How can Islamic Finance be developed in the Western world?



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The objective of this study is to help us understand the potential development of Islamic Finance in the western world.

In the first part, the study suggests getting familiarized with the concept of Islamic Finance. The activity is promoted as an ethical and economic alternative to the current financial model, with a financial practice governed by rules and principles coming from the Koran. These principles and rules function as a set of specifications. They are listed in the "Sharia Board".

The main Islamic financial products are divided into two specific classifications, namely participatory and non-participatory instruments. However, they share a common objective. It consists in defining the best distribution of risk, losses and gains between the different parties. There are specific mechanisms in the balance sheets of Islamic banks that take place in order to maintain the profitability of financial products.

In a second part, the study highlights the risks incurred and the consequences of the financial crisis on the activity of Islamic Finance. Indeed, its atypical functioning is double-edged. On one hand, its operating procedure enables certain risks incurred by traditional banks to be reduced. On the other hand, there are risks inherent in its operation added to the risks of the activity. The financial crisis of 2008 acted as a crash test for Islamic finance. It was able to withstand the global crisis and affirm itself as a credible financial system alternative.

The third part of the study focuses on the development of the activity in the Western world. It is the result of a long process of development which began in the 1950s and which gave origin to the main instances of Islamic Finance. It was first established in the countries of South-East Asia and the Middle East and then exported to some Western countries. London case is a good example of the strong enthusiasm around this model. However, the development of Islamic Finance faces barriers which can be explained by a legal and fiscal framework which is not yet adapted to the activity. A suspicion towards transparency and harmonization of financial products offered is slowing down its development for now.

In conclusion, Islamic Finance offers credible arguments as an alternative financial system. However, the difficulty of maintaining strict Koran regulations and the desire to be part of the global market is an objective that may seem at first sight complementary but which are in fact contradictory. Thus, the challenges of Islamic Finance are multiple and the answers are not yet organised.

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