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Bridging the knowledge gap in Islamic finance: Worldly Wise

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Over the past decade, Islamic finance has gained visibility especially with the ongoing financial crises, making the general public curious about its functionality and how it withstood the pressures of the global meltdown.

Hawkamah, in its recently launched Policy Brief on Corporate Governance for Islamic banks and Financial Institutions, identified a knowledge gap concerning Sharia-compliant finance, which needs to be addressed as Islamic finance enters mainstream finance.

In addition, the scarcity of Sharia scholars and Islamic finance experts raises the need to develop and disseminate knowledge and building capacity.

To address this issue, Hawkamah has teamed up with the Islamic Finance Department of Durham University in the UK and Dubai-based Dar Al Sharia to provide workshops on Islamic finance and Islamic financial instruments. An initial session is an ‘Introduction to Islamic Finance' to answer the one major question which has come to everyone's mind at one time or another — what is the difference between Islamic and conventional banking?


Many people have a misconception that both streams of banking are the same, with conventional banking products and services being merely ‘repackaged', with ‘interest' replaced by ‘profit'.

Islamic banking however, offers a different paradigm from conventional banking.

Instead of being a ‘depositor', you are an ‘investment account holder' in an Islamic finance institution.

Similarly, Takaful, the Islamic insurance industry, is based on the principle of collective, cooperative sharing of risk.

More generally, Islamic finance is based on Sharia principles which express an intention to meet the financial needs of participants with integrity and in a manner that is just, fair, trustworthy and honest, while ensuring a more equitable wealth distribution. Islamic finance embodies ethical principles and values as its core.

Islamic law prohibits usury, the collection and payment of interest, also commonly called ‘riba' in Islamic discourse. Instead, profit-and-loss sharing arrangements (PLS) or purchase and resale of goods, assets and services form the basis of contracts. Islamic law generally prohibits trading in financial risk, such as financial derivatives (which is seen as a form of gambling).

In addition, Islamic law prohibits investing in businesses and activities that are considered ‘haram' or sinful including gambling, drugs, prostitution, arms, alcohol or pork, or businesses that produce media that are not consistent with Sharia principles.


These Islamic principles uphold the principles of integrity, transparency, fairness and good corporate governance. The ongoing global financial crisis and recession has attracted investors and issuers to the perennial principles of ethics, solidarity, risk sharing, the financing of real activity and real assets, all of which lie at the core of Sharia-compliant finance. Increasingly the call for financial sector reform at a global level is for banking and finance to return to basics and be directly linked to the real economy: a main message of Islamic finance. In an age of increasing inequality within countries and between countries, of growing uncertainty as to the future, where greed and cupidity and accumulation of personal wealth are promoted to our young people as being the major motivation of their lives, the strength of Islamic finance is that it reintroduces moral values and ethics as an integral part of finance.

The Islamic finance market is also growing. Investment in infrastructure, public works, development projects and housing is becoming a major driver of demand for Islamic securities. Infrastructure and development projects with a predictable revenue stream are particularly suitable for Sharia-compliant financing, resulting in a real asset-backed instrument providing continuous security to investors. In the GCC the issuance of Islamic bonds has picked up since 2010, where seven issues of $4.53 billion (Dh16 billion), were issued, increasing to 16 issues of $7.34 billion in 2011. Already in 2012 to date we have seen ten issues of $8.33 billion.


The writer is executive director, Hawkamah and Chief Economist, DIFC.