Islamic Financial Institutions - dummies

By Consumer Dummies

Although Islamic financial institutions may have very different structures, types of customers, and goals, they all share one key element: They must comply with Islamic law. The following types of Islamic financial institutions serve Muslim and non-Muslim populations throughout the world:

  • Islamic banks: Islamic banks have many functions that mirror those of their conventional counterparts, but they must fulfill those functions in sharia-compliant ways. Therefore, the products available at an Islamic bank look very different from those available at a conventional commercial bank. And the ways in which an Islamic bank invests its funds differ significantly as well.

  • Islamic capital market participants: The Islamic capital market is where sharia-compliant financial assets are transacted. The individuals and institutions involved in the Islamic capital market work parallel to those in the conventional capital market, and they help investors find sharia-compliant investment opportunities. The Islamic capital market is open to any investors, including non-Muslim customers.

    Products that are bought and sold in the Islamic capital market include Islamic funds; sukuk, or Islamic bonds; and Islamic interbank money market funds (which are quite new and just now developing). Therefore, capital market participants include Islamic investment fund managers, sukuk issuers (including governments and major corporations), high-net-worth individuals who need sharia-compliant products in which to invest their money, and any other individual or entity that seeks sharia-compliant and/or socially responsible investment vehicles.

    Because this capital market is very young, it’s likely to grow and include more types of investment products as the Islamic finance industry matures.

  • Islamic index providers: When Islamic investment funds were first being developed, their investment performance was benchmarked against well-known conventional indexes (such as the S&P 500). But that comparison was flawed because Islamic funds can’t invest in so many of the industries represented by those indexes.

    As a result, Islamic indexes emerged that now serve as more appropriate benchmarks for examining the performance of Islamic investment funds. Key index providers who offer Islamic indexes include Dow Jones Indexes, S&P, FTSE, and MSCI.