Islamic Finance Essay

1587 words - 7 pages

In the name of Allah, the Most- Merciful, the Very-Merciful

Looking for New Steps in Islamic Finance
jìÑíá=jìÜ~ãã~Ç=q~èá=rëã~åá Islamic banking industry has grown rapidly during the past three decades spreading its operations in many parts of the globe. Making its first debut in the small Savings Association of Mitghamr (Egypt) in 1963, its strength has now reached over 250 financial institutions operating in more than 40 countries with assets valuing USD 750 billions, and an annual growth rate of 15 per cent. Almost all the giant conventional banks are in queue to establish their Islamic units to capture the new emerging market. This rapid growth of Islamic financial industry is, no ...view middle of the document...

It was in this background that some instruments of lesser risk like murabahah, ijarah and diminishing musharakah etc. were allowed by the Shariah scholars. It is also wrong to say that these instruments have an element of camouflaged interest. In fact, if implemented with all their necessary conditions that have always been stressed upon by the Shariah scholars, they are substantially different from an interest based financing. At the first place, all these instruments are based on real assets, and do not amount to trading in money and financial papers, which is the case in an interestbased financing. Secondly, unlike an interest-based transaction, the financier, in each one of these instruments, assumes the risk of real commodities, properties or equipments without which the transactions cannot be valid in Shariah. Thirdly, these modes can be used only to finance a commercial activity that is permissible according to Islamic rules and principles. These basic distinguishing features are enough to draw a line of difference between the two


techniques of financing. Therefore, the notion that they are another form of interest is not correct. Having said this, one must not forget that these instruments are not modes of financing in their origin. They are in fact some forms of trade that have been modified to serve the purpose of financing at initial stage as secondary and transitory measures. Since they are modified versions of certain forms of trade, they are subject to strict conditions and cannot be used as alternatives for interest-based transactions in all respects. And since they are secondary and transitory measures, they cannot be taken as final goal of Islamic Finance on which Islamic Financial Institutions should sit content for all times to come. It is a matter of concern for a student of Islamic finance, like me, that both these points are increasingly neglected by the players in the field, and especially by the new-comers in the industry. One should always differentiate between the transactions based on the original philosophy of a particular system and the transactions resorted to in exceptional situations on the basis of need. The former ones represent the real concept of the system, while the latter ones do not. The original concept of Islamic financing is undoubtedly in favor of equity participation rather than creation of debts, because it is only equity participation that brings an equitable and balanced distribution of wealth in the society. Debt-ridden economy, on the other hand, tends to concentrate wealth in the hands of the rich, and creates a bubble economy which fuels inflation and brings many other social and economic evils. 1 That is why Islam has discouraged creation of debts, which should be resorted to in exceptional situations only, and encouraged equity participation, which is the best way to a just and balanced distribution of the benefits of commercial activities. Out...

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