Future Prospects for Islamic Finance in the UKIntroductionThis paper briefly examines the current state of Islamic finance in the UK, and offers some insights into its prospects for the next decade. Worldwide, the Islamic finance sector is growing at 10%-15% annually, and the UK’s position as a leading financial centre plus the presence of a considerable Muslim population in the UK has made the country one of the leaders of Islamic finance (Ainley, et al. , 2007). This essay will first briefly describe the basic characteristics of Islamic finance and how key principles in Shari’ah law define what is allowable for Muslim businesses and consumers.
The development of Islamic finance from the point of view of the government’s attention to helping it grow in the UK will then be discussed, followed by an examination of some of the key challenges that must be addressed if Islamic finance is to continue its successful path. Characteristics of Islamic Finance“Islamic finance” describes the principles imposed on financial transactions and products by Shari’ah law, which governs all aspects of Islamic life (Aioanei, 2007: 11). The fundamental philosophy underlying Islamic finance is the concept of shared profit and risk, and the prohibition of riba, or interest (Abdul Rahman, 2007: 123).
The theological basis of the concept is that riba serves as an insurance against the lender’s risk, making the risk relationship between lender and borrower unequal; this is not allowed, because it is up to God to grant whether a venture should be successful or not – in other words, one who does not take a risk does not deserve a reward of profit (Abraham, 2009: 42).
The specific requirements of Islamic finance can be summarised in a number of key provisions (Aioanei, 2007: 11; Abraham, 2009: 42-43): First, riba is prohibited. Second, investments must be in ethical products, and avoid those which are haram (prohibited), such as gambling businesses, alcohol, prohibited foods such as pork, weapons, and other things considered immoral by Islam. Third, investments must be in “real” products, or be trade-related. For example, a Western financial invention like a credit default swap would not be acceptable in Islamic finance. The idea in this principle seems to be that money is something that should not have a value except as just a medium of exchange; without an underlying product for the money to represent, the money has no definable worth.
The fourth principle is avoidance of gharar (excessive risk). This is related to both the provisions against investing in that which is haram, since excessive risk is like gambling, and the prohibition of riba is the sense that any profit to the lender comes to him without his own effort in either case; winning a gamble is simply chance, and collecting riba is a guarantee against fair risk (Abraham, 2009: 43).
Finally, one of the most important principles is that a part of the profits must be paid as zakat (charity). Modern banking and financial systems present a number of challenges to Islamic finance, which in its ‘classical’, most theologically-pure form sets a bigger priority on social utility than financial gain (Abdul Rahman, 2007: 127). In order to stay up-to-date and relevant, however, some of the definitions of Islamic finance principles have been interpreted in different ways, which causes some confusion and conflict.
For example, riba in its orthodox form means all forms of interest, but it also can be, and has been interpreted as simply meaning “usury, ” or unfair interest, so long as what is considered “fair” interest can be defined as a form of profit-sharing (Abraham, 2009: 42). Abraham (43-44) also points out that the definition of what constitutes a “real” product can be bent as well, and has led to the development of sometimes controversial secondary financial products such as the sukuk murabaha, which is the sale of rights to receivables, or a form of bond.