5 advantages of Islamic Finance
Original article posted on Ummah Finance.
Islamic finance is a global market that operates through the conventional financial system. Over the years’ Islamic finance has grown and a rapid pace globally and is now an market worth more than $3.5 trillion. I set out to explain the 5 advantages that Islamic finance offers.
It helps by assisting financial inclusion
World Bank defines financial inclusion as “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs — transactions, payments, savings, credit and insurance — delivered in a responsible and sustainable way.” (Worldbank.org, 2017).
The conventional banking system is based on interest payment at a rate pre-set on the deposits of money. Payment and receipt of interest is prohibits in Shariah Law, Muslims abstain from banking. However, through Islamic banking, financial inclusion can be promoted and well used to bring a larger pool of savings in the local and global economy.
Reducing the impact of harmful products and practices
Shariah principles forbid any transactions that support industries or activities which are forbidden in Islam for example usury, speculation, gambling whether these are legal or not in the place of transaction.
Principle of financial justice
Financial justice is a requirement that helps Islamic finance products function in a Shariah compliant way. Western financial system looks at making profit through interest payments and makes the beneficiary liable for any risk. Islamic finance paves way for the sharing of profit/loss and risk involved in proportanal manner
Financial justice is a basic requirement for the functioning of Islamic finance products. Western or conventional financing looks forward to profit through interest payments and makes the beneficiary completely liable for any risk. Contrary to this, Islamic financing paves way for the sharing of net profit/loss and the risk involved in a proportional manner between the lender and the beneficiary. Therefore, if a financier is expecting a claim on profits of a project, it is necessary that he/she should also carry a proportional share of the loss of that project.
Encouraging stability in investments
In Islamic finance, investments are approached with a slower, insightful decision-making process, when compared to conventional finance. Companies whose financial practices and operations are too risky are usually kept away by Islamic financing companies. By performing intensive audits and analyses, Islamic finance promotes the reduction of risk and creates the space for a greater investment stability.
Accelerating economic development
Islamic finance companies certainly have profit creation and growth as their objectives. For which, they choose to invest in businesses based on their potential for growth and success. Thus in the Islamic banking industry, each bank will invest in promising business ventures and attempt to out-perform its competitors, in order to attract more funds from its depositors. This will eventually result in a high return on investments both for the bank and the depositors. This is unlikely in a conventional bank, where depositors redeem returns on their deposits based on a pre-determined interest rate.
Worldbank.org. (2017). Financial Inclusion Overview. [online] Available at: http://www.worldbank.org/en/topic/financialinclusion/overview [Accessed 12 Apr. 2017].
