for less than 2% of the Islamic finance assets globally even though the continent’s Muslim population is 250 million, and according to the World Bank, as many as 350 million Africans do not have a bank account.48
In June 2014, Britain became the first non-Muslim country to issue Sukuk, which is an Islamic substitute for the bond. Besides that, Singapore and Hong Kong are other non-Muslim-majority countries that have also issued Sukuk in the past. Among the major companies, Goldman Sachs and General Electric’s GE Capital have also sold Islamic bonds in the past few years. The Economist reports that some non-Muslims may be drawn to pious banks for ethical reasons since Islamic law forbids investments in stocks of companies which deal in arms, alcoholic drinks, and tobacco.49
1.1.7Islamic investments
In Shari’ah-compliant asset management, there are more than 1,410 Shari’ah-compliant mutual funds operating globally. By the end of 2017, the total global Islamic assets under management (AUM) stood at $110 billion as shown in Table 1.4.
In Islamic capital markets, Sukuk is an instrument representing ownership in the underlying asset to the proportion of investment in that underlying asset. The underlying physical asset can be financed using Islamic trade- and lease-based modes of financing. The funding for the asset comes from issuing participation certificates (i.e. Sukuk) to the investors. The returns on these assets come in the form of profit on sale or rentals on the use of the assets, which are paid by the issuer of Sukuk. Sukuk is one of the significant contributors to the total assets of the Islamic finance industry with a total outstanding value of $426 billion in 2017. Overall, 19 countries observed Sukuk issuances, amounting to $85 billion in 2017. Among these, agency Sukuk constituted a 6% share, whereas sovereign issuances and corporate issuances constituted 31% and 63% shares, respectively.
Table 1.4. Growth in Islamic fund assets.
Source: Thomson Reuters Global Islamic Finance Report 2018.
In Islamic investments, to determine the eligibility of a company with regard to Shari’ah compliance, two sets of criteria are employed. The first step is the qualitative screening. In this process, the companies are screened on the basis of whether their core business is in conformity with Islamic principles or not. Companies dealing in prohibited goods and services are considered non-eligible for selection in the Islamic index or portfolios. For instance, if a company sells goods and services such as alcoholic drinks, arms, pork, intoxicants, pornography, or betting, the company is considered Shari’ah non-compliant. If a company engages in interest and gambling-based financial products, such as conventional banking, leasing, and insurance, the company is rendered non-eligible for selection in the Islamic index or portfolios.
After eliminating firms with Shari’ah-non-compliant business operations, the remaining firms are evaluated on quantitative indicators. These quantitative indicators are related to Shari’ah-non-compliant leverage, Shari’ah-non-compliant investments and Shari’ah-non-compliant income. Finally, the dividend income obtained on Halal stocks is purified to exclude the Shari’ah-non-compliant portion of the income from dividends.
Figure 1.2 plots the daily closing index values of the Dow Jones Islamic Market World Index from May 2009 to May 2019. The holding period return for the overall period was 135% during the 10-year period. The average annual return during the period is clocked at 10% per annum, whereas the CAGR has remained at 9% per annum.
Figure 1.2. Dow Jones Islamic Market Index closing values (May 2009–2019).
Source: S&P Dow Jones Indices.
1.1.8Islamic insurance
Takaful is an Islamic substitute for conventional insurance. The conventional insurance includes the element of interest-based investments as well as resemblance to gambling since the payoffs are contingent on some future probabilistic events. Takaful avoids the element of interest by only resorting to investments that are permissible in Islamic law and which avoid Riba (interest), Maysir (gambling), and Gharar (uncertainty). Rather than paying premiums to a company, the clients contribute voluntary donations (Tabarru) in a pool of funds in Takaful. This pool of funds is managed by a Takaful operator or managing firm. In practice, if the Takaful operator only works as an investment agent and to process claims on behalf of all clients, then the agency (Wakalah) model is used to organize and structure the Takaful. On the contrary, if the Takaful operator not only works as an investment agent and to process claims on behalf of all clients as an agent but also as a partner, then the Mudarabah model is used to organize and structure the Takaful. In the Mudarabah model, the compensation to the Takaful operator is primarily based on the performance of investments. On the contrary, in the Wakalah model, the compensation to the Takaful operator is fee based.
In global Islamic finance assets, the share of Takaful is 2%. With a CAGR of 6%, Takaful assets have grown from $31 billion to $46 billion in 2017 as compared to 2012. Globally, there are 322 Takaful operators working in 47 countries.
Table 1.5. The distinction of Waqf from other social finance institutions.
1.1.9Islamic Awqaf
Waqf is one of the important institutions in Islamic social finance. In Waqf, the owner of some asset or property permanently dedicates an asset along with its usufruct and benefits to a particular social cause voluntarily. This enables the society at large to benefit from Waqf assets. In modern practice, Waqf can be established through movable as well as immovable assets. Using liquid assets like cash, Waqf can be used to mobilize funds for establishing institutions like schools and hospitals. It can also enable the divisibility of the social investments in Waqf and enable people at large to contribute to Waqf even if they do not wholly own a valuable tangible fixed asset or property. Table 1.5 gives the distinctive features of Waqf in comparison to Zakat and Sadaqah.
1.2Conclusion
This chapter has introduced the basic foundational principles and economic value proposition of Islamic finance. It has provided a brief look at the variety of Islamic finance institutions that are operating globally. The recent statistics on the Islamic finance industry exhibit exemplary growth and penetration in the Muslim as well as non-Muslim customer base in banking, investments, and insurance. In later chapters, the product structures on which these institutions operate will be explained in more detail.
Self-Assessment Quiz
1.Riba encompasses usury as well as:
(a)Any stipulated amount charged over the principal amount in a loan contract
(b)Any profit or mark-up in the
