What is Islamic finance?
Islamic Bank Loans or Islamic finance is a special kind of loan for Muslims as they cannot take the normal loans as it is prohibited to charge or give interest in Islam. Thus Islamic loans refer to how to raise capital for business, car, or property in accordance with Sharia law or Islamic law. Also, it tells the different types of investments that are allowed in this form of law.
What are some principles of Islamic finance?
Islamic finance can be tracked about 1400 years ago but if we talk in recent history then in the 1970s. Saudi Arabia and UAE were the first to launch Islamic Bank Loans. And then around 1990’s Bahrain and Malaysia also started this. Islamic loans or halal loans are now a US dollar 1 trillion dollar industry worldwide.
The main principles of Islamic finance are that:
- Wealth must be generated from legitimate trade and asset-based investment.
- Investment should also have a social and an ethical benefit to wider society beyond pure return.
- Risk should be shared.
- All harmful activities (haram) should be avoided.
How Islamic finance is different from other normal loans?
There are many differences between an Islamic Bank mortgage and a conventional normal loan service. And the first one is how the risk in shared or managed. In Islamic finance giving or earning through interests is prohibited. If any single company is liable to pay this interest then the risk is not shared equally. An Islamic Bank of Australia tells that the interest should be shared on a profit and loss basis. Sharia Law states many kinds of finance but it also specifies how risk is shared between supplier and client.
Example: Mudaraba is a partnership in profit in which one partner provides capital (rab al-mal) and the other provides labor and business expertise (mudarib). In essence, mudaraba is a special case of Musharaka (or sharia), with each type of contract having its distinguishing features.
Why is Islamic Banking important?
Justice and Fairness
The foundation of the Islamic Banking model is based on a profit-sharing principle, whereby the risk is shared by the bank and the customer. This system of financial intermediation contributes to a more equitable distribution of income and wealth.
Banking for All
Although based on Shari’a principles, Islamic Banking is not restricted to Muslims only and is available to non-Muslims as well.
Islamic Banking is about conducting business in a fair and transparent manner. Guiding you through to ensure a full understanding of risks and costs associated with the products and services is the utmost prerogative.
Ethical and Moral Dimensions
The strong ethical and moral dimensions of doing business and selecting business activities to be financed play an important role in promoting socially desirable investments and better individual or corporate behavior.
Speculative transactions are sources of instability and by nature are a misallocation of capital. Islamic Banks are prohibited from carrying out such activities, rather focusing on the deployment of capital to the real economy, to promote socio-economic justice.