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Why You Should Learn About Islamic Finance

It’s always a good idea to understand different platforms of global finance, especially as an MBA student. One field you should consider? Islamic Finance—or sharia-compliant finance. Let’s take a closer look at what it is, why it’s important, how it’s shaping global finance—and what it means for your MBA.

Jan 9, 2017
  • International News
Why You Should Learn About Islamic Finance

Islamic Finance entered the global business scene as early as the 1950s, gained momentum in the 1970s, after the oil crisis in 1973 and the emergence of Islamic movements, and skyrocketed in the 1990s. Ranging in scope from corporate finance to asset management, Islamic Finance has taken off globally, and will likely focus on derivatives liquidity management—largely driven by the oil industry. In a global industry that needs global expertise, it makes sense that MBA students should learn about Islamic Finance. Let’s take a look at what it is—and what it means for your MBA.

Businesswoman or saleswoman working with an arab man showing products in a tablet in a coffee shop

1. What is Islamic Finance?

Simply put, Islamic finance is compliant with Islamic law—also called sharia law. Islamic finance is widely known as “sharia compliant.” What does this mean? Sharia law prohibits usury, or riba, the acceptance of interest and fees in exchange for loans. Investing in businesses that provide goods and services considered “haraam,” or sinful, is also prohibited. For example, sharia compliant finance will not allow businesses to invest in companies that buy, sell, or produce anything related to gambling, pork, alcohol, pornography or gossip columns, among others. While interpretations among Muslim countries may vary, there are a few essential principles to understand.

The cornerstone of sharia-compliant finance? Risk-sharing. How does it work? A few key terms: mudharabah, or profit sharing, wadiah, or safekeeping, musharakah, or joint venture, murabahah, or cost plus, and ijah, or leasing. Interpretations vary, but generally, to achieve interest-free transactions, banks practice a variety of methods. For murabahah, or mortgage transactions, instead of lending a buyer money, some banks buy the property outright, sell it back to the buyer at a profit, and set up a pay-back schedule—with no late fees. How do banks manage default? They require significant upfront collateral. Some banks also engage in complicated rental agreements, where both bank and buyer share the cost and the buyer pays rent to the bank at an elevated cost, but one without interest.

silver coin stack and tree in concept of growth business background.

2. Importance and Job Growth

With the world’s Muslim population expected to leap to 2.5 billion by 2020, Islamic finance will continue to shape the global banking scene. Ten of the world’s 25 rapid-growth countries are Muslim. In a November article in the Financial Times, Professor Narayan Naik, course tutor and professor of finance at the London Business School states, “After the financial crisis, the traditional banking jobs around areas such as regulation are on the decline, which has made Islamic finance proportionately a more significant market.” According to the EY World Islamic Banking Competitiveness Report 2016, sharia-compliant participant banks manage more than $920 billion in assets. It’s no wonder that there has been a significant uptick in the number of jobs in Islamic finance… In a field where supply barely keeps up with demand, the need for experts in Islamic finance will have no trouble finding work in the Middle East, Southeast Asia, and increasingly in Europe, especially in the UK.

KUALA LUMPUR, MALAYSIA - AUGUST 14, 2016: Kuala Lumpur cityscape showing Petronas twin tower, also known as KLCC building during blue hour from the top of Regalia Residence Kuala Lumpur, Malaysia.

3. Opportunity to Discover Other Cultures

More universities offer MBA programs in Islamic Finance designed to attract a variety of students, not necessarily only Muslim students. Universiti Tun Abdul Razak, or UNIRAZAK, in Malaysia does just that. According to a 2013 New York Times article, UNIRAZAK’s program, in one of the geographic centers of the Islamic banking world, appeals to students globally. They participate in the International Business School Alliance, a network of schools that offers students at participating institutions to spend time in two schools and earn two MBAs. Other universities in the alliance are the University of Valencia, the University of Hertfordshire, Novancia Business School in Paris, The Institute of Business Studies in Moscow, and the University of North Carolina Wilmington. Programs like the one at UNIRAZAK allow for multiple MBA degrees from students who are interested in global finance, Islamic finance—and world travel.

Earth planet collapses into money. Abstract finance illustration. Elements of this image furnished by NASA

4. Understanding Other Types of Finance

Calling all students studying MBAs in Finance who want to work globally—understanding multiple financial platforms, in addition to conventional finance will not only enrich your personal knowledge, but will also make you significantly more competitive in the world of global business.

A few key takeaways? Islamic financial institutions were less affected by the global financial crisis because of their stable credit growth, asset-based investment, reduction of systemic risk, and generally balanced leverage. There’s also plenty of room for tremendous growth in a market booming with wealth.

Learn more earning your MBA in Islamic Finance.

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