The emerging trend of Islamic Finance.

Byline: NAZIR AHMED SHAIKH

Islamic finance is a unique system of financial management that is rooted in the principles of Islamic law, also known as Shariah. It is a rapidly growing and dynamic sector of the global financial industry, with an estimated total global assets of over $2 trillion as of 2022. Islamic finance has gained significant attention in recent years due to its ethical and socially responsible approach to financial transactions, which are guided by the teachings of Islam.

History of Islamic Finance

Islamic finance has its roots in the early Islamic period, with principles that were established over 1,400 years ago. The principles of Islamic finance are based on the teachings of the Holy Quran, and the Hadith, which is the collection of sayings and actions of the Holy Prophet. These teachings emphasize ethical conduct, economic justice and the prohibition of interest (Riba) and excessive uncertainty (Gharar).

Riba, or usury, refers to the charging or receiving of interest on loans or debts. In Islamic teachings, Riba is generally considered Haram (forbidden) based on the Holy Book and Hadith, which are the primary sources of guidance for Muslims. Let's explore this in more detail:

References: There are Ayats: For example, in the Second Surah (2:275), The Almighty says, "Those who consume interest cannot stand [on the Day of Resurrection] except as one stand who is being beaten by Satan into insanity. That is because they say, 'Trade is [just] like interest.' But He has permitted trade and has forbidden interest." This verse highlights that while trade is permissible in Islam, interest (Riba) is not.

Hadith references: Hadith, which are the sayings and actions of the Holy Prophet, also emphasize the prohibition of Riba. He said, as narrated by Abu Hurairah, that "He cursed the one who consumes Riba, the one who gives it to others, the one who writes it down and the two who witness it." (Sunan Ibn Majah)

Principles of Islamic Finance

Islamic finance is based on a set of principles that guide its operations. These principles are:

Prohibition of Interest (Riba): Islamic finance prohibits charging or paying interest on loans. Instead, it promotes risk-sharing and profit-sharing arrangements between parties.

Prohibition of Speculation (Gharar): Islamic finance discourages excessive uncertainty or speculation in financial transactions. Contracts must be based on clear terms and conditions, and parties should have full knowledge of the underlying assets and risks involved.

Ethical and Socially Responsible Investments: Islamic finance encourages investment in businesses that are socially responsible and morally ethical, such as those involved in healthcare, education, renewable energy, and infrastructure development. It prohibits investment in businesses related to alcohol, tobacco, gambling, and other haram activities.

Asset-backed transactions: Islamic finance promotes asset-backed transactions, where financing is tied to real assets, such as property, equipment, or commodities. This promotes real economic activities and discourages speculative transactions.

Sharing of profits and losses: Islamic finance emphasizes the sharing of profits and losses between parties in a transaction. This encourages a sense of partnership and accountability, as parties share the risks and rewards of an investment or business venture.

Avoidance of excessive debt: Islamic finance discourages excessive debt and...