Islamic Finance

Islamic finance is flourishing even in a time of economic turmoil in the world. And, more and more people are taking notice. Recently, many articles have been written by mainstream publications highlighting the success of Islamic banking and the need for the world to learn from this financial model.

In theory, Islamic banking differs significantly from conventional banking.

Five main principles set Islamic banking apart from conventional banking:

a) Three main prohibitions of Islamic banking are taking or giving interest, speculations, and investing in banned industry sectors.

b) Shari’a-compliant transactions also need to be based on profit- and loss-sharing principles and need to have an underlying tangible asset.

These principles result in a different business model from that of conventional banks.

For Muslims across the globe, Islamic banking is not simply a financially attractive alternative. Rather, it is a conscious choice based on the commandments laid down by God in the Quran, the holy book of Islam. A fundamental difference between conventional banking and Islamic banking is that the latter does not charge interest. The Quran expressly forbids transacting in interest in several places. At one point, God says,

“God has allowed trade and forbidden usury. Whoever, on receiving God’s warning, stops taking usury may keep his past gains– God will be his judge– but whoever goes back to usury will be an inhabitant of the Fire, to remain thereafter.” [The Qur'an, Chapter, Verse 276]

"O you who have believed, be conscious of God and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from God and His Messenger. But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged." [The Qur'an, Chapter 2, Verse 278-9]

Interestingly, Judaism and Christianity also prohibit usury. For instance, the Bible states,

“Do not charge your brother interest, whether on money or food or anything else that may earn interest.” (Deut. 23:19)

Yet, Islam is the only faith which maintains this prohibition originally observed by Christians and Jews.

“People think the Islamic [financial] system is based on faith, but it’s based on justice. The system is based on justice for the two parties and how you get to justice is extracted from the Islamic faith,” says Aly Khorshid, an Islamic finance scholar who writes for Islamic Banking and Finance magazine.