These products are based on sound financial principles.
The mere eschewing of interest does not mean that the financing is naive or unprofitable.
The principle of sharing profits and risks is nothing but equity financing.
Islamic style mortgage, the faith outlaws the charging of interest, so to skirt this restriction
“financiers” instead charge rent and allow the borrower or tenant to gradually purchase equity in the property. The motivation may be to adhere to religious codes but the result is a less risky financial arrangement for the household than a standard home loan.
Islamic banking is currently beginning to attract Non-Muslim customers, who are interested in this alternative way of banking.
Indeed, a growing number of Non-Muslims are turning to Islamic banking as customers, spooked by turmoil in the Western banking system increasingly see the sector as safe and more connected to the real economy.
In my opinion, Islamic banking will benefit from this new consumers’ interest and grow even more quickly than it recently did.
It is surely a good idea to explore how the spirit inherent in the “moral economy” of Islam could enable a just and ethical approach towards the management of systemic risk in economics, in business and finance the way risk-sharing, implicit in Musharaka, works, for example, with lenders sharing the borrower’s risk, and the notion of Mudharabah, the sharing of profit. This is very different from the way that conventional finance transfers the risk quickly and frequently onto someone else with profit going just one way.
“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service.” They suggested “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”, adding that sukuk may be used to fund the “car industry or the next Olympic Games in London.”
