Islamic Finance vs Conventional Finance
Islam as a religion guides Muslims on everyday aspects of life; that being said, Islamic finance is not only a way of investing or lending ‘ethically,’ it aims to be Shari’ah (Islamic law) compliant based on justice and equity. Islamic finance strictly follows rules set by Shari’ah that are dictated in the Quran and are the teachings of the Prophet Muhammad (S.A.W).
You may have heard that Riba is the only reason you should invest Islamically, however there are a many differences between Islamic and conventional finance methods. This system encourages the need for fair contracts and transactions that demonstrate economic purposes while discouraging excessive uncertainty, gambling and short selling. The question arises where a basic investment can help one spiritually and make us better Muslims. Some of the fundamental elements of Islamic Finance are outlined below.
Interest is forbidden (Riba)
Islamic finance is the most sin-free option available for investments. Muslims globally can invest without a predetermined fixed rate that is prohibited and defined as an exploitative practice. Islam encourages social justice through the fair earning of profits and shared rewards amongst lenders and borrowers for an equal distribution of wealth.
Surah al-Nisa states, “And for their taking interest even though it was forbidden for them, and their wrongful appropriation of other people’s property. We have prepared for those among them who reject faith a grievous punishment (4: 161)”
It can simply be expressed that people who believe that Islamic finance is unethical, don’t realize that by walking away from a Shari’ah compliant investment, they are supporting the conventional financial industry that acquires interest. Islamic finance and banking is still a developing industry and may not be perfect, but it’s certainly the most sin-free option currently available.
Managed Risk Sharing
When a risk is shared amongst two or more parties, the risk faced by each party is reduced and therefore, Islam encourages risk-sharing economic transactions. The principles behind this Shari’ah compliant finance do not eliminate potential risks involved with financial transactions, but instead seek to reduce them whereas conventional finance tends to unfairly place the risk on the borrowing party.
Consequently, Islamic Finance reiterates the utmost importance of disclosing information to lower risks and uncertainty at the time of investing in mortgages or contracts. This enables you to practice Islamic duties by providing any information that may or may not be a hindrance at the time of the contract or investment. Following these Islamic teachings can help one become successful in their ventures and refrain from investing in risky investments.
Every able Muslim is supposed to donate 2.5% from their idle balance of money to impose social justice. In most Islamic countries, this amount is deducted from Muslims bank accounts during the month of Ramadan. Zakat management is one of the main components of Islamic Finance, aiming to distribute wealth amongst the poor. Muslims also, give Zakat by taxing their property to ensure the socially responsible distribution of wealth
Given this all-pervading purpose, it is safe to say that the Shari’ah addresses all the prominent aspects that are important in shaping our lives, such as family, spirituality and our on-going focus, wealth.
Therefore every year in Ramadan you are engaging with instructions of Our Creator and performing acts according to Islamic teachings and the Shari’ah.
Choosing Islamic Finance over Conventional Finance
Islamic Finance distinguishes itself from conventional finance by avoiding risks and interests, promoting risk-sharing and the importance of Zakat. Similarly, financing Islamically can help one start a business, own a home and make investments without compromising their beliefs. If you support Islamic Finance because of its obvious advantages socially, economically and spiritually it is important to research the type of investment that you would benefit from in the future. We need to go an extra mile to promote this upcoming industry that will benefit not just Muslims but Non-Muslims too.