Perception of Islamic Financial System: Its Obstacles in Application, and Its Market

ABSTRACT It is often misunderstood that the Islamic financial system involves only the absence of interest and only applies to those who practice the Islamic faith. Although the paying or receiving of interest is strictly forbidden to the many million practicing Muslims all over the world, this system can be an alternative to the existing method for everyone. Further, the concept of Islamic finance involves more than zero interest. There are other principles such as prohibition of guaranteed earning, transactions to comply with a set of Islamic laws known as Shari'a, and the emphasis on the element of business risk. The central theme of this paper is (1) to provide an overview of the theoretical concept of Islamic finance, (2) to discuss the various instruments available in Islamic finance, the obstacles involved in its application, and its growing market trend, and (3) to analyze the perception of Islamic financial system in the U.S. INTRODUCTION The conventional banking and financial institutions exist today based entirely on the concept of interest-bearing instruments. It is hard to imagine that there is an alternative to the interestbearing financial system. This alternative method is commonly known as Islamic finance because of its deep roots in the Islamic religion. The objective of this study is to understand the basic concept of Islamic finance, to have an overview knowledge of the various instruments available, and to determine whether or not this interest-free economy is a viable alternative to the conventional financial system. The Islamic financial system is based upon the sharing of profit and loss, rather than on the payment of interest. Although the system does not allow for the payment or receiving of interest, there are a wide variety of instruments allowed that investors can choose from depending on his or her risk tolerance. The main idea behind the Islamic financial system is more than generating wealth. It is a financial system intended to promote economic growth while maintaining the morals of the communities. Although the method of interest-free economy has not been very well known by the general public, there is an emergence in the understanding and application of this concept by the Muslim communities as well as the traditional financial institutions. This is partly due to the growing interest by the Muslims for options that do not involve interest to satisfy their religious obligations. Further, the Western financial institutions are taking a closer look at this system not only to reach the niche market but because there is money to be made. The objective of this paper is three fold: (1) to provide an overview of the theoretical concept of Islamic finance, (2) to discuss the various instruments available in Islamic finance, the obstacles involved in its application, and its growing market trend, and (3) to analyze the perception of IFS in the U.S. he next section reviews the literature, followed by the various financial instruments within this system, its obstacles in application, its potential market, and finally the conclusion. LITERATURE REVIEW The subject of a zero interest based economic system has been around for over 1400 years yet only in the past two decades has there been studies and writing on the subject within the scope of the modern finance industry. Not only is the application of the Islamic financial system growing, but also, the academic writings and studies are also increasing. There are many misconceptions about the Islamic financial system and studies such as Zineldin (1990), Al-Omar and Abdel-Haq (1996), Khan (1987), and Saeed (1996) are truly instrumental in establishing the principles and the definition of various Arabic terms that can cause much confusion because of multiple meanings. After the basic knowledge about the concept is set, the next step is to see how the theory is put into practice. In this regard, there are several studies that specifically analyze practicing Islamic institutions via case studies. …