The purpose of this report is to highlight to you the basic principles of Islamic Finance and gives you a better understanding on how you can benefit from it.
Islamic financial products and conventional ones are different.
Islamic Finance is binded under the Islamic law, commonly referred as Syariah.
Below are some giant concepts of Islamic Finance.
1. Prohibition of Riba/Usury
In Islam, the charging of interest, or riba, is strictly prohibited.
Any return on investments should be in proportion with the profits of a business and not through guaranteed interest rate.
If the investments on the pertaining business where its business profit is high, the investor/lender will get a higher return of their investments.
Conversely, if the business profit is low, the investor/lender will also get a lower return of their investments.
The risk is shared by both the principal investor and the receiver (enterprise).
Riba is prohibited to prevent unfair exploitation by one party, who owns the money or capital.
Its fundamental reasoning is ”equality of compensation”.
It’s noble aim is to prevent the investors/lenders from charging interest excessively regardless of the performance of the business venture they have invested in.
2. Prohibition of Investments In Companies whose primary business includes Forbidden Products
It is a common understanding in Islam,to do good and forbids evil.
The Shariah prohibits investments in companies whose primary business include forbidden products such as alcahol,drugs,pork,tobacco,weapon production and entertaiment.
Many financial institutions have a religious board to monitor and ensure strict compliance is in place.
3. Prohibition of Gharar
Gharar means sale of probable items whose existence or characteristics are not certain,due to the risky nature which makes the trade similar to gambling.
Examples of Gharar include the sale of fish in the sea, an unborn calf in its mother’s womb, unripened fruits on the trees, etc.
All such cases involve the sale of an item which may or may not exist.
In such circumstances, the fish in the sea may never be caught, the calf may be still-born, and the fruits may never ripen.
In all such cases, it is in the best interest of the trading parties to be very specific about what is being sold and for what price.
In today’s modern context, gharar can be eliminated from contracts by carefully stating the object of sale and the price to eliminate unnnecessary ambiguities.
There must be full disclosure by both parties
What is the difference between conventional method of financing and Islamic way of financing ?
1. Interest rate is fixed
In conventional finance, interest rate is used to finance the loan for business purposes.
The amount of interest paid is fixed and does not increase even if the profit obtained increases.
In Islamic finance, allocation of profit is used to finance business loan.
The distribution of profit increases in accordance with the amount of profit obtained.
2. Sharing Of Risks
In conventional finance, interest is payable regardless whether the venture makes a profit or loss.
However, in Islamic finance, should the venture becomes non profitable or incur losses, the risk is borne by both parties.
3. Halal & Haram
This is applicable for the Muslims. Charging and paying interest are prohibited (haram) whereas receiving and distributing profits are permitted. (halal)
Who will be interested with Islamic Finance
Islamic finance may appeal to a few broad audiences. Generally.
1. Transparency Advocators
Some people are vigilant, when it comes to investment. They want to know what happen to their money, how their money is invested and where does it goes to.
As Islamic finance upholds the need for transparency, its products will definitely be an attractive boon to many.
2. Noble Investors
Some investors want clean money.
Money generated from legitimate,clean source. As Islamic finance forbids investment in companies dealing with forbidden products, these group of investors will also be attracted to Islamic Finance.
3. Business Entrepreneurs
These entrepreneurs may want an alternative to conventional loans. They are smart entrepreneurs who take calculated risks.
They will prefer an alternative to conventional loans.
In conventional loans,they have to pay interests regardless of whether their business makes a profit or incur losses.
They will prefer Mudarabah, an alternative financing method, which is a partnership contract between a capital provider and an entrepreneur where the risk is shared by both parties.
4. The Muslims
They adhere to investments in accordance to the Islamic principles. It gives them a peace of mind knowing whatever they invest in is Halal and in accordance to the Islamic Syariah.
There are tools in the market which automatically deduct their zakat from their savings, ensuring a holistic conformance to the religion. |
