Economics generally makes the assumption that human behavior is rational and, therefore,
takes rationality as given. Religion, in contrast, considers humans to be fallible (thus
potentially irrational) and aims to influence our behavior. Bringing religion into our
economic lives, then, necessarily means bringing moral values into what is supposed to be
free of such values. Some would think that never the twain—religion and economics—shall
meet, but in reality, they do.
Moral values, often derived from the major religions of the world, are increasingly being
introduced into our economic lives in the form of environmental concerns, protection of
the rights of labor, and promotion of fairness in trade. In finance, the increased level of
interest in socially responsible investments is a good case in point. It is in Islamic finance,
however, where economics and religion really come together.
The rise of modern Islamic finance in various parts of the world has motivated many,
whether academics or practitioners, to understand it. Investment professionals, including
CFA charterholders, are no exception; they want to learn about Islamic finance because they
are working in this industry, are considering joining it, or simply want to quench their
intellectual thirst. Not surprisingly, many books have been written on Islamic finance to
meet this demand, but there is a scarcity of introductory texts that are simple but comprehensive.
This monograph is one such text—reader friendly and wide in scope: It covers basic
Islamic financial concepts (such as riba and gharar), markets (banking, capital markets,
insurance), products (bank accounts, equity funds, and sukuk), and issues, such as corporate
governance and risk management. In presenting the material, the authors, Zaha Rina Zahari
and Bala Shanmugam, with the assistance of principal researcher Lokesh Gupta, have made
extensive use of the experience of their home country, Malaysia, which is perceived as the
most advanced and liberal model of modern Islamic finance.
This monograph helps the reader understand that the Islamic finance industry does
not have global Shari’a standards to decide what is and isn’t compliant in every part of the
world. Moreover, many observers note that there is a gap between the theory of Islamic
finance and its practice; they argue that the industry is putting form over substance to merely
replicate conventional financial products. The debate evokes much passion, and it seems to
be gaining momentum as Islamic finance gains market share and attention.
But debate is an inevitable consequence of the merger of faith and finance and, in
particular, of the emergence of Islamic finance. In the current global financial crisis, the
intellectual environment seems to have become more conducive to considering alternative
methods of meeting financial needs and increasing the role of moral values in our economic
lives. This monograph is, therefore, in tune with the times. The Research Foundation of
CFA Institute is pleased to present A Primer on Islamic Finance.
Usman Hayat, CFA
Director, Islamic Finance and ESG Investing