History of international trade in islamic finance - Research Paper Example

Finance and accounting: history of international trade in Islamic finance History of international trade in Islamic finance Introduction Islamic finance is a theme about which several non-Muslims do not know much and even understand less. In fact most businesses, the only time they are bound to make an indirect contact with an Islamic financial institution or bank is when importers in a Muslim nation arranges credit for an international transaction through such as an institution opening the only opportunity to have some of the documents get to go through your country’s exporter or its bank.

All through the medieval era (1000-1500 AD), the Middle Eastern tradesmen engaged in financial transactions purely on Sharia basis which by the way, was guided by similar values, just like their counterparts in Europe at the time. Thus, Arabs from Ottoman Empire established strong international trade connections with the Spanish as well as put up strong financial systems devoid of interest and operated on a profit-loss sharing formula. Such instruments as these took care of the financing of trade as well as other businesses (Al-Suwaidi, 1994).

Research methodology This research will focus on the historical perspective of international trade in Islamic finance. The kind of research that will be implemented in this study is qualitative research. Qualitative research will endeavour to collect information in an endeavour to gain an in-depth understanding of the origins of international Islamic finance as well its influence and spread to other countries. In addition, the research will trace the evolution of international trade finance up to its current status (White & McBurney, 2010).

Sampling method-This research paper will make use of chain or snowball sampling which will identify cases that are relevant and of interest to the topic given. This may be carried out by interviewing information-rich individuals as well as doing literature review that focuses purely on evaluating all readily accessible materials. Such materials will comprise appropriate historical journals of information, relevant research papers that have been done, important trade publications, on-line data resources, as well as any other relevant published materials.

This is a very cheap method of collecting information, even though it frequently does not provide information that is timely or current. I would like to make use of this sampling method because it is readily available, inexpensive, easy to use, has got a lot of varied information as well as its accuracy. Literature searches are also very fast especially over the internet and those done in libraries also do take quite a short period of time, usually between 1 to 4 weeks. As the Asian and Middle Eastern areas became significant trading partners for European corporations such as the Dutch East India Company, financial institution and banks from Europe began to set up branches in these nations, which normally were on the basis of interest.

With the significantly increasing role, Western nations began to operate in the world economy; conservative financial institutions became more central to business activities. Credit unions as well as cooperative societies, though on a small scale based on principles of profit and loss sharing continued existing, however their operations were very much centered in tiny geographical regions (Murat, 2011). It was, however, not till the mid 1980s that international trade in Islamic finance began to grow and expand exponentially.

Considering the growing importance of Islamic trade finance and banking, it is extremely important for Non-Muslims, as well as their financial institutions to acquire some understanding of the history of international trade in Islamic finance, where it is coming from, going and its impact on the international business arena. International trade in Islamic finance goes back, theoretically that is, as early as 17th century, however, it was implemented and practiced in last century (Natalie, 2008).

While the likelihood of islamising the financial system was debated as early as the 1890s and the initial modern experimenting with Islamic banking was not done till 1963 in Mit Ghamr-an Egyptian town. The Mit Ghamr was basically a cooperative society whereby depositors were granted right to get small loans for useful purposes only. Consequently, the project also attracted funding for investing in various projects, however on the profit-sharing principle. Even then, a lot of care had to be taken to make sure that it projected no Islamic likeness, for the basic fear of being viewed as a demonstration of Islamic fundamentalism which was an abomination of the political regime at that point in time.

Consequently, the bank earning its revenue from profit-sharing investments instead of interest greatly thrived. Thus when in 1967, it finally was dissolved, mostly due to (pressure from the government), nine such banks had merged in the country. Later the Mit Ghamr experience was revived in 1971 by its founder, however, this time round with the support of the government as a state-run business known as the Nasser Social bank. A key role was played by the organisation of the Islamic conference (OIC) at multi-national level with the setting up, in 1975, of Islamic Development Bank (IDB).

The IDB was launched in Jeddah majorly with the backing up of the Saudi ruling family. Currently, the IDB performs a key role especially in international trade in Islamic finance amongst member nations as well as between the industrialized worlds in addition to member states. Gulf business concerns performed a big part in the fast expansion of Islamic finance during this period. By 1977, the increasing number of Islamic financial institutions led to the setting up of the International Association of Islamic Banks (IAIB) to assist in cooperation between banking institutions from various regions of the globe.

Exchange of information between the financial institutions is made possible by a rising number of research institutions as well as university research programmes dedicated to the study of Islamic banking, finance and economics (Abdullahi & Chee, 2010). International Islamic trade finance is currently a 250-380 billion dollar industry as far as its assets are concerned, held by more than 250 interest free Islamic institutions presently operating in more than 80 countries. Countries such as Iran and Pakistan have even set up entirely Islamic state-run financial systems.

In addition, countries such as Malaysia have come up with parallel conventional and Islamic systems, providing a wide range of complicated interest-free investment and instruments products. In international trade in Islamic finance, capital is an important factor of production and therefore it is acknowledged that there is a related cost. It is important to note that all product structures in international trade in Islamic finance must have an underlying identifiable asset or enterprise and are on basis of sharing of risk-reward for all involved parties.

Islamic finance market is here to stay and is exponentially growing; continuously having new entrants in the market daily (Visser, 2013). References Abdullahi,D., Chee, K. (2010). Islamic Finance:understanding its Principles and Practices. New York,NY: Marshall Cavendish International. Ahmed, A. (1994). Finance of International Trade in the Gulf. New York,NY: Brill. Alice, J. (1996). Islamic Law And the Finance of International Trade. Syme Department of Banking and Finance , 1-16. Hans, V. (2013).

Islamic Finance:Principles and Practice,2nd Edition. New York,NY: Edward Elgar Publishing,Inc. Jason, C. (2006). Islamic Principles Governing International Trade Financing Instruments. Northwestern Journal of International Law & Business , 1-15. Monzer, K. (1997). Financing International Trade:An Islamic Alternative. Thunderbird International Business review , 1-10. Murat, C. (2011). Islamic capitalism and Finance:Origins,Evolution and the Future. New York,NY: Edward elgar Publishing,Inc. Natalie, S. (2008). Islamic Finance-a History.

Financial Services Review , 10-12. Sufyan, I. (2004). Islamic Finance Expanded. Ethical ltd , 1-18. White, T., McBurney, D. (2010). Research Methods. New York,NY: Wadsworth Cengage Learning.