implies that:

(a)Gambling and lottery are disallowed

(b)All credit sales are disallowed

(c)All types of speculative trades on forecasts are disallowed

(d)All of the above

4.In a direct potential exchange between saving-surplus and saving-deficient units, there is a problem of

(a)Double coincidence of wants in terms of matching cash flow needs

(b)Matching preference for maturity in investment and financing

(c)Both (a) and (b)

(d)None of the above

5.Takaful is an Islamic alternative of insurance which avoids

(a)Riba

(b)Maysir

(c)Both (a) and (b)

(d)None of the above

Self-Assessment Questions

1.List any two examples of goods and services that are not Halal in terms of (i) consumption and (ii) investment.

2.List any five means of earning income that are not permissible in Islamic economics.

3.List the five important elements in the hierarchy of needs in Islamic jurisprudence.

4.Define the term Riba. How does bank interest constitute Riba?

5.Illustrate the Islamic finance ecosystem by identifying institutions in Islamic commercial finance and Islamic social finance.

6.What is the size of assets in (i) Islamic banking, (ii) Islamic asset management, and (iii) Takaful globally.

7.Differentiate between Zakat, Waqf, and Sadaqah.

8.How is Takaful different from conventional insurance?

9.Identify social welfare projects which can be funded by mobilizing funds through Cash Waqf.

10.Briefly explain the economic demerits of Gharar and Maysir in economic activities.

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¹ Al-Qur’an, Al-Baqarah: 276.

² Al-Qur’an, Al-Baqarah: 188.

³ Al-Qur’an, Al-Mutaffifeen: 1–4.

⁴ Al-Qur’an, Al-Maida: 90.

⁵ Al-Qur’an, Al-Maida: 38.

⁶ Al-Qur’an, Al-Maida: 90.

⁷ Al-Qur’an, Al-Nur: 19.

⁸ Al-Qur’an, Al-Nisa: 29.

⁹ Jami-al-Tirmizi, Vol. 3, Chapter on Business, Hadith Number 1209.

¹⁰ Jami-at-Tirmidhi, Vol. 2, Chapters on Zakat, Hadith Number 680.

¹¹ Sunan Abu Daud, Vol. 2, Book of Zakat, Hadith Number 1648.

¹² Jami-at-Tirmidhi, Vol. 2, Chapters on Zakat, Hadith Number 653.

¹³ Al-Qur’an, Al-Baqarah: 168.

¹⁴ Al-Qur’an, Al-Baqarah: 219.

¹⁵ Al-Qur’an, Al-Baqarah: 276.

¹⁶ Al-Qur’an, Al-Maida: 90.

¹⁷ Al-Raysuni, A. (2005). Imam Al-Shatibi’s. Theory of the Higher Objectives and Intents of Islamic Law. Malaysia: The International Institute of Islamic Thought (IIIT).

¹⁸ Quoquab, F., Abdullah, N. L. et al. (2015). “Epicureanism & Global Consumerism in Shaping Muslim Buyers’ Consumption Pattern: An Islamic Perspective”, International Journal of Innovation & Business Strategy, 3, 1–12.

¹⁹ Al-Qur’an, Al Zukhruf: 32.

²⁰ Al-Qur’an, Al-Baqarah: 188.

²¹ Al-Qur’an, Al-Nisa: 29.

²² Al-Qur’an, Al-Bani-Israel: 35.

²³ Al-Qur’an, Al-Mutaffifin: 1–4.

²⁴Al-Qur’an, Al-Maida: 1.

²⁵ Al-Qur’an, Al-Tauba: 34.

²⁶ Al-Qur’an, Al-Nahl: 92.

²⁷ Al-Qur’an, Al-Baqarah: 282.

²⁸ Sunan Ibn-e-Maja, Vol. 3, Chapters on Charity, Hadith Number 2410.

²⁹ Sahih Bukhari, Vol. 3, Book of Sales, Hadith Number 2076.

³⁰ Sunan Ibn-e-Maja, Vol. 3, Chapter on Business Transactions, Hadith Number 2246.

³¹ Sahih Bukhari, Vol. 3, Book of Sales, Hadith Number 2079.

³² Sahih Bukhari, Vol. 3, Book of Watering, Hadith Number 2356.

³³ Sahih Muslim, Vol. 4, Book of Marriage, Hadith Number 3459.

³⁴ Sahih Muslim, Vol. 4, Book of Financial Transactions, Hadith Number 3821.

³⁵ Sahih Muslim, Vol. 4, Book of Financial Transactions, Hadith Number 3836.

³⁶ Sahih Bukhari, Vol. 3, Book of Hiring, Hadith Number 2270.

³⁷ Sunan Ibn-e-Maja, Vol. 3, Book of Pawning, Hadith Number 2443.

³⁸ Sahih Bukhari, Vol. 3, Book of Manumission, Hadith Number 2545.

³⁹ Keynes, J. M. (1936). Theory of Income, Employment, Interest & Money. New York: Polygraphic Company of America.

⁴⁰ Diamond, D. W. (1984). “Financial Intermediation as Delegated Monitoring: A Simple Example”, Review of Economic Studies, 51(3), 393–14.

⁴¹ Ahmed, A. (2010). “Global Financial Crisis: An Islamic Finance Perspective”, International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 306–320.

⁴² Chapra, M. U. (2007). “The Case against Interest: Is it Compelling?” Thunderbird International Business Review, 49(2), 161–186.

⁴³ Chachi, A. (2005). “Origin and Development of Commercial and Islamic Banking Operations”, Journal of King Abdul Aziz University: Islamic Economics, 18(2), 3–25.

⁴⁴ Thomson Reuters (2018). Islamic Finance Development Report. Salaam Gateway.

⁴⁵ Global Islamic Finance Report (2019). Global Islamic Finance Report. London: Edbiz Consulting Group.

⁴⁶ Demirgüç-Kunt, A., Klapper, L. et al. (2013). Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults. Policy Research Working Chapter No. 6642.

⁴⁷ Naceur, S. B., Barajas, A. et al. (2015). Can Islamic Banking Increase Financial Inclusion? IMF Working Chapter, WP/15/31.

⁴⁸ The Economist (2017). Africa is Islamic Banking’s New Frontier. Print Edition, July 13, 2017.

⁴⁹ The Economist (2018). Why Non-Muslims Are Converting to Sharia Finance. Print Edition, October 20, 2018.