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An Introduction to Islamic Finance: Theory and Practices

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Book: 'An Introduction to Islamic Finance: Theory and Practices'

Author: Zamir Iqbal and Abbas Mirakhor

Publisher: John Wiley & Sons (Asia) Pte Ltd, 2006

ISBN: 0-470-82188-4

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At first sight, this title might make you wonder about the connection between religion and finance. After all, we don’t hear a lot about Buddhist finance or Christian finance. In fact, most people think of finance as being in an entirely different category from religion. Yes, we aim to be honest and trustworthy in all our financial dealings – but we don’t expect to hear people quoting religious texts in banking circles.

 

Islamic finance experts Iqbal and Mirakhor believe that this common disconnect between religion and finance is something that we have accepted too easily. All the major religions make statements about finance, but we have conveniently explained them away. Take the concept of interest for example. Many religions explicitly prohibit interest, but we have interpreted that as a prohibition on “taking too much interest”. So charging interest is okay, provided we don’t overdo it.

 

An Introduction to Islamic Finance explains that Islam has taken a tougher stance, maintaining a strict prohibition on interest. Not surprisingly, conventional finance analysts were initially shocked by this idea. They predicted that such a financial system had to fail, since investors would have no reason to risk their capital. But the analysts were wrong; over the past few decades, it has been proven that Islamic finance can and does work.

 

Instead of interest, Islamic finance determines the return on capital after the event, based on the return generated by the funds. Iqbal and Mirakhor point out some advantages of this system over conventional debt- and interest-based finance. Islamic finance aims for more balanced risk and profit sharing, while the conventional system has very unequal contracts in which debtors carry most of the risk.

 

But An Introduction to Islamic Finance isn’t just about interest; it gives an overview of the religious principles, historical background and working practices that form the basis of Islamic finance. We are assured that “Islamic economics is capable of providing a paradigm different from traditional economics”. This new paradigm will “propose solutions to society’s problems – such as distorted income distribution, external diseconomies accompanying growth, unemployment and poverty and environmental problems”.

 

Of course, there is still a lot to be done. Iqbal and Mirakhor explain some of the key challenges facing Islamic financial systems today and suggest how they may be resolved. This detailed and authoritative text is essential reading for those interested in the principles underlying Islamic finance and its future potential in global money markets.