Islamic Banking: Know the Rules

With double-digit annual growth over the past decade, over 1 billion potential customers and a $4 trillion prospective market according to Standard & Poor's, Islamic banking is on the rise. But to profit from it, you need to understand more than balance sheets and investment metrics.

A sound strategy requires a nuanced comprehension of Islamic law (Sharia) and of the cultural, economic, demographic and political differences among Muslim populations around the world.

While it is too early to pick winners, one thing is clear: Success will change both conventional and Islamic banking.

What Is Islamic Banking?

Islamic banking is conducted in accordance with the principles of Islamic commercial law (figh al-muamalat). The chief principles are the prohibition against charging interest (ribá), the requirement that borrower and lender share risk, the ban on speculation and trading in risk (bayu al-gharar) and the proscriptions against financing un-Islamic activities such as trade in pork, alcohol and pornography (haram). These principles impact Islamic banks in at least three important ways.

First, liquidity constraints can depress the return on assets. Because interest is prohibited in the nascent market, robust short-term interbank lending systems have not developed. Liquidity is further tightened because banks have greater difficulty securitizing and selling their illiquid long-term investments with uncertain returns -- a problem exacerbated by the fact that Islamic bank loans are more akin to equity than debt for purposes of valuation.

Want more? Check out TheStreet.com TV video. Keith Lieberthal says there's no proof Islamic banks have been used any more than conventional banks for terrorist financing.

« Previous Page

1 2 3 4 5 6

Next Page »