Pros and Cons of Islamic Banking

Pros | Cons | * as a safer, more stable alternative to conventional finance look at the damage that an interest-based system has done to the US and Europe * emphasising Islam’s preference for an equitable distribution of wealth and dislike of excessive financial leverage * its assets estimated to total nearly $1 trillion globally * it had expanded at a compound annual growth rate of 20 per cent over the past three years, compared to 9 per cent for conventional finance | The Dubai debt crisis of 2009 showed this claim to be on shaky ground. Companies such as property developer Nakheel and Jebel Ali Free Zone raised funds through sukuk but were forced to restructure once they found themselves unable to pay creditors. | * The market in Islamic bonds, or sukuk, is believed to total about $50 billion, roughly one per cent of global bond issuance * Dubai’s fast-growing Emirates airline said it was looking at the Islamic finance market to fund aircraft deliveries as European banks backed out of plane deals because of the euro zone debt crisis. * Some big Western banks, facing tough conditions in the funding markets on which they have long relied, are also turning to sukuk. HSBC issued a $500 million sukuk in May and Goldman Sachs announced a $2 billion sukuk programme last month. | deposits in Islamic banks, which do not offer interest but may invest depositors’ money in relatively risk-free investments and give them a share of the profits, are supposed to be safer because of Islam’s curbs on speculation. But Dubai Bank, an Islamic institution, ran into such serious debt problems that the Dubai government had to arrange last month for it to be taken over by a conventional bank. | * In contrast with conventional banks, Islamic banks do not consider only the credit worthiness and interest rate as standards; instead they must apply Islamic moral/ethical criteria in their provision of financing. * This adds another merit for Islamic banks since