Financial instruments in islamic banking system

The economic activities in any economic system can be viewed as contracts between economic agents. A financial instrument is also a contract, whose terms and conditions define the risk-andreturn profile of the instrument. In Islam, a contract is deemed legal and lawful by the Shariah (Islamic Law) if the terms of the contract are free of any prohibition. The Islamic economic system has a set of core contracts, which serve as building blocks for designing more sophisticated and complex financial instruments. The growth of Islamic banking is symptomatic of the global demand of Shariah-compliant products. This growth illustrates not only the desire to follow the religious mandates and the spirit of Islam, but also the socio-economic capabilities of such a popular system. This paper aims to study the nature and growth prospects of various financial instruments available within the Islamic financial system.