Islamic Finance

Islamic Finance

Finance, of any sort, is one of the most boring topics in the world. Islamic finance isn’t much different. Even though I am trained as an accountant, I get a headache just thinking about how to mesh Islam and modern finance together.

Yet, despite my aversion to the topic, I know it’s necessary. And most Muslims agree that it is also. Hence, I decided to write a quick post about finance for Muslims, but without too much technical jargon.

Because that’s when the headaches start. My country, the United States, has been crippled by decades of reliance on Riba (interest and usury) and glorification of wealth at all costs.

Americans are working harder than ever (if they can find work), spending more than ever, yet making less. The American dollar is in shambles and may soon be overtaken by the Euro as the world’s most reliable currency.

Millions of Americans are out of work. Hundreds of thousands of condos, houses, townhouses, and real estate sit empty, unsold, and unsalable. The American manufacturing sector is almost non-existent.

And to top it all off, we’re spending billions of dollars a day to manage two wars. All of these problems can’t be blamed on modern finance. Perhaps if we Americans were able to get over our arrogance and our misguided thinking that we’re the greatest in the world at everything, we would notice that there are other financial systems that work well.

Certainly, most of the crazy schemes that wiped out the false wealth we’ve accumulated over the years would not have happened with Islamic finance.

Why Islamic Finance is Needed

I’ve heard some question the validity of Islamic finance. Not just non-Muslims but Muslims also. They ask, is Islamic finance even needed? The Prophet Muhammad (peace be upon him) didn’t use any fancy financial mechanisms to achieve success.

That is certainly true. But the world was much simpler back then. It is foolish and unfair to compare the way we live now to the way people lived 1400 years ago. Doing so is neither practical nor wise. Islamic finance is needed for the following reasons:

  • Purchasing high priced items that are necessities like cars and homes
  • Funding research into science and technology
  • Paying for higher education and training
  • Insuring property and lives against damage and casualties
  • Investment into business and economic growth

The Muslim Way of Doing Things

Let’s take a look at insurance. The modern insurance is a big gamble. It really only benefits the insurance companies (who are usually nothing more than undercover financial institutions). Say for instance you have a car.

Depending on where you live, the type of car you have, and several other factors, you might pay as much as $200 a month on insurance. If you go ten years without an accident, that’s a total of $24000 you’ve paid. Now, what if you get into an accident after 10 years?

Your policy might say it covers you for $50000, but it’s unlikely you’ll ever see that amount. The insurance company will only cover the damage that was caused. If the total damage was estimated at $2000, that’s all they’ll cover.

That may seem fair to you, but keep this in mind: the insurance company will recoup that $2000 several times over by raising your monthly premiums. But what about an Islamic alternative.

How about an insurance program that is focused on helping its members rather than increasing profits? There is such an alternative and it’s called Takaful. Here’s how Takaful works:

  • Several people pay into the Takaful fund.
  • The Takaful operators invest that money to bring profits to the members.
  • At the same time, the funds and investments can be used to protect any of the members if needed according to the agreement (insurance contract).
  • Whatever profits are left at the end of the year, are shared between the members.
  • But there is no guaranteed return, so Riba is avoided.

This same principle can be applied to major purchases, such as homes and vehicles. But rather than a Takaful fund, an Islamic bank of some sort would be needed.

The people who deposit their money into the bank would also be part owners of the bank. They all stand to profit or lose if the bank’s fund are not managed properly. The Islamic bank can have many functions.

It can invest (with the approval of the members) in different businesses. So if someone needs a loan for their business, rather than taking an interest bearing loan, they take an investment from the bank and its members.

If the business prospers, the bank and its members profit as well. If the business fails, the bank and the member lose their investment. Of course, a scheme like this would require thorough due diligence to ensure, to as much of an extent as possible, that the business being invested in was a viable one.

Can Islamic Banking Co-Exist With Modern Finance?

I am certain that Islamic banking and finance can work. I say this not just as a Muslim, but as a student of finance and economics. However, I’m not sure if the two methods can exist side-by-side.

There is no model, that I’m aware of, where both Islamic banking and modern banking exist on an equal level in society. The wonderful thing is that Islamic banking and finance is much more fair than traditional finance.

It may take more work and more time to bring success, but that success will be shared by more people in the society. Whereas modern finance only truly benefits a few and puts the majority into perpetual debt for purchasing necessary things like homes, cars, and education.

If Islamic finance was given a fair share in the market, and if it was promoted properly and given a decent chance, it would certainly attract more people, perhaps even non-Muslims. Until that day happens, we just have to suffice with avoiding Riba and interest as best as we can, and make do with what Allah has given us for now. Leave Islamic Finance and return to home page.

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