Five advantages of Islamic Finance

In a global market that predominantly operates through the conventional financial system, Islamic finance began its journey about 40 years ago. Initially its patronage was limited to the Middle East, where it was conceived. But over the years, Islamic finance has grown progressively and has spread to over 70 countries and has become a $2 trillion market at the global level. Let us take a look at five advantages that are offered by Islamic finance, which have made it a preferred choice among countries that have accepted it as a financial discipline.

It assists in financial inclusion

The conventional banking system is based on paying interest at a pre-determined rate on deposits of money. As both payment and receipt of interest is prohibited by the Shariah law, Muslims generally abstain from banking. Through Islamic banking, financial inclusion can be promoted and a larger pool of saving s can be brought into the economy.

Reducing the impact of harmful products and practices

Shariah principles forbid any investment that would support industries or activities that are considered harmful to the people and the society in general. This includes usury, speculation and gambling, irrespective of whether these are legal or not in a given territory.

It promotes the principle of financial justice

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.

At Guidance Residential, we share the responsibility of risks involved in homeownership, throughout the period of financing. However, we do not claim a share on the increase of the home’s value that would happen over time.

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.

 

Image source