Today the U.S. is the World’s largest economy and a leadership position in various international institutions.

Early American leaders focused on developing the country’s economy and kept it off the rivalry of the Europe’s imperial powers, and the Atlantic and Pacific oceans served as barriers as invaluable buffers to allow the country to grow free of foreign interference.

According to an article in Council for Foreign Affairs, the U.S. economy took off after the Civil War and by the middle of 1880s, the U.S. surpassed Britain as the world’s leading producer of manufactured goods and steel.

The United States did not participate in WW1 until April 6, 1917. That decision helped the allies turn the tide of war and it ended in armistice. However, in its brief involvement, the US suffered over 116,000 military deaths and 200,000 wounded.

Fighting erupted again in Asia and Europe in the 1930s, but the U.S. remained on the sidelines of WWII until 1941. However, the U.S. leaders were willing to supply the Allies of France, the United Kingdom and the Soviet Union with loans and weapons against Germany and its coalition.

On July 1, 1944, as the battles of WWII raged, 730 delegates from 44 nations met at a hotel in Bretton Woods, New Hampshire and agreed to constitute the World Bank for Reconstruction and Development and the International Monetary Fund. The Articles of Agreement were ratified on December 27, 1945 when representatives from 21 countries convened in Washington, DC to become the Bank’s first members. The aim of these multilateral financial institutions was to govern international financial security and monetary order and stability.

Dollar as the Current Reserve World Currency

The strength of U.S. dollar in the global economy is supported by the size and strength of U.S. economy, its stability, and its being open to trade and capital flows.

It started at the end of WWII as the U.S. stood victorious with unprecedented global power. In addition to towering as the world’s military heavyweight, the United States boasted the most valuable currency of dollar to which all other major currencies became fixed.

The U.S. economy nearly double in size between 1939 and 1945, while in stark contrast Western Europe contracted by 18 percent and Japan’s was cut in half. This economic and military strength uniquely positioned the United States to promote postwar peace and prosperity. And this time, instead of retreating to western hemisphere as it did following WW1, the U.S. resolved to prop Europe back up and rebuild Japan.

In particular, the U.S. sought to ensure that Europe’s physical, economic and political collapse did not allow the Soviet Union to expand its influence. To shore up its allies, Secretary of State George Marshall announced a multibillion-dollar aid plan in 1947.

In addition, the U.S. agreed to rebuild Western Europe’s armies. In 1949, the U.S., Canada along with ten European countries formed a military alliance known as the North Atlantic Treaty Organization for collective security.

China grows as competing economic superpower

Several reports show that China has emerged as an economic superpower that rivals the United States in many ways, although the total economic power of U.S. strategic partners vastly exceeds the Chinese economy, and its efforts in technology, research and development.

Nevertheless, China is already competing with the economies of developed democratic states on a global level. China’s massive belt and road initiative is an infrastructure project that aims to stretch around the globe. It is seen by the U.S. as a disturbing expansion of Chinese power, and it has struggled to offer a competing vision. Some countries have experienced a debt crisis to pay China.

The Belt and Road initiative is an expansion of the Silk Road initiated during China’s Han Dynasty (206 BCE-220 C.E.) and extended from the Central Asia into Europe.

President XI Peng announced the Belt and Road initiative during his official visits to Kazakhstan and Indonesia in 2013. This vision included creating a vast network of railways, energy pipelines, highways, and streamlined border crossings through the mountainous former Soviet republics westward and southward to Pakistan, and the rest of Southeast Asia.

In addition to infrastructure improvement, China funded special economic zones or industrial areas designed to create jobs.

China-Pakistan Economic Corridor (CPEC) would include a collection of projects and connect Chia to warm water seaport of Gwadar on the Arabian Sea.

BRICS: an Alliance of Major Developing Countries

The ABC News on August 2, 2023 described BRICS as an acronym for the countries in the group: Brazil, Russia, India, and China and South Africa coined in 2001 by an economist for the fastest-growing states predicted to collectively dominate the global economy by 2050.

Together, the group accounts for about 40 percent of the world population and a quarter of the global economy. The group was designed to bring together the world’s most important developing countries to challenge the political and economic power of the wealthiest nations of North America and Western Europe.

Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE) were invited to become members with effect from January 1, 2024.

The BRICS rapidly expanded in its diplomatic activities advocating a larger voice in global economic and security forums for its members, and created brand new financial institutions. The members share a desire to give them a larger role in affairs of the world.

Over 40 countries have expressed interest in joining it, according to 2023 summit chair South Africa. Each year there is summit held in a different member country.

The organization cooperates in its security area around the annual meeting of its “high representatives” in coordination with the United Nations.

Of the BRICS collective achievements is the creation of its own New Development Bank along with a Contingent Reserves Arrangement as the most significant. These institutions represent its pivot to action after the IMF and World Bank failed to materialize between 2010 and 2015.

