One of the highlights for the US Islamic home finance industry began in February 2007. The Federal Home Loan Mortgage Corporation (Freddie Mac) sent out a press release announcing that it would no longer buy subprime mortgages. and riskier mortgage-backed securities. Two months after the announcement, one of the major subprime mortgage lenders filed for Chapter 11 bankruptcy protection. Three months after filing for bankruptcy, financial institutions across the country warned of “tough conditions” ahead. . Manifestations of such difficult conditions appeared on the financial market horizon when once well-established mortgage companies began filing for Chapter 11. Similar circumstances reached the UK when the Bank of England authorized an authorization to provide liquidity support to Northern Rock, Fifth largest mortgage lender in the country. Five months later, the UK Treasury became the owner of Northern Rock.
Until then, the majority of the population did not fully understand the severity of these “difficult conditions.” In late 2008, the Federal Reserve Bank of New York was authorized to lend $ 85 billion to AIG. This was the beginning of the most serious recession in the United States since the Great Depression. What was a chain reaction that led to an unprecedented global financial crisis, as the world suffered from rising unemployment, rampant foreclosures, and severe skepticism of financial instruments.
This led to renewed attention to an unknown market segment that seemed comparatively more stable and, more importantly, much more ethical: the Islamic financial sector. From the financial centers of Malaysia to the Middle East, spanning more than seventy countries, Islamic finance in the US increased from $ 5 billion in the 1980s to $ 1 trillion in 2010. This phenomenal growth called the attention of global investors seeking to safeguard their investments through more ethical and reliable financial instruments. When financial sector workers realized that these Sharia-compliant instruments avoided many of the worst effects of the global financial crisis, they became an attractive investment vehicle to support a more diverse portfolio. The Shariah compliant financial sector has avoided investing in predatory lending businesses and overly leveraged financial instruments due to the strict ethical nature of the Shariah governance system. The news and media began covering this ancient but unknown industry in hopes of learning from the mistakes of the mainstream banking sector.
The concept of the modern Islamic financial services industry is rooted in the principles of Islamic legal jurisprudence dealing with financial transactions, a branch of Islamic jurisprudence called Fiqh Al Muamalat. Fiqh Al Muamalat is a framework of Islamic law that traces the conduct of Muslims in commercial or economic activities. Islamic financial products and judgments are based on specific Qur’anic injunctions that prohibit certain features of financial transaction patterns and related economic activities.
The Qur’an prohibits interest, also called usury or riba. The underlying reasoning is that Islam considers lending to be an act of charity to help another member of society in their time of need; therefore, it is strictly forbidden to benefit from someone’s difficulties. In the conventional banking system, when interest is charged on a loan, the risk of that transaction is transferred to the borrower, while the lender makes a profit from the transaction based on interest. Difficulties endured by the borrower in the event of a loss from the transaction are not taken into account.
By its nature, Islamic law prohibits unethical financial practices. It also promotes the distribution of wealth among all people to reduce poverty and inequality. This is manifested in the prohibitions of activities such as excessive speculation, gambling and investment in products that are harmful to society as considered by Islamic law (alcohol, pornography, etc.). The structure of Islamic financial products and services, especially its ban on speculative transactions, has helped the industry escape most of the adverse effects of the global financial crisis. The governance model of Islamic financial institutions has been praised as an ethical alternative by institutions such as the International Monetary Fund and the World Bank. Economic experts have suggested that Islamic financial principles can be harnessed to promote financial inclusion that improves the quality of life in developing nations. Islamic financial principles can also contribute to financial stability and economic development around the world.