Islamic Finance

by

Clement M. Henry, Jennifer E. Lamm

• LAST REVIEWED: 14 December 2009
• LAST MODIFIED: 14 December 2009
• DOI: 10.1093/obo/9780195390155-0026

Introduction

The term “Islamic finance” generally refers to a corpus of theoretical economics and the practice of banking according to the principles of Shariʿa, or Islamic law. It is often viewed as the theoretical response to the challenge posed by Western capitalism and Marxism. Its emergence in the early 1970s coincided with the development of Political Islam, although, at the time of its formation (and certainly today), supporters of Islamic finance were decidedly nonpolitical and resistant to any association with politics.

General Overviews

General works on Islamic finance tend to be catalogues of Sharia-compliant instruments that replace conventional interest-based financing. Mohammad Nejatullah Siddiqi (Siddiqi 2004) is one of the academic pioneers of the subject, together with Nabil A. Saleh (Saleh 1986). Western-trained economists offer somewhat different perspectives, however. While Kuran 2004 is extremely critical of “Islamic economics,” others, such as el-Gamal 2000, take a more nuanced approach but also recognize that Islamic finance has faced trade-offs between principle and expediency in the competitive world of international finance. Vogel and Hayes 1998 and Usmani 2002 analyze the principles of Islamic jurisprudence underlying contemporary financial practices.

• el-Gamal, Mahmoud Amin. A Basic Guide to Contemporary Islamic Banking and Finance. Houston, TX: Rice University, 2000.

  El-Gamal provides a quick reference guide that covers the main topics and controversies within Islamic banking. Available online from Rice University.

• Henry, Clement M. and Rodney Wilson, eds. The Politics of Islamic Finance. Edinburgh: Edinburgh University Press, 2004.

  This edited volume covers political as well as economic constraints after the September 11 attacks. In addition to an analysis of global trends, it includes articles on the Islamic banking experience in Egypt, Jordan, Kuwait, Sudan, Tunisia, and Turkey.

• Iqbal, Munawar, and Philip Molyneux. Thirty Years of Islamic Banking: History, Performance, and Prospects. New York: Palgrave Macmillan, 2005.

  Covers the development and growth of Islamic banking from the point of view of economists and financiers.

• Kuran, Timur. Islam and Mammon: The Economic Predicaments of Islamism. Princeton, NJ: Princeton University Press, 2004.

  This collection of essays by a professional economist is highly critical of the extensive literature on “Islamic economics” and finance, although he recognizes some of the positive potential of Islamic banking as well.

• Rahman, Fazlur. “Riba and Interest.” Islamic Studies 3, no. 1 (1964): 1–43.

  Rahman's article is one of the earliest statements on riba in English, for a general audience (not classically trained Islamic scholars).

• Saleh, Nabil A. Unlawful Gain and Legitimate Profit in Islamic Law: Riba, Gharar, and Islamic Banking. Cambridge, UK: Cambridge University Press, 1986.

  Saleh examines riba and gharar, two restrictive rules in Islamic law, in the five schools of Islamic law.

• Siddiqi, Mohammad Nejatullah. Riba, Bank Interest, and the Rational of its Prohibition. Jeddah, Saudi Arabia: Islamic Development Bank, 2004.

  Siddiqi presents an excellent and readily available summary of the principal arguments in support of Islamic banks, together with a succinct history of their evolution in various parts of the world. Available online from the Islamic Research & Training Institute and at the personal website of Siddiqi.

• Usmani, Muhammad T. An Introduction to Islamic Finance. The Hague: Kluwer Law International, 2002.

  Focuses on Islamic banking products, such as musharakah, murabahah, ijarah, salam, and istina'.

• Vogel, Frank E., and Samuel L. Hayes III. Islamic Law and Finance: Religion, Risk, and Return. Boston: Kluwer Law International, 1998.

  Vogel and Hayes present one of the most in-depth studies of Islamic finance available in English.

• Warde, Ibrahim. Islamic Finance in the Global Economy. Edinburgh: Edinburgh University Press, 2000.

  An excellent critical introduction to Islamic finance that copes with the issue of defining an “Islamic bank.” Warde describes the paradox of Islamic finance, which on the one hand is rooted in medieval Islamic scholarship, and on the other is a modern industry operating in more than seventy countries and (at the time of writing) enjoying growth rates of more than 20 percent a year.