What is Islamic Finance?

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Islamic finance is a global financial system that complies with sharia  — a code of conduct that guides all aspects of Muslim life. Sharia prohibits certain elements that are common in conventional finance, such as interest and speculation. As the world’s Muslim population increases, the demand for Islamic financial firms and products is growing dramatically.

What is Islamic Finance all about?

Islamic finance is a financial system that operates according to Islamic law (which is called sharia) and is, therefore, sharia-compliant. Just like conventional financial systems, Islamic finance features banks, capital markets, fund managers, investment firms, and insurance companies. However, these entities are governed both by Islamic law and the finance industry rules and regulations that apply to their conventional counterparts.

Although the Islamic finance industry itself is quite young, Islamic theories of economics have existed for more than a millennium; by the mid-12th century, in fact, many Muslims scholars had presented key concepts of Islamic economics that are still relevant today.

But political and social turmoil put the brakes on Islamic finance for a very long time; only in the 20th century did Muslim scholars and academics seriously begin to revisit these and the modern Islamic finance industry began in the 1970s.

Islamic economics is based on core concepts of balance, which help ensure that the motives and objectives driving the Islamic finance industry are beneficial to society.

  • Balancing material pursuits and spiritual needs
  • Balancing individual and social needs

The promotion of a responsible free-market economy

A Muslim believes that Islam doesn’t restrict economic activity but instead directs it toward responsible activity that benefits other people, protects the earth and respects Allah. In other words, Islam allows for a free-market economy where supply and demand are decided in the market — not dictated by a government. But at the same time, Islam directs the function of the market mechanism by imposing specific laws and ethics.

A key purpose for imposing these laws and ethics is to promote social justice; Islam and social justice are inseparable. Therefore, social justice is a key concept of the Islamic finance industry.

Islam tries to achieve social justice in the economy in many ways:

  • Promoting adherence to Islam
  • Requiring zakat (taxing the property of people who acquire wealth and distributing that tax to people in need)
  • Defining the state’s obligations
  • Prohibiting usury (interest)
  • Encouraging shared risk

What are the key principles that has to be fallowed

Based on the core concepts of Islamic economics, Islamic finance institutions adhere to certain principles that distinguish them from conventional finance:

  • Prohibiting interest (riba)
  • Steering clear of uncertainty-based transactions (gharar)
  • Avoiding gambling (maysir or qimar)
  • Avoiding investment in prohibited industries






Source : Islamic Finance For Dummies By Faleel Jamaldeen