Islamic Finance For Globalised World: Principles And Impact Essay.

Principles of Islamic Finance

Discuss about the Islamic Finance for Globalised World.

Islamic finance has evolved as one of the most important methods of financing in the globalised world. Many countries have carefully studied its viability and characteristics and have permitted the Sharia law to flourish in view of its effectiveness in addressing certain ills of the society. In light of its potential, some countries have streamlined their financial system by integrating the Islamic financial system with it.

The outline of this summary is to incorporate the objectives, analyze the approach and delving into the aspects of methodology used in the study. Since this style of finance is growing at a rate of 11% annually, the present value of assets is estimated to be around US$2 trillion, which covers bank and non-banking financial institutions, insurance and capital markets (Abdul-Gafoor 1999).

Though the functioning of Islamic finance is mainly concentrated in Middle Eastern countries, few institutions have established themselves in developed countries like United States and European Union. 

Islamic finance is mainly defined as a service related to the discharge of financial obligations by following the tenets of Sharia. The objective of the same is to find out the sources of the Sharia and how it shapes and affects the financial jurisprudence with regard to economic, social, cultural and political factors (Abdul-Gafoor, 2003). Apart from this, the principles of the law have also been dwelt upon.

The primary sources of this law are Quran, Hadith, Sunna, Ijma, Qiyas and Ijtihad. Quran is considered as the holy book of Islam, which was given to Prophet Muhammad. Hadith is the narrative part of Prophet,which includes the deeds and learning of the Prophet; Sunna connotes the habitual deeds of the Prophet; Ijma pertains to the consensus of different religious scholars unrelated to the tenets of Quran and Sunna. Qiyas is the analogical deduction for rendering an opinion on a given case which is not related to Quran and Sunna and comparing the same with another case mentioned in the Quran or Sunna (Abdul-Gafoor 2006).

The development of Islamic law dates back to the time of Prophet Muhammad in the seventh century A.D when he was believed to have received divine revelation from Allah (God of Islam). During the Prophet’s lifetime, several tenets of Islamic finance were derived from his viewpoints like silent partnership and full partnership. It was he, who allowed and encouraged the prospect of giving interest free loans on the grounds of benevolence and compassion (Ahmed 2004).

Riba

After his death, a rapid expansion was witnessed specially in the Middle Eastern regions, which expanded its scope to Asia, Africa, Europe and also to parts of Central Asia. From the beginning of the nineteenth century, Western powers gradually started casting its shadow and Islamic countries also fell into the ambit of its rules and methods of functioning. By the middle of the twentieth century, almost all Islamic nations were functioning under the principles and laws of western capitalist powers (Akacem and Gilliam 2002). In the later part of this century, Islamic countries felt the need to bring back the concept of Islamic finance and they started incorporating banks and other financial institutions based on the facets of sharia law. In the 1970s, some Islamic banks were established like Dubai Islamic Bank and Nasser Social Bank. 

The law is controlled by Sharia, which encompasses the legal structure of Islam, supported by the teachings of Quran and Sunna. The basic principles governing Islamic finance are prohibition of Riba (too much interest), prohibition of Gharar, which does away with respect to disclosure of information in a contract. Restriction with regard to gambling and dealing in sinful activities and staying away from alcohol consumption are also critical factors governing the principles (Alam 2000). In addition to this, risk sharing should be honored between issuer o funds and the recipient. There should be material evidence pertaining to every financial transaction. A financial transaction must not result in exploiting any of the parties involved.

This pertains to the concept of charging interest on a loan given by a lender to a borrower. This principle calls upon debtors to fulfill the commitment of meeting any excess amount over and above the principle amount (Al-Dhareer 1997). One should not be at default after taking a loan. This understanding varies from one religion to another in the context, that a particular religion forbids their faithful to charge interest from their own faith but not from others. The basic premise of this concept is that it is unethical on the part of Islam to charge any extra money as the same should be properly accounted for by virtue of investing it in productive use (Al-Jarhi and Iqbal 2001).

