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Islamic Financial System: The Sukuk Or Islamic Bond

1127 words - 5 pages

It is in no doubt that the Islamic finance and banking sectors have grown into a significant market that played a great role and emphasis in the worldwide financial industry. As a matter of fact, the Islamic finance industry presented and showed a stellar development and growth in terms of figures (Hancock, 2013), as Islamic finance is maturing at 10 to 15 percent annually, and there is no indication that such inclination is to decelerate in the future (Afshar, 2013). Furthermore, Islamic banking is known as a key contributor in the Islamic finance total assets in terms of its market share, which is of about 80.3% (, 2013). Having to consider such progressive trend of the ...view middle of the document...

By definition, the term Islamic finance simply describes the system that operates under the principle of the Islamic Law, which by Muslims calls the Shari’a (Afshar, 2013). From the perspectives of this particular law creates and shapes the Islamic finance system including all financial transactions and activities. In other words, the Islamic banks and financial institutions must abide by the Shari’a. Taking consideration on the term’s etymology, the literal meaning of the Arabic word Shari’a is the “way to the source of life”, which also shapes the legal system in keeping the code of behavior called for the Holy Qur’an and the hadith. Conventionally, the Islamic law encapsulates a range of responsibilities and practices that every Muslim should follow such as practices like worshipping, prayer, manners and morals, marriage, inheritance, and most especially to commercial transactions (Algaoud & Lewis, 2007). Mentioning that the Islamic Law simply governs any commercial and finance transactions, there are basically five basic elements that the Islamic banking and finance presents salient features that rooted to religion. These rules provide Islamic finance its unique religious individuality. These aspects include the riba, haram or the halal, Gharar or maysir, Zakat and Shari’a board.
Based on the Islamic Law, it is very that paying or accepting interest or the riba for a loan is prohibited (Afshar, 2013). From the Western point of view, the ruling out of interest in all commercial transactions is likely the most controversial element of the Islamic economics. The prohibition of paying or accepting riba in the commercial banking system is unequivocally stated in the Holy Qur’an, and thus implying that investors must likely be compensated by other way or approach besides interests. Specifically, the Holy Islamic Bible also stressed out that those who violate the prohibition are at “war with God and His Prophet Muhammad (Algaoud & Lewis, 2007, p. 39).” Furthermore, from the Islamic Law, money is likely not considered as an asset; rather is a mere medium of exchange and a measuring unit of value. In financial and commercial transactions, individuals or financial organizations should not generate income from money. This is because such self-generation of money from money is considered as a riba. For instance, selling and accepting of debts or receivables without the underlying asset for anything than its par is intolerable (Afshar, 2013, p. 45). Apart from the prohibition of riba, commercial and financial...

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