Islamic Finance - My Understanding

Image courtesy: Capital Business

A friend once asked me is Islamic Finance and banking for only Muslim? This prod me to write this short piece based on my understanding. Many people believed that since the name says 'Islamic' it simply has to do with Muslims. It is a financial system that allows all and sundry to participate irrespective of their religious beliefs.

Islamic finance and banking  sometimes called Non- Interest Finance can be said to be financial activities which is based on Islamic principles that forbids interest 'Riba' and financial speculation. It focuses more on risk and profit sharing which is the basic principle.

The major principles :

Non-Interest (Riba) : The conventional banking focuses on taking and giving interest  but in Islamic finance, it prohibits any payment above the actual amount of principal been borrowed.

Risk Sharing: It is financial system that focuses on profit, loss and risk sharing as well as participation of parties involved the transaction.

Investment in gambling and dealings in alcohol is prohibited.

Market prices are determined based on the forces of demand and supply and not on speculation.

Finally, non -Interest finance as I like to call it is centred on fair, transparency and risk sharing in all dealings. I will follow up this short piece with my personal opinion on Islamic finance and the financial crisis.