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Islamic finance enters the mainstream: although Islamic finance is gaining ground in many countries, it faces challenges such as modifications of laws, regulations, and decision-making frameworks.

Article Excerpt
Recent years have seen a marked growth in the Islamic financial services industry, which includes banks as well as insurance and investment firms that conduct business in accordance with Islamic religious laws. The International Monetary Fund (IMF) estimates that total Islamic assets are currently $250 billion compounding at 15% annually. If this rate is sustained, that figure would catapult to $500 billion within five years and $1 trillion within 10.

More than 300 Islamic financial institutions now provide an alternative for an estimated 1.2 billion Muslims (20% of the world's population), mostly concentrated in the Middle East and Southeast Asia. Non-Muslims are also choosing Islamic finance as an option with some recent financial offerings experiencing 30% to 70% non-Muslim participation. Borrowers, especially foreign companies operating in Islamic countries, find that including Islamic sources of funds makes sense not only culturally, but also to diversify and deepen their access to capital.

Islamic finance is also gaining ground in Western economies such as Great Britain, with its 2.5 million Muslims. Several banks in the country now offer Islamic services, and London, which has historic ties with the Middle East and other Muslim regions, has become a center for innovation for Islamic products and services. In the United States, Islamic finance has captured the interest of the Federal Reserve Board and the U.S. Treasury, which has appointed an in-house specialist to better understand international developments related to Islamic finance.

Three major factors are responsible for this trend. First, the resurgence of interest in Islamic business practices that had been suppressed under two centuries of Western colonization. Second, excess liquidity generated chiefly by oil and trade is stoking the coffers of Islamic financial institutions around the world. Third, the Islamic leadership, with a view to being a full partner in global finance, has focused on building an infrastructure to strengthen the Islamic financial industry.

With these developments, denizens of conventional finance have a heightened incentive to understand the nature of the Islamic financial services industry. The following sections offer some insights into typical operations in Islamic banks, insurance companies, and investment firms and how the burgeoning infrastructure is laying the foundation for meaningful growth.

MODERN ISLAMIC FINANCE

Islamic religious law provides detailed guidance for every facet of a Muslim's life--social, political, and economic. This includes the sanctioning of all commercial activity and, in the case of Islamic finance, approval of all products, services, and even specific transactions. This total integration of religion and commerce is unfamiliar to most non-Muslims who regard religion as a personal, rather than business, issue. In Islam, no such distinction exists.

Islamic law is richly detailed and difficult to distill into simple rules, but knowledge of two characteristics is helpful. First, Islamic law operates by exception: "All is acceptable in Islam, unless expressly forbidden." Second, the following five tenets help...