Attempting to define Islamic financing is not always easy. Put simply, Islamic finance is a way of doing financial transactions and banking while respecting Islamic Law (Shari’ah). The underpinning principles of Shari’ah are based on social vision of public interest, equity, justice and fairness. Shari’ah gives guidance as to what is, and what is not acceptable behaviour in all areas of a Muslim’s life.
Islamic finance as practised today involves the application of Shari’ah to the financial activity of Muslims in the modern world. It focuses on wealth distribution based on risk-sharing models. A distinctive feature of Islamic finance compared to conventional banking is the notion of profit and loss sharing. As profit cannot be assured, an Islamic financial institution must assume at least part of the risk of a given transaction. There can be no guarantee of a fixed return – so the parties share in the gain and losses.
Although Islamic finance has been said to be niche financing, in the last few decades it has been proven to be innovative and a common financing method. According to the Islamic Finance Development Report, global Islamic finance assets are forecast to reach $3.69 trillion by 2024. Islamic finance is not limited to Islamic countries’, but is also involved in non-Islamic countries’ financial models. It has been classified as an alternative, ethical, remunerative and safe finance option.
In this series we will unpack the rulings governing the principles of Islamic finance and explore the Shari’ah application to conventional financing. Look out for our blogs and case studies on Islamic finance.
This article was co-authored by Uzair Bulbulia
*The authors would like to thank Hishaam Khan and Shuaib Ramjam for their contribution to this blog