Essentials of Islamic Finance
Main Principles of Islamic Economic System:
The main principles of Islamic financial system include:1.
The prohibition of taking or receiving interest.2.
Capital must have a social and ethical purpose rather than merely maximizing profit.3.
Investments in businesses dealing with alcohol, gambling, drugs or anything else that theShariah
considers unlawful are deemed undesirable and prohibited.4.
A prohibition on transactions involving speculation or high degree of risk.5.
A prohibition on gharar, the uncertainty about the subject-matter and terms of contracts
this includes a prohibition on selling something that one does not own.6.
Zakat as an essential part of the Islamic economic system.7.
Only financing through participation. No concept of lending money/resources on fixedmarkup or return.8.
Money in itself doesn‟t have any value but is backed by an asset such as Gold, Silver etc.
Money can‟t be traded like a commodity. It can only be used as a medium of exchange.
Highly emphasis on socio-economic development rather than merely economicdevelopment.11.
Needs and wants do not affect the supply of the resources.12.
Islamic economic system regards man, money and commodity as factor of production.13.
It permits 3 types of ownership i.e. individual, state and public ownership.14.
Circulation of Wealth.
Fundamental Differences between the Conventional andEconomic System:
While conventional economists are now in the process of understanding the failure of evil basedsystem, Islamic economics never got entangled in a secular and materialist worldview. It is basedon religious foundations which strike at the very basics of secularism. To ensure the true well-being of all individuals, irrespective of their sex, age, race, religion or wealth, Islamic economicsdoes not seek to abolish private property, as was done by communism, nor does it preventindividuals from serving their self-interest. It recognizes the role of the market in the efficientallocation of resources, but does not find competition to be sufficient to safeguard social interest.It aims to promote human brotherhood, socio-economic justice and the well-being of all throughan integrated role of moral values, market mechanism, families, society, and good governance.This is because of the great emphasis in Islam on human brotherhood and socio-economic justice.
On the basic policy differences of both the systems, the following differences have beenhighlighted.