Only a few decades back, Islamic finance was unknown to even many Muslim scholars who were religious and propagators of Islam. To many other finance experts, the subject of Islamic finance was merely a laughing stock. It was very difficult to convince them that finance and business could be carried out without interest which is charged for lending. In fact, the world economy was so much obsessed with interest that anyone who talked about an economy without interest was thought to be a man without knowledge or an illiterate person. Even now, the majority of finance and business practitioners hardly believe that they could succeed without interest. The practitioners, who borrow business capital from banks against payment of interest, could not think of an alternative mode of borrowing through sharing of profits with banks instead of paying a pre-pledged interest.
The thought of doing business without interest came from the religious belief of prohibition of interest in Islam. In other religions also, sharing of business profit with lenders at a pre-agreed ratio or even at a variable ratio can be thought of a better finance work of sharing businesses' result more equitably between entrepreneurs and borrowers and lenders or owners of the capital.
Islamic finance is thought to be more than just the one based on interest, as the system offers both entrepreneurs and depositors equitable share of profits of businesses. Against this, the interest- based system either offers too little to the capital owner or in many cases, put the entrepreneurs in real trouble when they lose in business.
After practising well over four decades, Islamic finance is now recognised by scholars of finance across all religious faiths as one which is more stable. It offers more stability compared to the one based on interest to the financial system of a country for the very reason that the burden of failures of a business is shared both by lenders and entrepreneurs. Islamic finance is now recognised as a model of finance and can be practised by any one irrespective of religious beliefs. In fact, now-a-days this finance is being looked into by more non-Muslim scholars. Business schools of the West, one after another, are opening up courses of Islamic finance for teaching. And the students, of whom the majority are non-Muslims, are coming from all across the globe.
In the West, England is leading in the field of Islamic finance. Already many famous British business schools like Durham, Aston, Bangor and Cass Business School have opened courses on Islamic finance. Among Muslim countries, Pakistan, Malaysia and Indonesia are leading in teaching courses on Islamic finance to their students. Elsewhere in Europe, Germany is showing interest in Islamic finance. It stands second to England in Europe in attracting investment from persons who want to shun interest. The Frankfort School of Finance and Management has already developed online certification course in Islamic finance.
Islamic finance is no more confined to Muslims. Rather it is attracting people irrespective of their religious affiliation who are looking for alternative modes of investment. Religious faiths are not standing on way to their investment decisions. In Islamic finance, there is no borrower or creditor per se; they are partners in business. The creditor also sees how the borrower does in business. Islamic finance-related literatures have already been developed by Muslim as well as non-Muslim scholars who have made researches on the subject and also published their findings extensively in this area. Islamic finance has its roots in what the Al-Quran says about business and that of interest.
Thousands of models have been developed by the economists relating to business based on interest. In the same way, many other economists are developing such models devoid of interest. In the last few decades, Islamic finance also drew the attention of international financial institutions like the World Bank and the International Monetary Fund (IMF). The economists who are working in these institutions are also writing on the subject. It is not that Islamic finance will replace interest-based one or the one which is dominating the global finance since long. But this mode of finance can be expected to stay side by side as a junior partner of the conventional system in the world of finance in the years to come. The size of Islamic finance crossed $ 1.0 trillion long ago; now it is touching $ 2.0 trillion. Different financial products in Islamic mode are being offered to investors. The Islamic bond 'Sukuk' is one of them.
The writer is Professor of Economics, University of Dhaka.