What is Islamic Finance?
For many Muslims, not getting involved with Riba (usury) is as far as Islamic finance goes. Although avoiding Riba plays a significant part in Islamic finance, there is more to Islamic finance than this. Let us get into the basics, the factors involved and the reasoning behind these rules.
Islamic finance follows Islamic principles and jurisprudence, which is designed to promote social and economic justice. There is great focus on partnerships when it comes to Islamic finance, which means that for both parties in any transaction, profit and risk should be shared equally.
This eliminates the ability of one side taking advantage of the other. Conventional finance’s interest-based framework puts most of the risk on the borrower, which is the very opposite of Islamic finance. This brings us back to Riba and why it is prohibited in Islam.
So what is interest? It is a rental or leasing charge to the borrower for the use of an asset. Interest benefits the lender, who charges interest at the borrower’s expense. This causes an imbalance, where one side wins and the other loses.
In Islam, money is viewed as a means of exchange and has no real value in and of itself. Hence, money is not allowed to be made on something which doesn’t hold any real value. Instead, Islam encourages making money out of an asset, which holds its own value.
Gharar (excessive risk) and Maysir (speculation) are also problematic in conventional finance. Derivative contracts such as futures and options are examples of Gharar and Maysir.
These contracts involve uncertainty as they aim to predict the future price of an underlying asset and they lead to one party benefiting at the cost of the other. Islamic finance safeguards us from falling into excessively risky or speculative investments and requires that all terms are clear before either party enters a contract.
Why is it important?
As Muslims, it is important for us to follow Islam in all aspects of our lives. By understanding what we can and cannot get involved with, we guarantee that we earn a Halal income. Islamic finance is not restricted or beneficial only to Muslims. Its transparent model encourages being ethical and moral, both of which will further enhance our communities and economies.
Where do I start?
We are fortunate to live in a world where there are numerous options for Muslims to store and grow our wealth. As an alternative to conventional savings accounts, Shariah-compliant savings accounts allow you to earn profit rather than interest.
Investing in Shariah-compliant assets such as Halal stocks and property is another great way to grow your wealth. For Muslims looking to purchase a house through Halal means, Islamic mortgages are a great alternative to conventional mortgages.
Islamic finance is becoming more widely recognised, and better options and alternatives to its conventional counterparts are being developed. I for one am very excited to witness the rapid growth in the Islamic finance industry over the coming years.