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Islamic finance refers to the means by which corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible under this form of law. A unique form of socially responsible investment, Islam makes no division between the spiritual and the secular, hence its reach into the domain of financial matters.
Central to Islamic banking and finance is an understanding of the importance of risk sharing as part of raising capital and the avoidance of riba (usury) and gharar (risk or uncertainty).
Islamic law views lending with interest payments as a relationship that favors the lender, who charges interest at the expense of the borrower. Because Islamic law views money as a measuring tool for value and not an asset in itself, it requires that one should not be able to receive income from money (for example, interest or anything that has the genus of money) alone. Deemed riba, such practice is proscribed under Islamic law (haram, which means prohibited) as it is considered exploitative. By contrast, Islamic banking exists to further the socio-economic goals of Islam.
Accordingly, Sharia-compliant finance (halal, which means permitted) consists of profit banking in which the financial institution shares in the profit and loss of the enterprise it underwrites. Of equal importance is the concept of gharar. Defined as risk or uncertainty, in a financial context it refers to the sale of items whose existence is not certain. Examples of gharar would be forms of insurance, such as the purchase of premiums to insure against something that may or may not occur or derivatives used to hedge against possible outcomes.
Why Islamic Finance?
Islamic banking regardless of the emphasis on its ethics is a suitable option for both – Muslims and non-Muslims. The market demands for Islamic banking are higher than ever and more than 50,000 professionals will be required for the industry in the next five years.
ECONOMIC BENEFITS ASSOCIATED WITH ADOPTING ISLAMIC FINANCING IN NIGERIA
REDUCING ECONOMIC DISPARITY
Keep in mind that Islam does not prohibit accumulating wealth. It does, however, promote awareness of — and shared responsibility for — the hardships experienced by the poor. (One of the five pillars [obligatory acts] of Islam is zakat, or giving a portion of your wealth to charity.)
Greater implementation of Islamic principles in the financial markets can result in investments that benefit people at all points on the wealth spectrum. The potential rewards of such movement — regionally, nationally, and globally — are substantial and may include less violence and greater stability.
Reduces the Impact of Harmful Products and Practices:
Islamic banking restricts the goods and services that are restricted in Islam such as alcoholic beverages, tobacco, gambling, pornography, etc. irrespective of whether they are legal or not in a given country.
Strengthens Financial Stability:
In Islamic finance, the investments are approached cautiously and the decision-making process is carried out thoroughly unlike the conventional banking system. The companies who appear risky are usually kept away from financial institutes. This is why during the global 2008 financial crisis; the Islamic financial institutes remained untouched. With careful audits and analysis, the Islamic finance institute lessens the occurrence of risk and enhances financial stability.
SPURRING ECONOMIC DEVELOPMENT
Islamic financial institutions certainly aim to make profit; if they didn’t, they wouldn’t stay in business. However, the profit motive is tightly linked with other responsibilities that affect more than just shareholders.
To be profitable, an Islamic institution must respect and develop strong partnerships with its customers. It must screen and select investments based on their compliance with sharia law as well as potential for growth and success. The bank must provide ways for money to move from the wealthy to the poor, from those seeking to fulfill the obligation of zakat to those seeking resources build a better life.
ENCOURAGING LONGER-TERM INVESTMENT
The Islamic approach to investment encourages a slower, more thoughtful decision-making process than the conventional one. After all, an Islamic investor seeks to make socially responsible choices — to avoid investment in companies that cause harm to people or the environment. Weeding out such companies is the first step in a screening process that every Islamic fund uses. The next step — eliminating companies whose financial practices are too risky — goes a long way toward reducing risk and creating greater investment stability.
Intensive screenings, reduced risk, greater stability, socially responsible investment selections . . . this is not the stuff of quick action or (usually) quick returns. Investors following Islamic principles tend to follow a path that encourages more thoughtful selections and longer-term commitments.
Welcome2Africa International also uses this medium to announce to the general public that registration for the Islamic Financing session of the Back2Back Agri-finance training series is still ongoing and interested individuals should visit https://www.agrifinancetrainingsng.com/register to register.
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