Islamic banking: Analysis on emergence, growth and principles

Abstract

Islamic finance is experiencing significant growth in international finance, particularly in a few key countries. Its endurance and widespread appeal are demonstrated by its recent over 20 percent annual growth, which is primarily attributable to the ownership, participation, and equity principles that regulate Islamic financial activity. Theoretically, Islamic banking can withstand economic shocks because it limits excessive risk-taking, promotes risk-sharing, and keeps a close relationship with actual economic activity. While these banks encounter similar risks to those faced by conventional banks, they are also subject to unique, idiosyncratic risks that require tailored risk management practices. The rapid expansion of Islamic finance has significant macroeconomic policy implications that warrant careful consideration.