Friday, 14 October 2016

Islamic Finance- Principles and Practices

Islam is not just a religion in normal sense of word, but it’s a complete way of life. Islam guides man throughout his entire life and is always concerned about all pace of living. It’s concerned about moral, spiritual, political, social and economic life aspects of human being. Islamic finance is such an activity that is emerged based on the principles of Islamic laws. Islamic law also called Shariah prohibits the acceptance any kind of interest for loan amounts (called riba) in any manner.

Islamic finance is completely based on the concepts of Islamic economics and its main principles are prohibiting interest for loans, avoiding gambling, avoiding investment in prohibited industries and driving clear of uncertainty based transactions. Islamic finance always encourages shared risk and zakat by promoting social justice. Sharing risk between the financial institutions is based on long term relationships between them. Islamic insurance (called takaful) also involves shared risk management and mutual responsibility.

Conventional banking practice is all about eliminating risk where as Islamic banking is completely based on risk bearing. In conventional banking banks have the sole right to cancel the contract where in case of Islamic finance and banking sole right to cancel the contract is not in their hands. The differences in banking terminologies reflect in the contractual relationships of each banking system. The objectives and practices that drive Islamic finance are completely based on Islamic theory of economics which promote justice and social responsibility.

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