Islamic finance is a type of financing activity that must comply with Sharia (Islamic Law). The concept can also refer to the investments that are permissible under Sharia. It seems to be gaining immense popularity worldwide thanks to the host of benefits it offers.
Among the most notable benefits you are destined to enjoy include the lowering of economic inequality, increasing market participation and encouraging simplicity and transparency. If this is not enough, Islamic Financial products link economic activity to financial markets and encourages economic growth.
Some people tend to confuse conventional finance to Islamic finance. While they both carry a few similarities, they are totally different in their own way. The main difference between conventional finance and Islamic finance is that some of the practices and principles that are used in conventional finance are strictly prohibited under Sharia laws.
Let’s examine some of the key principles behind the success of Islamic financial products all around the world.
Paying or Charging an Interest
It is essential to note that Islam views lending with interest payments as an exploitative practice that favors the lender at the expense of the borrower. As per Sharia law, interest is usury (riba), which is strictly prohibited. For this reason, there is no paying or charging of interest when you so decide to use Islamic financial products.
Uncertainty and Risk (gharar)
The rules of Islamic finance ban participation in contracts with excessive risk and/or uncertainty. The term gharar measures the legitimacy of risk or uncertainty in investments. Gharar is observed with derivative contracts and short-selling, which are forbidden in Islamic finance. Be sure to research more on ghararto better understand what it entails.
Speculation (maisir)
As we conclude, you should keep in mind that Sharia strictly prohibits any form of speculation or gambling, which is called maisir. In this regard, Islamic financial institutions cannot be involved in contracts where the ownership of goods depends on an uncertain event in the future.
Now that you have an insight into the key principles of Islamic finance, why not consider using it to your advantage?