Islamic finance is becoming an increasingly important part of the global banking and capital markets. In the Asia-Pacific region, Malaysia and Indonesia are among the largest markets for Islamic finance as a result of the predominantly Muslim population. In addition, regional financial centres such as Singapore and Hong Kong have adopted legislative and policy reforms to promote and facilitate Islamic finance transactions. This article provides a high-level overview of Islamic finance. It commences by defining Islamic finance. It then outlines the key principles of Islamic finance, examines its historical development and explains its key structures and processes. It concludes by outlining the issues and challenges and noting the development of Islamic finance in China.
What is Islamic finance?
In basic terms, Islamic finance refers to financial transactions that are governed by Shariah law (i.e. Islamic principles). There are two important sources from which Shariah law is derived: the Quran, which is the scriptural foundation of Islam, and the Sunnah, which is the teachings and practices of the Islamic prophet, Muhammad. The process of interpreting these sources of Shariah law is called fiqh (which literally means “full understanding”) and it is from the interpretation of these two sources by Islamic scholars that Islamic jurisprudence arises.
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.