Handbook of Finance: Financial Markets and Instruments

Chapter 10. Introduction to Islamic Finance

MAHMOUD A. EL-GAMAL, PhD

Professor of Economics and Statistics, and Chair of Islamic Economics, Finance, and Management at Rice University

Abstract: Islamic finance began to take shape in the 1970s. It was fueled financially by the flow of petrodollars to Islamic countries in the oil-rich Gulf Cooperation Council (GCC) countries, and fueled ideologically by the nationalist and Islamist movements that took shape during the first half of the twentieth century. This industry has witnessed dramatic growth over the past decade, fueled again by petrodollar flows and resurgence of nationalist and Islamist tendencies. As will become apparent shortly, the demarcation between Islamic and conventional financial practices is almost exclusively a matter of contract form. This makes Islamic finance a branch of structured finance more generally. A third reason for growth in Islamic finance must thus be added to excess liquidity in the GCC and the rise in Islamist and nationalist sentiments, and that is the ready availability of structured-finance methods that were developed during the 1980s and 1990s.

Keywords: Islamic finance, structured finance, riba, gharar, bay` al-`ina, murabaha, salam, takaful, Fiqh, fatawa, tawarruq, securitization, da` wa ta`ajjal, ijara, sukuk al-ijara, sukuk, musharaka, mudaraba, salam, istisna`, `urbun

The purpose of this chapter is to describe Islamic finance briefly. This chapter is not written from the point of view of pious ...