Shariah law dictates the way in which Muslims should manage their money and stipulates the main rules that Sharia-compliant funds and mortgages must adhere to. Key to Islamic finance is the fact that money itself has no intrinsic value; it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and profits as a result of exchanging cash with another person are not allowed. A Muslim is not allowed to benefit from lending money or receiving money from someone. In other words, earning interest (riba) is not allowed for Muslims wishing to adhere to Islamic law. To comply with these rules, interest is not paid on Islamic savings or current accounts or applied to Islamic mortgages. Many Forex brokers provide Islamic Forex, aka Sharia accounts, to enable Muslims to invest their money through their brokerage.
To date, Islamic banks have had to work hard to remain profitable although their average return has always been lower than non-Islamic banks. However, this is proving impossible. The average return on equity at Shariah-compliant lenders was 11.6 percent in 2011, compared with 15.3 percent at their non-Islamic counterparts, according to a December report by Ernst & Young that covered 12 countries. In addition, the use of hedging and treasury solutions has also lagged behind.
Shariah banks reported an average $17 billion of assets in 2011, dramatically less than the $65 billion for non-Islamic lenders. This resulted in 50% higher operating costs. Growth is proving to be a challenge with most Islamic banks maintaining a very basic risk infrastructure while operating in highly competitive domestic markets.
With Islamic banks indicating that their small scale and a lack of risk-management products makes it harder for them to compete Ernst & Young LLP has warned that lower profitability threatens to slow expansion of the $1.8 trillion Shariah Bank industry.