Today, the NDB is fully operational; each of five countries has contributed an equal share of $50 billion initially and each has an equal voice. The $100 billion Contingent Reserve Arrangement provides emergency lending in case of a liquidity crisis. It was also created specifically as an alternative to IMF.

According to Reuters, BRICS is often considered a counterweight to the group of Seven (G7) democracies consisting of the US, Canada, France, the U.K, Germany, Italy and Japan. Primarily, it aims to challenge Western dominance in the global economic system. This includes institutions such as the United Nations, World Trade Organization, International monetary Fund and World Bank. Brics has for 15 years looked at ways to secure better representation for its member at international financial institutions.

The group called for reform of international financial institutions and a need for a stable and more diversified international monetary system. BRICS leaders also floated the idea of creating a global common currency to move away from reliance on the US dollar.

Islamic finance: Its establishment and recent worldwide emergence

The practice of Islamic finance and banking came into existence with the foundation of Islam. However, the establishment of formal Islamic Islamic finance occurred only in the 20 th century.

According to Corporate Finance Institute, the main difference between conventional finance and Islamic finance is that some of the practices and principles that are used in conventional finance are strictly prohibited under the Sharia law.

Principles of Islamic finance:

1. Islamic finance strictly complies with Sharia law. Islam considers lending with interest payments an exploitation that favors the lender at the expense of the borrower. According to Sharia law, interest is usury, which is strictly prohibited.
2. Investments in businesses involved in producing and selling of alcohol and pork are prohibited in Islam. These activities are considered haram or prohibited. Therefore, investing in these businesses in also forbidden.
3. Speculation. Sharia strictly prohibits any form of speculation or gambling. Thus, Islamic financial cannot be involved in contracts where ownership of goods depends on an uncertain event in the future.
4. Uncertainty and risk (Gharar). The rules of Islamic finance ban participation in contracts with excessive risk or uncertainty. The term Gharar measures the legitimacy of risk or uncertainty and is observed with derivative contracts and short selling, which are forbidden in Islamic finance.

In addition to above prohibitions, Islamic finance is based on two other crucial principles;

1. Material finality of the transaction. Each transaction must be related to a real underlying economic transaction.
2. Profit/loss sharing: parties entering into contracts share profit/loss and risk associated with the transaction. No one can benefit from the transaction more than the other party.

In a somewhat detailed article in the Global Financial Magazine on August 1, 2024 Chloe Dormat, An American television/ film writer and multimedia journalist wrote on Islamic finance and how it works.

She said, “In just a few decades, Islamic finance has established itself as a significant player in global finance. Today with thousands of institutions around the world, this sector is no longer limited to the

devout clientele of Muslim countries in the Middle East and Southeast Asia. It has successfully gained market share in Europe, Asia, Africa, and North America, where a diverse clientele is drawn to the Sharia– compliant principles of risk-sharing and social responsibility. As global investors increasingly prioritize sustainability and ethics, Islamic banking’s alignment with these values positions it as a key player in the burgeoning sustainable finance movement.”

“Islamic banking has also proven resilience in turbulent economic times. By prohibiting speculation and leveraging risk-sharing mechanisms, Islamic banks have demonstrated their ability to withstand crises, sometimes better than the conventional sector, a strength particularly relevant for investors in today’s uncertain economic climate. With a host of new financial innovations and robust regulatory backing, Islamic banking is poised for a brighter future.”

According to the article, Islamic finance hardly existed 30 years ago, yet it has become a $3.96trillion industry with over 1,650 specialized institutions located all around the world. Islamic banks are by far the biggest players in the Islamic finance industry and account for 2.7 trillion or 70% of total assets.

According to a 2023 State of Global Islamic Economy report, total sharia-complaint assets are expected to grow to $5.95 trillion by 2026.

Islamic finance only represents about 1% of global financial assets but with a compound annual growth rate of 9%, it is expanding quicker than conventional finance. In some geographic areas like the Gulf Cooperation Council or Sub-Saharan Africa, Islamic banks now compete directly with Western banks to attract Muslim clients.

So what is behind the success of Islamic finance? The most famous rule in Islamic finance is ban on usury. In economic terms, it means lender and borrowers are forbidden from charging or paying interest, and Sharia-compliant banks don’t issue interest-based loans.

The obvious question then becomes, how do Islamic banks make money? Instead of lending money to their clients at a profit, they buy the underlying product, and then lease it or re-sell it on instalment to the client for a fixed price typically higher than the initial market value. The key notion here is risk-sharing; the banks make a profit on the transaction as a reward for the risk they took with the customer.

Instead of thriving off interest rates, Islamic banks use the customer’s money to acquire assets such as property or businesses and profit when the loan is successfully repaid.

All Islamic finance investments, acquisitions, and transactions must reflect Islamic values. Dealing with anything illicit called haram like alcohol production, pork breeding, arms manufacture, or gambling is strictly forbidden.

