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Islamic Finance

Islamic Finance

The last three decades have witnessed the modern rebirth of Islamic finance both in terms of literature and practice. Islamic banks and financial institutions emerged in response to Muslim societies’ needs of shari’a compatible alternatives to conventional banking services and investment vehicles. The principles of shari’a strike a balance between the needs and interests of individuals and the society. In shari’a, the interests of the ummah (nation) are given precedence over those of individuals in case of conflict or disagreement. However, the interests of individuals are well maintained under shari’a, thanks to a well established system of contracts and contractual settings that cover all aspects of a Muslim’s life (personal, legal, commercial, financial, etc).

Islam bestows particular attention on the broader economy and it outspokenly encourages investment and spending. However, not every individual has the capabilities and expertise to directly invest his/her money in the lookout for profit. Here inter Islamic banks that provide a worthwhile vehicle to mobilize and invest the savings of individuals for the benefit of those individuals, the banks themselves, and the broader society. Islamic banks invest mobilized money based on shari'a compatible contracts such as mudaraba or wakala (investment agency) and share the results of that investment with capital providers (i.e., depositors) according to an agreed upon profit sharing ratio. On the contrary, in conventional banking, deposits are typically guaranteed a fixed return (riba or interest) regardless of the results of investing. This is due to the fact that in Islamic banking, investment is based on a profit-and-loss sharing mechanism where both parties (depositor and depositee) share the results of investing. In conventional banking, the depositor-depositee relationship is inherently an interest-bearing loan whose par value is guaranteed whatsoever.

In this section, light is shed on the key aspects and concepts of Islamic banking and finance in a simple (though not lacking a professional touch), straightforward, and contextual manner. To that end, the section covers and addresses almost everything about Islamic finance from the very basic to the most sophisticated and advanced.

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