In a global environment that has become increasingly challenging, Islamic Finance has experienced rapid expansion. It is fast emerging as a viable and competitive form of financial intermediation with significant potential beyond the recent setback faced by DUBAI WORLD last fall.
The integration of Islamic Finance with international financial markets and institutions has demonstrated its resilience and sustainability in the international financial system.
Islamic Finance holds the promise for an inclusive and inherently stable financial system, the potential of which is yet to be fully realized.
The Shari’ah permits a wide array of deposits taken on the principles of bailment, partnership, and investment which are not contemplated by the common law.
Islamic modes of finance give rise to Islamic Banking assets which range from products that are similar to conventional banking products, to risk sharing assets that are unknown in conventional banking.
Islamic Banking is also truly universal banking as it encompasses both banking and securities businesses.
A significant part of Islamic Banking business is fee-based activities, not only in retail banking business but also in corporate and capital market businesses.
In addition, as mudarib or entrepreneur, the Islamic Bank makes judicious forays by way of direct participation into the investments in the real sector of the economy, a role that is not played by conventional banking.
Distinguishing features of the islamic economic system
The global economic scenario necessitates the evolution of a system that could lead to a balanced, sustainable and equitable economic order in the world at large for the benefit of individuals and societies.
Islamic economic principles can become a basis for promoting a balance between the social and economic aspects of human society, the self and social interests, and between the individual, family, society and the State.
At the global level, it could be helpful in eliminating sources of instability, thus making the world a happier place with harmony among followers of various religions.
All economic and financial contracts in the framework of Islamic Finance have to conform to the Shari’ah rules, with the objective of helping to achieve the well-being of people in the worldly life as well as in the Hereafter.
Profit, according to Islamic theory, is the result of the productivity of capital that an entrepreneur has invested or a reward for his workmanship or for shouldering responsibility.
As capital provider he has to bear the loss, if any, and as entrepreneur he has to pay the wages, rentals and other expenses and gets the residual, if any.
All participants in a joint business have similar rights and liabilities according to the nature of the activity or the terms of the agreement.
Islamic rules of economics make it binding for human beings not only to abide by the Shari’ah tenets relating to dos and don’ts but also to keep in mind the impact of their activities on others and society as a whole.
Islam adopts a balanced approach between an individual’s freedom and the well-being of society.
The main prohibitions and business thnics in islamic economics and finance
As a rule, Islamic law does not recognize transactions that have a proven illegitimate factor and/or object.
For that purpose, Shari’ah has identified some elements which are to be avoided in commerce or business transactions.
In this regard, the prohibition of Riba, Gharar and gambling is the most strategic factor that defines invalid and voidable contracts and demarcates the overall limits which should not be crossed.
In addition to these prohibitions, Islam has prescribed a moral/behavioural standard that is almost common in all civilized societies of the world.
Effort has been made to ascertain what constitutes Riba.
Any increase over the principal amount of a loan/debt against nothing but time is Riba.
As a logical corollary to the prohibition of Riba, the Shari’ah has prohibited all benefits accruing to a person without any labour, risk or expertise.
Any person who wishes to earn profit on his monetary investment must bear the loss or damages accruing to the business where his money capital has been used.
Gharar means excessive uncertainty in any business or contract about the subject of a contract or its price, or mere speculative risk.
It leads to the undue loss of one party and the unjustified enrichment of the other.
It includes ambiguity/uncertainty about the ultimate result of a contract and the nature and/or quality and specifications of the subject matter of the contract or the rights and obligations of the parties.
A sale or any business contract which entails an element of Gharar is prohibited.
Jahl (ignorance) is a part of Gharar and means lack of clear understanding of the specifications about the very nature of the contract or the subject matter.
Gambling is a form of Gharar because the gambler is ignorant of the result of the gamble.
Governments and public/private sector corporations mobilize funds on the basis of lotteries and draws, which come under the banner of gambling and are, therefore, prohibited.
Draw-based prize schemes launched by financial institutions are also repugnant to the tenets of the Shari’ah due to the involvement of botn Riba and Maisir.
The philosophy and features of islamic finance
Islamic banking and finance has been conceived as banking and finance in consonance with the ethos and value system of Islam.Hence it is governed, in addition to the conventional good governance and risk management rules, by the principles laid down by the Islamic Shari’ah.
Islamic banking, is expected not only to avoid interest-based transactions, but also to avoid Gharar, also prohibited in the Islamic Shari’ah, and other unethical practices and to participate in achieving the goals and objectives of an Islamic economy.
Also, all commercial transactions must be governed by the respective rules and norms of Islamic ethics, as enunciated by the Shari’ah. The Islamic system disapproves of any exploitation or injustice on the part of any of the parties involved.
What is not prohibited is permissible. Therefore, all contracts are valid unless they violate the text of the Holy Qur’an or Sunnah of the holy Prophet (pbuh), or are in conflict with the objectives of the Shari’ah.
Islam considers the property of people as sacred and inviolable as their life and honour.
To en ensure this, it forbids the unlawful devouring of others’ property by way of theft, embezzlement, usurpation, bribery, cheating and all other unlawful means of acquiring wealth.
These proscriptions are in addition to the main prohibitions like Riba, Gharar and Qimar, which are considered major causes for usurpation of others’ property.
Banking and non-banking financial institutions can operate as indirect and direct intermediaries, respectively, in the Islamic framework.
The instrument of “interest” will be replaced by a set of instruments comprising risk-based profit/loss sharing ratios and profit margins in trading and leasing activities.
Islamic financial institutions, in order to get legitimate profit/earnings, will have to take up liability, undertake risk and add value through trading and leasing transactions and services.
The markets that can function in the Islamic financial framework include both money and capital markets, equity markets, limited forex markets, forward markets and investment Sukuk markets, representing a variety of instruments for fund and investment management by Islamic financial institutions.
A variety of target-specific Sukuk can be issued on the basis of various modes, keeping in mind the relevant Shari’ah rules.
Finally, when it comes to huge infrastructure projects located in Islamic countries and originated by european groups and funded by occidental banks , needless to say that Islamic Finance techniques should be used along with Conventional Finance as they do complete each other.