Islamic Finance

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Many of us have heard of traditional banking. But h0w many of us have actually heard of Islamic financial policies. Let’s take a interesting look at what is Islamic finance? The way it operates.  Just to let everyone know this information about Islamic finance is taken from MCB.org.uk. All I am trying to do is spread the knowledge.

 

What is Islamic Finance?

The basis of Islamic Finance denounces usury, termed as riba (which is the lending of money at exorbitant rates) but it doesn’t stop just there. The concept is more accurately that money has no intrinsic value – it is only a measure of value, and since money has no value itself, there should be no charge for its use. Therefore, Islamic Finance is said to be asset based as opposed to currency based whereby an investment is structured on exchange or ownership of assets, and money is simply the payment mechanism to effect the transaction. The basic framework of an Islamic Financial System is based on elements of Shariah, which governs Islamic societies. Shariah, the law of Islam, originates from two principal sources: the Quran, the Holy Book of the Muslims and its practices; and the Sunnah , the way of life prescribed as normative in Islam, based on the teachings and practices of Prophet Muhammad (pbuh).

   When did Islamic Finance start being used?

 As mentioned, the basis of Islamic Finance is from the Shariah, so the concepts of Islamic Finance have been around since the origination of Islam itself. The practices of what we see today have been used throughout the last 1500 odd years across the modern Muslim world and beyond. The modern Islamic finance really originated in the 1960s, escalating with the petro-dollar boom of the 1970s when in 1975, the Islamic Development Bank was formed to promote acceptable financial practices according to Islam. While many banks originating in the Middle East strictly follow these principles, many also follow Western practices of finance, with a number following both practices to cater for both markets. Interestingly, many of the internationals larger banks (with HSBC, UBS and Citigroup as notable examples) all have Islamic banking arms, both in the Middle East and the West.

 

What are the main principles of Islamic Finance?

 The main principles of Islamic Finance include:                     

The prohibition or taking or receiving interest at exorbitant rates (Riba), but this does not preclude a rate of return on investment which is agreed up front by both parties contracting. In most cases, the references to interest rates by Islamic financial institutions are to help benchmark the return on investment to offer transparency. This does not imply interest is being used in the transaction.

 Risk in any transaction must be shared between at least two parties so that the provider of capital and the entrepreneur share the business risk in return for a share in profit.

 The prohibition of speculative behaviour (Gharar), meaning that gambling (Maysir) and extreme uncertainty or risk is prohibited and thus contractual obligations and disclosure

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