Abstract
Modern Islamic finance emerged from a belief that conventional forms of financing may contain elements prohibited by Sharia, since the Quran forbids taking interest. As an alternative, a myriad of Islamic financial transactions have been innovated based on a combination of classical trade-based contracts and other accompanying arrangements. These products are deemed to be in compliance with Sharia precepts, yet provide some level of economic parity with comparable forms of conventional financing
Highlights
Modern Islamic finance emerged from a belief that conventional forms of financing may contain elements prohibited by Sharia, since the Quran forbids taking interest
Modaraba describe contracts of profit-sharing between a capital provider and an entrepreneur in which the former contributes the capital and the latter contributes his effort in managing the business
In a Modaraba contract, the capital providers may agree to limit the rate of return to a defined percentage whereby the excess can be given to the manager as an incentive or performance fee
Summary
Modern Islamic finance emerged from a belief that conventional forms of financing may contain elements prohibited by Sharia, since the Quran forbids taking interest. A myriad of Islamic financial transactions have been innovated based on a combination of classical trade-based contracts and other accompanying arrangements. These products are deemed to be in compliance with Sharia precepts, yet provide some level of economic parity with comparable forms of conventional financing [1]. Islamic finance has witnessed rapid expansion over the years and can truly be considered a global industry both in terms geographical spread and assets class coverage. The IFSB estimates assets of the world Islamic financial industry to reach 1,600 billion USD along with revenues of approximately 120 billion USD by 2012. Given that about 22% of the world population is Muslim, even a 1% contribution by IFIs towards global financial assets and deposits depicts a significantly untapped market [2]
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