Islamic Finance

The Koran forbids charging interest or paying it. Yet even strictly observant Muslims can participate in modern-day commerce. They use alternative arrangements designed to comply with sharia, or Islamic law. These financial instruments, in which the buyer and the seller typically share risk as well as profit, are some of the fastest-growing on the market. Even companies and governments outside the Muslim world are using them. And why not? The world’s Muslim population is growing rapidly and in many places growing wealthier, creating new customers for sharia-compliant bonds, mortgages and insurance. Fans of these arrangements think they can compete with conventional ones even for non-Muslim customers. How big Islamic finance can become, however, is a matter of debate.

Shariah-compliant financial assets are forecast to reach $3 trillion sometime in the next decade from an estimated $2.1 trillion at the end of 2016. Sales of Islamic bonds, called sukuk, rose 24 percent to $44.1 billion last year as some issuers rushed to lock in borrowing costs before an increase in U.S. interest rates. The U.K., which hopes to become a global center of Islamic finance, in mid-2014 became the first non-Muslim country to raise funds by selling sukuk; Luxembourg, South Africa and Hong Kong followed. Kenya and Morocco are also planning debuts in the Islamic bond market. Companies such as General Electric Capital and Goldman Sachs also have sold sukuk. Rather than lend money to a conventional borrower in exchange for interest, sukuk holders own a share of the asset that backs the debt and receive income from any profit it generates. Investors in Muslim-dominated countries in the Middle East and Asia aren’t the only ones buying sukuk: There’s strong demand in Europe and the U.S., too. Islamic insurance, which operates on a cooperative business model, is also expanding. Ernst & Young projects it will maintain double-digit growth, with member contributions totaling $20 billion by 2017. Ethical investing has gained impetus in Islamic finance after the sale of bonds to raise funds for vaccines in 2014 and the issue of socially responsible Islamic bonds by Malaysia’s sovereign wealth fund the following year. In November, gold was ruled acceptable as an investment in Islamic finance for the first time after the World Gold Council adopted Shariah-compliant regulations for trading the metal.