DEFINITION OF ISLAMIC FINANCE
Islamic finance is a financial system that operates in accordance with Islamic law (called shariah) and is, therefore, shariah compliant. Just like the conventional financial system, Islamic finance has banks, market capital, fund managers, firm investments, and insurance companies.
Although the Islamic financial industry itself is relatively young, Islamic economic theories have been around for more than a millennium in the middle of the 12th century, in fact many Muslim scholars have introduced key concepts of Islamic economics that are still relevant today. But politics and social turmoil put the brakes on Islamic finance for a very long time only in the 20th century when Islamic scholars and academics began to seriously review these topics and, in doing so, set the stage for the industry modern Islamic finance emerged in the 1970s.
THE BENEFITS OF ISLAMIC FINANCE SYSTEM
The Shariah contracts used in every Islamic banking product are different from conventional banking products. There are clear differences in operations involving contracts entered into between banks and customers although banking operations are generally the same in terms of capital management, risk and so on.
In the context of profitability, Islamic banking benefits in ways that do not conflict with Islam. Profit comes from sale and purchase contracts, profit and investment (investment) and other Shariah-recognized contracts.
For example, deposit products, Islamic banking structured the product using the Wadi’ah Yad Dhamanah contract which is a guarantee guarantee. It differs from conventional bank account savings products when each account holder is promised a certain return on the savings made. This led to bankruptcy as the bank borrowed money from customers to carry on its business activities.
WHAT IS SHARIAH
The rules governing Islamic Finance are derived from the Shari’ah. The Shari’ah is a framework of Islamic Jurisprudence derived from the primary sources thats is The Qur’an and the teachings of the Prophet Muhammad (pbuh) known as the Sunnah.
There is a dynamic secondary source of common law rulings and scholarly interpretations referred to as Fatwa’s. These fatwas are the results of human interpretation of the Shari’ ah, of its texts, or its principles, or a combination of the two; they are not the word of God. Islamic law is a process than a code, and the results of legal deliberations may differ when different methods are employed.
In investment contracts, Islamic banking uses contracts such as Mudarabah (profit sharing) or Musyarakah (profit sharing), which is in line with the fiqah method. Which means’ every return is at risk’.The accumulated funds can be invested by the bank into activities. Other businesses such as home financing, vehicles and equipment under sharia law in order to profit.
Banking has to do with halal and illegal matters. Through Islamic banking, the banking business of a Muslim is not only beneficial to the world but also to the hereafter. By subscribing to Shariah-compliant products provided by the Shariah Advisory Council at the bank level and at the Bank Negara Malaysia Shariah Advisory level, all products and services offered are able to assist customers in their daily transactions.
RULES OF ISLAMIC FINANCE
The rules of Islamic finance adhere to the broad principles of avoiding Maysir and Qimar which are gambling and speculation along with Gharar which is uncertainty coupled with exploitation and unfairness. This closes the door to the concept of interest and precludes the use of conventional debt-based instruments.
The Islamic financial system encourages risk-sharing, promotes entrepreneurship, discourages speculative behavior, and emphasises the sanctity of contracts.
Islamic finance offers different instruments to satisfy providers and users of funds in a variety of ways. Basic instruments include cost-plus markup financing (murabaha), profit-sharing (mudarabah), leasing (ijarah), partnership (musharakah), and forward sale (bai’ salam). These instruments serve as the basic building blocks for developing a wide array of more complex financial instruments, suggesting that there is great potential for financial innovation and expansion in Islamic financial markets.
THE BENEFITS OF ISLAMIC FINANCIAL SYSTEMS
1 . Dividend distribution based on profit and sale activity
This gives the buyer and seller a fair and equitable advantage. In fact, the average rate of return on sales that refers to the system is based on the amount of profit earned.
2. Submission and distribution in accordance with Islamic Shariah is overseen by the Shariah Advisory Board
This situation does not give a sense of sympathy when it comes to trading and Islamic banking systems. Shariah advisers are appointed based on their education in Islamic finance. Therefore, all procurement matters are done upon receipt by the Shariah advisory body.
3. Only carry out halal trading activities
Any activity involving halal products is acceptable sharia. The Shariah Advisory Board will ensure that the sale and purchase activities are conducted legally and legally.
4. Determination of the average rate of sale proceeds is made at the time of the agreement
In the event of a sale, all possible advantages and disadvantages must be clearly discussed before the agreement can be made to avoid any misunderstanding between the parties involved. This will ensure that all parties are satisfied with the transaction.
5. The process involved is not in doubt
The process of selling and buying needs to be clearly defined and there should be a witness to avoid any doubt about the profitability of the sale or investment.
6. Represented by a strong Islamic Banking Institution and Takaful Operator
Islamic Banking Institution and Takaful Operator will ensure that all products and services offered are shariah compliant during the sale and purchase process.
If an Islamic financial institution is not in compliance with Shari’ah precepts, there is nothing but its name to distinguish it from a conventional institution. One of the goals in publishing this work is to enhance the appreciation of practioners for the importance of Shari’ah compliance and its significance for consumers.
Related article : History of islamic banking
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