Emerging Islamic Capital Markets - a Quickening pace and New Potential Islamic Finance Basics of Islamic Economic and Financial Systems Emerging Islamic Capital Markets

Describing the Islamic financial system simply as 'interest-free' does not do justice to the system. Promotion of entrepreneurship, preservation of property rights, transparency and the sanctity of contractual obligations, which are crucial to any sound financial system, describe its essence. Today, Islamic financial and banking activities have reached an impressive size of over US$250bn, as compared to a meagre US$6bn in the early 1980s. Market participants and policy makers are increasingly paying attention to its potential and how to take advantage of the opportunities presented. The term 'Islamic finance' or 'Islamic financial system' 1 is not as uncommon today as it was two decades ago when financial institutions in several Muslim countries started exploring ways to operate a banking system prohibiting the payments and receipts of interest. Islamic modes of financing have been in practice in some form or other since the early history of Islam. Throughout the Middle Ages, Islamic merchants became indispensable middlemen for fostering trade through development of sophisticated credit instruments in Spain, the Mediterranean and Baltic states. In modern banking history, an interest in the revival of Islamic modes of financing emerged in several Muslim countries, during their post-colonisation period. In the early 1960s, independent but parallel attempts in Egypt and Malaysia led to the establishment of financial institutions, which were designed to operate on a non-interest basis so as to comply with Islamic principles. But it was not until the first wave of oil revenues in the 1970s and the accumulation of petro-dollars which gave momentum to this idea, that the Middle East saw a mushrooming of small commercial banks competing for surplus funds. At the same time, interest grew in undertaking theoretical work and research to understand the functioning of an economic and banking system without the institution of 'interest. ' Continuing demand throughout the 1980s led to sustainable growth and, by the nineties, the market for Islamic financial products had attracted the attention of several western commercial banks, which started to offer specialised financial services to high net worth individuals and later at the retail level through 'Islamic windows. ' Today, there are more than 240 financial institutions operating on the basis of non-interest based instruments in more than 40 different countries. An Islamic economic and financial system is a rule-based system comprising a set of rules and laws, collectively referred to as Sharia' governing economic, social, political and cultural aspects of Muslim …