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The risks and rewards from the explosive growth in Sharia finance

Wednesday, 30th January 2008

BOOMING Middle Eastern economies and increasing affluence across the Islamic world are fuelling rapid growth in the $1 trillion (£502bn, E677bn) market in Sharia finance.

BOOMING Middle Eastern economies and increasing affluence across the Islamic world are fuelling rapid growth in the $1 trillion (£502bn, E677bn) market in Sharia finance.

Islamic – or Sharia – finance bans charging interest on loans. Sharia also forbids activities such as gambling and the production and retail of alcohol. Instead of traditional money-lending, Sharia finance is akin to ownership of a stake in a business; the idea is for the “lender” to share in the risks of the business he finances and for debt to be replaced by equity-style financing.

For example, instead of going to a bank to borrow money, an entrepreneur who wants to buy an asset can jointly purchase it with a financier in a mudharabah contract. The “lender” (really a venture capitalist) gets a share of the income in proportion to his ownership of the asset.

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