Gharar is prohibited in Islam as the same involves a high degree of uncertainty with respect to the probability in the rate or amount of return on a particular investment. The purpose of this policy is to equally allocate the benefits between the lender of the instrument and the receiver of the instrument so as to ward off any uncertainties in the future (Al-Masri 2003).

Prohibition of Gharar

Maysir pertains to the practice of indulging into illegal activities like gambling and other sorts of games like lotteries, casino as per the Islamic traditional value and ethics. All these sorts of activities are considered unethical and immoral in the eyes of Sharia law and therefore banned in most of the Islam ruled nations. In order to achieve success in life, this principle has to be adhered to in full faith (Al-Saati 2003). According to various proponents of the law, there exists a high risk factor in these types of transactions; so the issue of bankruptcy might come into the picture which would be totally uncalled for.

Sharia law forbids its faithful citizens from indulging in transacting certain activities, which does not hold ethical value in its eyes. According to its established doctrine, drugs, alcohol and consuming pork are prohibited and people should invest only in fruitful ventures or legitimate instruments which benefit the society as a whole (Anwar 1995).

The purpose of enacting this law is to broaden the ambit of profit sharing amongst all the stakeholders in an equal fashion and also the loss factor when the same arises due to unfavorable business outcomes. The main thrust point of this principle is that nobody should enjoy the benefits at the cost of others’ sufferings (Archer and Rifaat 2002). Every stakeholder should bear the equal responsibility of any loss and also garner its share of success when the business generates a profit, no matter how small or big it may be.

It is considered as one of the bedrocks of Islamic finance, whose idea is to collect a certain percentage of wealth from the wealthy individuals and distribute them amongst the poor. It is collected in the form of a tax from the richer sections of the society and channelizes the fund for the betterment of the weaker sections of the society. In spite of the universal truth that all are equal in the eyes of God, there exist tremendous disparities between the rich and the poor with regard to income distribution (Billah 2001). Therefore it can be inferred that Islam makes it mandatory to some extent for the rich to contribute a certain proportion of their wealth towards the welfare of the society, which in turn would help in eradicating poverty in a nation (Billah 2001).

Since commercial insurance is one of the most widespread industries with regard to Islamic finance, there exists an argument based on Gharar concept, which is forbidden by the law as it exploits those who do not reap any benefits. In order to bypass this crucial phenomenon, Takaful has been incorporated which is a mutually beneficial scheme (Choudhry and Mirakhor 1997). The purpose and method of sustaining the scheme is to pool the requisite amount of resources and invest in meaningful instruments, which would yield profit in the future.

Prohibition of Maysir

Since there are different parameters based on which each mode of Islamic finance theories are applicable, it reflects a wide variety of its functional aspects and presents a good future scope for improvement not only for Islamic banking but for non-Islamic banking as well.

It is mainly focused on the development and upliftment of the marginalized sections of the society, which helps in alleviating poverty and discrimination. Keeping in mind the fact that, Islamic finance prohibits certain practices like alcohol, gambling and any activity which is considered immoral, the structure and functioning of the Islamic method of finance is quite different from other styles of banking and finance, like the western methodology.

Conclusion:

Bases on the findings and analysis of the above, it can be inferred that, the conduct and functioning of Islamic finance is based on the tenets of Sharia law, whose sources are Quran, Hadith, Sunna, Ijma, Qiyas and Ijtihad. The main principles of Islamic banking are prohibition of Riba and Gharar, which puts emphasis on inclusiveness and abstinence from indulging into immoral and unethical activities in the society. Full disclosure of pertinent information and contribution towards the benefit of the weaker sections of the society are main thrust areas of its principles. The objective of Islamic finance is equal sharing of benefits and losses by both the investor and the entrepreneur and all other stakeholders who are involved in capital infusion. It discourages sinful acts related to gambling, betting and alcohol indulgence as it presumes the same would be harmful for the society and that every legal transaction should be supported by physical evidence in warding off any future contingencies.

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