Discover what makes Islamic Finance different from conventional finance

The economic crises that took hold of the world in 2008 led everyone to believe that there are many problems in economic system in vogue across the globe. The current economic system incorporating huge interests is not something that world can handle and is not capable enough to provide solutions to all the financial problems the world is suffering from. The important question is what the alternative is and the answer is the Islamic Finance.

It will sound strange to most of the westerns that Islam has its own separate financial systems. As a matter of fact, a complete Islamic banking and financial system exists to provide a variety of religiously acceptable financial services. Similarly, banks and other financial institutions working on the principles laid down by Islamic finance are expected to ‘contribute richly to the achievement of the major socio-economic goals of Islam just like all other aspects of Islamic society.

Objectives of Islamic Finance:
The first and foremost objective of Islamic finance is the welfare and betterment of the society. Similarly, Islamic finance aims at providing socioeconomic justice, full employment and ensuring equal distribution of wealth and income. Another important objective of Islamic Finance is the mobilization and investment of savings for economic development in such a way that a just (profit sharing) return is ensured to all parties involved

Sources of Islamic Finance:
The main source of Islamic Finance is the Holy Quran itself. Allah Almighty has explained different aspects of Islamic finance in detail in Holy Quran. Apart from Holy Quran, the Sunnah of Holy Prophet ﷺ is another major source of Islamic Finance. Sunnah is actually the teachings and traditions of Prophet Muhammad ﷺ as transmitted by the relaters of authentic traditions. Islamic Finance also depends on Ijmaa, which is the common opinion of Islamic religious scholars, for achieving all of his objectives and goals.

Principles of Islamic Finance:
Islamic finances is the perfect alternative of the traditional financial systems. Some of the basic principles of Islamic Finance are as under.

  • Prohibition of Interest (Riba)
  • Prohibition of Maysir (speculation)
  • Prohibition of Gharar (unreasonable uncertainty)
  • Financing in allowed activity (Halal)
  • In Islamic finance, money is not an asset (Obligation of tangible asset in each operation of the financial institution).

Definition of Riba:
In Arabic, Riba means increase or excess and in Islamic finance or banking, Riba is another name of charged interest. The Islamic law or Sharia forbids Riba because it is considered extremely exploitive. Some people take Riba only as excessive interest but for others, it covers the whole concept of interest.

It is also pertinent to not that Riba or interest is not only prohibited in Islam. All other major religions such as Christianity, Judaism and even Hinduism, having the combined following of two third of world’s population, have prohibited Riba. However, only financial systems based in Islamic tenets are dedicated to the elimination of the payment and receipt of interest in all forms.

Prohibition of Gambling:
In addition with Riba, Islam also prohibits gambling and speculation (Maysir) and unreasonable uncertainty (Gharar). This is to ensure that investment be undertaken on the basis of halal (permitted) activities, and benefit society through the collection of zakat. Similarly, money is not considered as an asset but takes its value from the operation that was financed. You can use money to buy and sell and but cannot buy or sell money itself.

Profit and Loss Sharing in Islamic Banks:
In banning Riba, Islam seeks to establish a society based upon fairness and justice. A loan provides the lender with a fixed return irrespective of the outcome of the borrower’s venture. It is much fairer to have a sharing of the profits and losses.

A banking system in which interest is not allowed may appear strange to those accustomed to conventional Western banking practices. In this respect, it is necessary to distinguish between the expressions ‘rate of interest’ and ‘rate of return’.

Whereas Islam clearly forbids the former, it not only permits, but rather encourages, trade and the profit motive. The difference is that in trade there is always the risk of loss or low returns. What is eschewed is the guaranteed rate of interest: the pre-agreed, fixed return or amount for the use of money.

Conclusion :
Islamic finance is presenting many differences with conventional finance. It’s a science that must be learned and studied with more attention to understand its different principles and sources. It can be a solution to many problems related to the current financial system if it is applied with right manner and with more partnerships rather than sales financial products.

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