This ethically driven approach to business partly explains the success of Islamic banks at a time when many customers lack trust in the financial system. Moreover, Sharia-compliant entities have proven themselves in times of crisis.

Because Islamic law holds that making money from money is wrong, Sharia-complaint institutions tend to refrain from engaging in speculation. They traditionally avoid derivatives instruments such as futures or options and prefer to have assets grounded in in the real economy.

This substantially protected Islamic banks from the 2008 financial crisis. Unlike their conventional counterparts, Sharia-compliant banks were not involved with toxic assets and resisted the shock better. This is a major reason why Islamic finance now has a serious, stable and trustworthy image around the world.

Many of the products offered by Islamic finance institutions are comparable to Western or conventional finance even though interest and speculation are forbidden. Banks are by far the biggest players in Islamic finance – some of them are exclusively Islamic while others offer Sharia-compliant products but remain mostly conventional.

Aside from the absence of interest, the key concept of Islamic finance is risk sharing between parties in their operations.

Types of financing arrangements

Islamic finance is based on several restrictions and principles that do not exist in conventional banking; special types of financing arrangements were developed to comply with those restrictions. Following are types with Arabic names but apart from that an equivalent conventional is found in conventional banking:

Murabaha or cost pus selling: This is most common product in asset portfolios and applies only to commodity purchase. Instead of taking out an interest loan to buy something, the customer asks the bank to purchase an item and sell it to him or her at a higher price on instalment. The bank’s profit is determined beforehand and the selling price cannot be increased once the contract is signed. In case of late or default payment, different options are available including a third party guarantee, collateral guarantees on the client’s belongings or a penalty fee to be paid to an Islamic charity since it cannot enter the bank’s revenues.

Ijara or leasing: Instead of issuing a loan for a customer to buy a product like car, the bank buys the product and then leases it to the customer. The customer acquires the item at the end of the lease contract.

Mudarabah or profit sharing: In this case, it is the bank which provides all the capital intended for the creation of a business. The product is then leased to the customer. The customer acquires the item at the end of the lease contract.

Mushrakah or joint venture: It is an investment involving two or more partners where each partner brings in capital and management in exchange for a proportional share of the profits.

Takaful or Insurance: Sharia-compliant insurance companies offer products comparable to conventional insurance companies and function like a mutual fund. Instead of paying premiums, the participants pool money together and agree to redistribute to members in need according to pre-established contracts.

The common pool of money is run by a fund manager. The fund can be run in different ways when it comes to the surplus distributions and the fund manager’s compensation.

There are three big models:

The Wakala: The fund manager receives a fee and the surplus remains the property of participants.

The mudarabah: The profits and losses are shared between the fund manager and the participants. In addition to these two, a hybrid could involve a mix of the above two models.

Sukuk or Sharia-compliant bonds

These Islamic bonds came into being in 2003 when an institution based Bahrain started to issue them. Sukuk financial instruments took off in 2006 when their issuance hit $20 billion. They are issued by more than 20 countries. Malaysia is the bigger issuer of sukuk, followed by Saudi Arabia. They are issued outside the Muslim world including the UK, Hong Kong and Luxembourg. Apart from a drop in 2015-2016 their volumes grew steadily to reach $162 billion in 2019, up 25% from 2018. The record number was backed by a strong appetite from Malaysia, Indonesia, Gulf Cooperation countries and Turkey.

Sukuk certificates, representing undivided shares in ownership of tangible assets, usufruct and services or ownership of the assets of particular projects. The returns on the certificates are directly linked to the returns generated by the underlying assets. Sukuk are very appealing to governments for raising funds to spend on developing projects.

Future Prospects for Islamic Finance

According to the World Bank Islamic finance has emerged as an effective tool for financing development worldwide, including in non-Muslim countries. Major financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system – and that it has

the potential to help address the challenges of ending extreme poverty and boosting shared prosperity.

As discussed above, the Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2.7 trillion, covering bank and non-bank financial institutions, capital markets, money markets and insurance (“Takaful”).

In many majority Muslim countries, Islamic banking assets have been growing faster than conventional banking assets. There has also been a surge of interest in Islamic finance from non-Muslim countries such as the UK, Luxembourg, South Africa, and Hong Kong.

Islamic finance is equity-based, asset-backed, ethical, sustainable, environmentally- and socially-responsible finance. It promotes risk sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare.

Despite its rapid growth in recent years, Islamic finance is still in its infancy representing only 1% of the global finance assets. It will need to address several challenges. The World Bank is supporting it in its client countries to strengthen the legal, regulatory and institutional foundations of Islamic finance.

In 2013 The World Bank established the Global Islamic Finance Development Center as a knowledge hub in partnership with the government of Turkey, followed by Egypt. In July 2015, the World Bank and the General Council for Islamic Banks and Financial Institutions, the global umbrella of Islamic institutions, signed a memorandum of understanding (MOI) to help foster the development of Islamic finance globally and expand its use as an effective tool for financing development worldwide, including non-Muslim countries.