Best features of Islamic finance

Islamic Finance

The main principle of Islamic finance is its adherence to interest or riba free financial transactions, while other principles are: prohibition of fixed return, profit-and-loss sharing and hence risk sharing, participatory financing; prohibition of uncertainty, speculation and gambling; money not having any inherent value in itself; and also equity-based financing.

Within these principles, Islamic financial contracts are designed to facilitate financing according to Islamic norms. The contracts include: murabaha, mudaraba, musharaka ,ijarah (leasing), Salam, istisna, and sukuk .Islamic banks and financial institutions have developed other hybrid financial contracts based on these traditional modes.

International Finance

The economic and monetary system that transcends national borders. The field of international finance concerns with studying global capital markets and involve monitoring movements in foreign exchange rates, global investment flows and cross border trade practices.

The economic interaction among different nations involving the monetary payments and the exchange of currency. The cornerstone of international finance is foreign exchange, including foreign exchange markets and exchange rates. International trade, the study of trade between nations, is a related area of international economics.

Best features of Islamic finance which provides solution for bad economy.

Shariah Compliant Current & Savings Accounts

In the absence of interest, there needs to be some incentive to gain a customer and this is done through a profit sharing exercise whereby at the end of the year, banks allocate profit to the account holders, which may be equivalent to, but not the same as, a conventional saving rate. In the UK, the Consumer Credit Act requires all lenders to show a comparative rate of interest to comply with the Consumer Credit Act 2006. Often the sight of an interest rate is misunderstood as trading in interest when in reality it is only used as a benchmark and to comply with the CCA.

Also, since an overdraft facility would amount to charging interest, banks may offer interest free loans (Qard- Hassan) in certain cases. This is not obligatory on the bank as it has to ensure it keeps a commercial viewpoint on its trading operations. Consider this, if an Islamic Bank offered Qard Hassan to all its customers, there would be no trading profit to pay its operating costs and share of profit to its depositors – the bank wouldn’t be in business for very long.

Murabaha (Cost-Plus Sale)

Murabaha essentially is undertaking a trade with a markup and is used for short-term financing, similar in form to purchase finance. An example would be a bank purchasing a tangible asset of some sort from a supplier with the resale based on the cost plus an agreed markup. This is most often used to finance property, since the bank would not be allowed to charge interest on any loan. Once such a debt covenant is in place between a bank and the customer, repayments can begin until a completion point where the asset is transferred to the customer. There is no exposure to variations in interest rates as there is a fixed markup percentage, identified at the outset.

Ijara (Leasing)

Ijara is a leasing contract whereby one party leases an asset for a specific amount of time and cost from another party, usually a bank. The bank would bear all the risk and a portion of the installment payment goes towards the final purchase of the asset at the time of transfer of asset. This can also be set up as a lease-purchase contract for the term of the asset’s specified lifetime.

Musharaka (Equity Participation)

There is very little difference between this and a joint venture agreement. The parties involved contribute in varying degrees of assets, technical expertise etc. and agree to a percentage of the returns as well as the risk. All parties must invest a certain amount of capital. In the case of purchasing a property under this sort of arrangement, it is purchased by both the bank and the customer together, and the repayments made are partly rent and partly a buyback.

Mudaraba (Partnership Financing)

Mudaraba is very similar to Musharaka and is a trustee type finance contract under which one party provides the labour while the other provides the capital.

Istina (Commissioned Manufacture)

Istina is the solution for manufacture of goods since speculation prevents the selling of something that one does not yet own. With a promise to produce a specific product that can be made under certain agreed specifications at a determined price and on a fixed date, an Istisna contract is established. Specifically, in this case, the risk taken is by a bank that would commission the manufacture and sell it on to a customer at a reasonable profit for undertaking this risk.

Does Islamic finance provides solution for problems of economy??

It would seem obvious why Muslims would use Islamic Finance, but realistically, Muslims are only now being able to get the opportunity to do so, and while not all Muslims would necessarily shift, there is growing popularity. What is surprising is the growing number of non-Muslims taking up Islamic Finance. In the UK, Salaam Insurance, the UK’s first Takaful Company, has a significant part of their customer base made up from non-Muslims.

This is in large part due to the conventional pricing of the product range but also due to the ethical nature of Islamic Finance itself. If products are developed using Islamic principles along with a Western approach, Islamic Finance could become an even more significant market over the coming years. After the impact of the excesses and greed by conventional banks in the run up to the credit crunch, the public, governments and financial institutions are all looking for a better way of managing money and a fairer way of wealth distribution, Islamic finance is one such way as long as it can stay true to its principles.

Benefit that Islamic finance will bring is the curbing of speculation. How will it curb speculation? There is a ruling in the Shari’ah that prohibits one from selling what one does not have. This implies that the short sales that create havoc in the stock foreign exchange and commodity markets will be prohibited in speculative short sales; the intention is not to give and take delivery. Rather, an offsetting purchase transaction is made and there is settlement of the difference. Mr. [George] Soros did this during the exchange rate crisis in Britain in the early 1990s and made a profit of one billion pounds sterling. Encouraged by this success, he, along with other speculators, did the same thing in the Far East and destabilized the foreign exchange markets there. Curbing speculation will help stabilize the financial markets.