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An Intro to Islamic Finance

by in Islamic Finance
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An Introduction to Islamic Finance

Questions normally asked when people talk about Islamic Finance include among others what is Islamic Finance? How does Islamic Finance differ with conventional finance? Is Islamic Finance only for Muslims? And how Islamic Finance can benefit people? As this is only an introduction, we will not elaborate in depth about those questions. However, some key points will be discussed here to give understanding to the beginners about what is Islamic Finance all about. As the time goes, more intermediate level of subjects will be presented in the Islamic Finance section, and thus; more questions will be answered.

Currently, Islamic Finance has been practiced in many areas of financial sector such as the banking sector, capital market, insurance, micro finance, and venture capital. The Islamic Finance also has been growing relatively fast in the last two decades. We will discuss further the latest update on the growth of Islamic Finance in the next section. In this section, we will focus the discussion with the concept and philosophy of the Islamic Finance.

Basically, Shari’ah is the basis of Islamic Finance. There is a separate section in this website discussing about the Shari’ah. But, in brief, Shari’ah is essentially the framework that governs all aspects of a Muslim’s life including, without limitation, his worship and how he conducts his business. There are two main bodies of rules relating to Shariah.’ The first one governs the relationship of man with Allah and sets out how man should worship Allah, known as Ibadat. The second one is called Muamalat. It relates to the interaction between people, and regulates all aspects of social interaction covering political activities; social activities; and economic activities.

So, Islamic Finance is part of the Muamalat. There are two primary sources of Sharia’a, Qur’an – the Book of God, Allah SWT, and Sunnah the words, acts and tacit approval of Prophet Muhammad (SAW). Although Sharia’a is often referred to as Islamic law, it is best characterised as an ethical framework providing legal, moral and spiritual guidance aimed at achieving the goals of Islam. Talking about Shari’ah, it is important to understand what it is aimed by the Shari’ah, or normally referred as Maqasid Shari’ah.

Imam Abu Hamid al-Ghazali states that “the very objective of that Shari’ah is to promote the well-being of the people, which lies in safeguarding their faith (din), their self (nafs), their intellect (‘aql), their posterity (nasl), and their wealth (mal). Whatever ensures the safeguard of these five serves public interest and is desirable, and whatever hurts them is against public interest and its removal is desirable.”

Other great Muslim scholar Imam Ibn al-Qayyim contends that “the basis of the Shariah is wisdom and welfare of the people in this world as well as the Hereafter. This welfare lies in complete justice, mercy, well-being and wisdom. Anything that departs from justice to oppression, from mercy to harshness, from welfare to misery and from wisdom to folly, has nothing to do with the Shariah.”

Within the above context, since Shari’ah is the foundation of Islamic Finance, it is clear that conceptually Islamic Finance cannot separate itself from the ethical dimension of Shari’ah. Consequently, Islamic Finance cannot only care about the profit maximization, but also about how that profit is made. It is not just about the ends, but also the means to achieve the ends. High profit gained through unethical ways or harming public good will not be acceptable in Islamic Finance.

Here, it does not mean that the profit is not important. Profit is still important to ensure the sustainability of Islamic financial institutions, but it is not everything. Moreover, the Shariah itself (as the base of Islamic Finance) is not only concerned on the welfare of the people in this world, but also in the Hereafter.

Considering that -according to the Islamic belief system- the welfare in the Hereafter is much better than the welfare in this world, then all policies pertaining to the creation of welfare in this world should be aligned with the objective to achieve welfare in the Hereafter, there should be no contradiction between them. If there is, then the welfare in the Hereafter should take a priority.

The same then could be said when we apply the Islamic Finance concept into companies and/or Islamic financial institutions (IFIs), that the profit maximization desired should not be at the expense of the return in the Hereafter.

Here, the alignment will be necessary. In short, the behaviour of the IFIs will then -even from this world only perpective- need always to be ethical and uphold the public good.
Tagged in: islamic finance
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