An Overview of Islamic Finance

Islamic finance has started to grow in international finance across the globe, with someconcentration in few countries. Nearly 20 percent annual growth of Islamic finance in recentyears seems to point to its resilience and broad appeal, partly owing to principles that governIslamic financial activities, including equity, participation, and ownership. In theory, Islamicfinance is resilient to shocks because of its emphasis on risk sharing, limits on excessive risktaking, and strong link to real activities. Empirical evidence on the stability of Islamic banks,however, is so far mixed. While these banks face similar risks as conventional banks do, theyare also exposed to idiosyncratic risks, necessitating a tailoring of current risk managementpractices. The macroeconomic policy implications of the rapid expansion of Islamic financeare far reaching and need careful considerations.