Interest-free banking - Islam, other religions.

Byline: NAZIR AHMED SHAIKH

Islamic finance and traditional interest-based finance are two different systems of managing financial transactions and investments, with distinct principles and practices. The comparisons include:

Underlying principles: Islamic finance is based on the principles of Shariah, which is the Islamic legal framework derived from the Holy Quran and Sunnah. It promotes ethical and socially responsible financial transactions, emphasizing fairness, transparency and risk-sharing. In contrast, traditional interest-based finance is based on conventional economic principles and does not have specific ethical guidelines.

Prohibition of interest (Riba): Islamic finance prohibits the charging or paying of interest (Riba). According to Islamic teachings, money should be used as a medium of exchange and a store of value, but it should not be used to generate profit through interest. In traditional finance, interest is a common component of financial transactions, such as loans, bonds and mortgages.

Asset-backed transactions: Islamic finance emphasizes asset-backed transactions, where investments are required to be backed by tangible assets, such as real estate, commodities or productive businesses. This promotes real economic activities and discourages speculative or unethical investments. Traditional finance on the other hand, may involve transactions that are not necessarily backed by tangible assets, and speculative investments are often common.

Risk-sharing: Islamic finance promotes risk-sharing between parties. In Islamic contracts, such as Mudarabah (profit-sharing) and Musharakah (partnership), profits and losses are shared between parties based on pre-agreed ratios. This encourages a fair distribution of risks and rewards. In traditional finance, the lender typically bears minimal risk, while the borrower bears the majority of the risk.

Prohibition of unethical investments: Islamic finance prohibits investments in unethical activities, such as gambling, alcohol, tobacco and weapons, as they are considered harmful to society. In contrast, traditional finance may not have specific ethical guidelines for investments and investments in such activities may be permissible.

Social responsibility: Islamic finance emphasizes social responsibility and welfare. It encourages the use of funds for socially responsible purposes, such as philanthropy, community development and poverty alleviation. Traditional finance may not have a specific emphasis on social responsibility.

Governance and Transparency: Islamic finance promotes transparency and good governance in financial transactions. Contracts and agreements are required to be clear, transparent and mutually agreed upon. Traditional finance also promotes transparency and good governance, but it may not have specific requirements based on religious or ethical guidelines.

Can Islamic Finance replace Interest-based Finance?

Islamic finance is based on the principles of Shariah, which prohibit the payment or receipt of interest (Riba) and emphasize principles of fairness, risk-sharing, and ethical investment. Islamic finance offers alternative financial models that are aimed at creating a more equitable and socially responsible financial system. However, whether Islamic finance can be a complete replacement for interest-based finance depends on various factors and perspectives.

From a theoretical perspective, Islamic finance can be seen as a potential replacement for interest-based finance as it provides a unique approach to financial transactions that align with the...