Islamic finance
Islamic finance refers to a system of financial intermediation that is based on the principles of Shari'ah law and guided by ethical and moral values. It seeks to promote social justice and equitable distribution of wealth while avoiding practices that are considered unethical or harmful to society.
The definition of Islamic finance varies among different sources, but it generally refers to a financial system that adheres to the principles of Shari'ah law, which is the moral and ethical code of conduct in Islam. It is based on the concept of risk sharing and prohibits the receipt and payment of interest (riba), excessive uncertainty (gharar), and speculative and unethical practices.
Rules of Exchange in Islamic Law
The rules on exchange in Islamic finance are derived from the principles of justice, fairness, and equality. These rules regulate transactions between parties and ensure that both parties are treated fairly and equitably.
The main principles of exchange in Islamic finance are profit and liability, selling "what you have," debt for debt, and the prohibition of interest (riba), gambling, and deceptive uncertainty (gharar). These principles are based on the rules and guidelines set forth in the Shari'ah law.
Concept of Profit and Liability
Islamic finance recognizes that risk-taking is an inherent part of any business activity. Under this concept, the profit and loss from a business transaction are shared between the parties based on a predetermined agreement.
Concept of Selling “What You Have”
The principle of selling "what you have" means that in an Islamic finance transaction, only assets that are actually owned by the seller can be sold. Islamic finance prohibits selling goods or services that one does not possess or own at the time of the transaction. This principle is intended to prevent fraudulent or deceptive practices.
Concept of Interest (Riba)
This principle prohibits exchanging debt for debt, as it is considered an unjust and unfair transaction. The principle of "debt for debt" is not recognized in Islamic finance, as it goes against the prohibition of riba, or interest. The idea behind this principle is that a debt is simply exchanged for another debt, with no underlying economic activity or creation of value. This is considered as a form of riba because the exchange results in an increase in the amount of the debt without any real justification. Riba is seen as a major sin in Islam, and the Qur'an prohibits the charging and taking of interest in several verses. According to Islamic teaching, money itself has no intrinsic value and can only be used as a medium of exchange. As such, it is not considered acceptable for one person to gain more money simply by lending money to another person and charging interest on the loan.
Difference Between Islamic Finance and Conventional Finance
Islamic finance differs from conventional finance in several key ways, including:
- The underlying principles and values that guide the financial system
- The types of financial products and services offered
- The way risk is managed and shared between parties
Islamic banks and conventional banks also differ in several ways, including their relationship with clients, their sources of funds, and the uses of the funds.
- The main difference between Islamic finance and conventional finance is that in Islamic finance, the bank and the client have a partnership, whereas in conventional finance, the bank is merely a lender.
- Islamic banks are required to have their funds invested in Shari'ah-compliant investments, while conventional banks have a wider range of investment options.
- Islamic banks are also restricted in the types of investments they can make, as they must comply with Shari'ah law. Conventional banks have fewer restrictions on the types of investments they can make.
Renewed Interest in Islamic Finance
The 2008 financial crisis and its aftermath caused a great deal of skepticism and mistrust in the traditional financial sector. This, in turn, led many investors to look for alternative financial systems that offer stability and ethical investing principles. Islamic finance, with its focus on shared risk, asset-backing, and a ban on speculative investment, was seen by many as a more stable and ethical alternative to the conventional financial system. This has led to increased interest in Islamic finance, not only in Muslim-majority countries but also in non-Muslim countries where the principles of Islamic finance are seen as a positive development in the global financial system. Additionally, the growth of the Muslim population and the increasing purchasing power of Muslims globally has also contributed to the growth of Islamic finance, as more people are looking for financial products that are aligned with their religious beliefs and values.
You have followed a link to a page that is still under construction. To edit the page, you need to create an account with us (see the help page for more info). If you are here by mistake, click your browser's back button.