Islamic finance is a centuries-old practice that is incessantly marking its significance in not only the Eastern but also the Western states. So what exactly is this practice that has captivated the interest of millions across the globe and is gaining continuous recognition? Islamic finance is the process through which the financial conglomerates in the Muslim world inclusive of their banks and further loan giving financial organizations raise their capital in agreement to the Islamic rules and regulations that are called as the “Shari’ah”. The various categories of investments that are permissible under the Shri’ah are included in this field.
This industry is showing an impressive and a steady growth rate of above fifteen percent with global worth of almost £150bn to £250bn. Its history dates back to the inception of Islam whereas it was formalized in the beginning of the early sixties when the concept of Islamic banking was made official, owing to the demand for the “Shari’ah” practices. It is basically the acceptance of its attribute of risk sharing that is an important component of elevating the capital and shunning “riba” and “gharar” which are usury and the uncertainty risk respectively.
According to the Islamic laws there are two people involved in a business transaction regarding loans, the individual who is being paid the loan is the borrower whereas the one paying it is the lender. Normally interest is charged by the lender on the amount that he is lending. This concept is vehemently rejected by Islam which terms capital as a means of value rather than as an asset, and asserts the negation of receiving interest over money. Further under the Islamic rules and regulations it is termed as illegal and “haram”. The existence of Islamic banking works towards the supplementation and fulfillment of both the economic and the social objectives of Islam. Some of the investment arrangements that are permitted under Islamic banking have been briefly explained in the following paragraphs.
Profit banking is permissible that involves the sharing of both profit and loss between the financial organization and the respective enterprise that has been endorsed by it. Under the indentures of profit and loss sharing the capital of the investors is amalgamated and the eventual loss and turnover is shared. As mentioned earlier, gharar is the uncertainty risk factor that involves the acquisition of a premium against an unforeseen and unpredicted calamity that might befall. Similarly the concept of equity financing of a particular corporation is permitted, as long as the respective organization is not found to be involved in some kind of restricted productions say for instance pornography, alcohol and artillery.
Joint stock ownerships are quite common. The declining balance equity involves the combined purchase of say for instance a house by the bank and the financier. With the passage of time the ownership of the house is transferred by the financier to the original owner whose expenses comprised the home owner’s equity. The lease to win is a related method except for the provision of almost the entire finance by the respective financial institute or sponsor on the terms that the house is resold to them after a predetermined time period. A share of the all the individual payments make up the lease.