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The Advantages Of Islamic Finance And Banking

1410 words - 6 pages

As the world has recently passed through the global financial crisis that begun in 2008 in the USA with the banks’ collapsing, analysts are giving different opinions and making new economic hypothesizes about the origin of, as well as the process of different countries escaped from the crisis. Among all these new “theories”, the case of Islamic banks is interesting in terms of its nature and consequences. In my essay, I will try to highlight the basic principles of the Islamic finance, the reasons of the restriction of interest, the most important tools used by Islamic banks in economic activities and brief explanation of them, and finally my view point of the probable future improvement of the Islamic financial system.
First of all, let us outline how Islamic banks actually work and what their main differences are in comparison with conventional banks. In this banking system, banks are operated by Islamic laws (known as Sharia), so Islamic economic principles are considered as primary guidance. Two basic doctrines behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest . Hence unlike conventional commercial banks, Islamic banks do not pay or charge interest on lending or borrowing of money. This is because the Sharia’s strictly prohibits, among other things, the receipt and payment of riba (interest) /. The interpretations to clarify the meaning behind this restriction suggests that earning or charging extra amount of money from debtor has to be seen something as immoral behavior, because making pressure on your borrower is actually unfair from the view point of Islam. To make it clear, the religion of Islam basically promote the principle of justice in the financial activities as well as in all other activities of an individual. Therefore, people should lend money not because of making profit, but for helping others to solve their financial problems or simply provide a funding for their economic activities. It is fair, since the lender has no guaranty that, he will not be in the position of borrower in the future, and he probably would not like to see any pressure against him through interest. This is directly related with the term of Islamic PLS (means profit and loss sharing) which states that the relationship between borrower, lender and intermediary are rooted on financial trust and partnership . Here banks are in the role of intermediary, and individuals become lender through investing on the bank or borrower through taking debts.
When it comes to the economic impact of the interest (riba) on the whole economy and individuals, I think interest is a negative factor. Despite of the fact that especially in western economies, thinking of an interest-free system is quite difficult for current (Example banks) and potential lenders, analysts and academicians emphasize the possibility of non-interest based economy. As an example Arshad Zaman and Asad Zaman argue that...

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