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Islamic Financing – the real alternative to capitalist financial systems!

Updated on September 6, 2011

NOTE:

Islamic finance – (if you are not a Muslim, don’t be put off by the word Islamic, there is no hidden Muslim agenda here to overtake the world or anything).

Islam = PEACE therefore ISLAMIC = PEACEFUL

Islamic finance is nothing more than a method of monetary dealings that embodies all aspects of the transaction, unlike the existing system which merely concentrates on the returns that will be generated by conducting a particular deal.

Okay...so where do I start with this, financial systems or dealings between individuals are inherently geared towards making profit, unless you happen to be haggling with your parents for pocket money. Even then they want returns, it may not be monetary it could easily be something like “Well let’s see, I can give you the extra 10p you want this week if you promise to clean your room and wash your clothes and ....you get my point”.

So in essence where money is involved it comes with responsibility and pay-back requirements, as they say “no free lunch in this world”.

Now that we have briefly established that there is no such thing as free MONEY, we need as a society to put in place systems that will allow every citizen to have access to money and banking in a way that will not exert on the individual undue pressures and stresses.

We all know the financial melt-down the world is experiencing currently due to greedy bankers and financial institutions profiteering at the expense of poor Joe & Jane public.

Why Choose Islamic Finance?

Introduction to Islamic Finance

Islam is a system of belief and a template for life that encompasses not only man's relationship with God, but also provides Muslims with a code that regulates their entire way of life. The Quran sets out its notions of equity, justice, fairness, morality and many other values which underpin the entire Islamic system.

Islamic financial and banking system is based on the complete prohibition of payment or receipt of any prearranged, assured rate of return. This negates the concept of interest and precludes the use of debt-based instruments. The Islamic Financial system encourages risk-sharing, promotes free enterprise, discourages speculative behaviour, and emphasizes the sanctity of contracts.

It works on a number of dimensions for each transaction and focuses on HOW, WHAT and WHEN (with the greater emphasis on the SOCIAL context of any deal) benefits are realised:

  1. The person or institution that lends the money.
  2. The person or business that consumes the money.
  3. The risks that are shared between the parties.

Islamic Law (Shariah)

In the Quran Allah states, that He has created, and owns everything. Man, therefore, holds wealth on trust for Allah (God) and must carry out his duties as trustee in the manner prescribed by God. These duties are found in the Islamic Law (Shariah ).

Shariah is system of devising laws based on the Quran, Hadith (sayings of Muhammad), centuries of debate, precedent and interpretations.

However, it is not a codified body of law. It is, by virtue of its derivation, capable of development and interpretation. When a new issue arises on which the position of the Shariah is unknown, it may be necessary to seek a legal opinion (Fatwa ) from a religious scholar (Mufti ).

Definition and more info on Shariah - http://en.wikipedia.org/wiki/Sharia

Islamic financial institution

An Islamic financial institution will have a committee made up of senior officers and religious scholars which evaluate whether certain transactions conform to Shariah. Each Shariah committee will form its own view as to the acceptability of a particular transaction.

Islamic financing

Islamic financing is not tied to any particular jurisdiction or ethnic group, but it can take place anywhere with anyone in the world where there are people who wish to engage in financing transactions in a manner consistent with their faith and views.

One of the fundamental principles governing Islamic financing is that the receipt of interest is prohibited. This is categorically stated in the Qur'an:

"Those who devour Riba (interest) will not stand except as stands one whom the devil hath driven to madness by (his) touch" (II:275)


In an investment environment, Riba is interpreted as any return on money that is predetermined in amount and therefore includes interest-based financing.

Islamic principles allow instead for the replacement of interest by a return that is dependent upon the profitability of the underlying investment. In addition, Islamic principles permit the financing of sales by means of deferred payment at a premium to the spot price.

Various Shariah compliant financing and investment structures have been developed. Four of the most commonly used structures are:

• Murabaha (Sale at an agreed profit margin)

• Mudarabah (Participation financing) and Musharaka (Equity participation)

• Ijara (Leasing)

• Sukuk (Islamic bonds).

My intention is not to make you an expert in Islamic Finance but merely to give you a taste for what is available as an alternative to our current financial systems. We are all suffering to some extent due to the way in which our existing financial systems work and the manner in which the richer continuously get wealthier and the poor in society keep on paying more and more taxes and a burdened with unmanageable interest bearing products that just make them poorer by the day.

Now that we are all aware of an alternative and it is a real option maybe it is time that we ask and seek info on these products. Especially if it helps make the society and financial dealings allot less self centred and more community focused where our actions are for the benefit of many rather than greedy financiers who only wake up in the morning to make their next million. Don’t get me wrong I like making money too, but not at the expense of someone else.

Some Reasons for a change:


It is up to us as individuals to make our choices so that the best financial product is available to all people and it is biased more towards the benefit of society rather than individual companies or share holders.

If you wish to expand your knowledge then please read on...

Easy Money in Politics these days...

Comments

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    • Zubair Ahmed profile imageAUTHOR

      Zubair Ahmed 

      6 years ago

      Hi Quillligrapher,

      Thank you for reading and the nice comment. Given the current financial chaos I think it is wise to look at some ethical alternatives.

      Ta

    • Quilligrapher profile image

      Quilligrapher 

      6 years ago from New York

      This is a very informative and well-written hub. I’m looking forward to reading more of your work. Q.

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