Islamic finance

Islamic finance refers to the banking activity followed strictly in accordance with Islamic law, also called as Shariah. The term also implies investment plans under the law. The bank raises fund through the practical application of the Shariah and hence the correct term to be used is: Shariah-compliant finance. The law does not encourage the acceptance of interest for the money given as loan irrespective of the payment being fixed or variable. Investing in business providing services/goods that are against the Islamic principles is considered as “Haaram” (sinful).
Islamic banking illustrates the importance of risk sharing by providing insight of raising funds and avoiding interest on loans. Islamic law is against the view of lending money to the borrower with interest, because Islamic law does not view as asset but as value as it does not encourage the income from money solely. They deem Riba is completely forbidden as it is sinful and is connected to usury. As per the Shariah Compliant finance the financial institutions equally share the profit and loss of the firm it underwrites. This is similar to the concept of gharar – risk or uncertainty. A few instances of the gharar is the schemes in the insurance, where premium forms are purchased to insure against that might or might not take place or rarely to take hedge policy to potentially reduce the risk. Under Islamic banking equity financing is allowable but restricted to companies not involved in illegal activities like alcohol production, weaponry or pornography.
Like other financial institutions, Islamic banking also involves in making money to the banking services but only following the Islamic rules and principles. It is clear that Islamic banking services prohibit the making of interest by simply lending money as the transactions – Fiqh al-Muamalat rules oblige the Islamic law. The principle behind Shariah is the sharing of risk important trade component rather than risk transfer commonly followed in the conventional banking system.

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