بسم الله الرحمن الرحيم
16 Rabi-al-Thaani 1444/11 November 2022
All praise is due to Allah, the Cherisher, Sustainer, Nourisher and Provider of the entire creation. May peace, blessings and salutations be upon our Beloved Prophet Muhammed ﷺ.
We live in a time where the world in which we reside, revolves around money. One of the biggest challenges which we as Muslims are faced with today is the evolution of conventional financial systems and its processes. Within recent times, we notice Islamic Financial Systems being brought into communities and are struggling to find its place in the financial world. One of the main reasons for this is our misconception that Islamic Finance is the same as Conventional Finance with a “tweak” in terminology. In this article we will explore the two financial systems respectively.
One of the most important principles of Islamic Finance is that it is an asset-backed means of financing. Money is seen as a medium of exchange which possesses intrinsic value and it is not seen as a commodity, meaning that profit on money alone cannot be generated however profit can only be generated when money is used to purchase something of intrinsic value.
The first of many significant differences is that Islamic Finance is based on Divine Law whilst Conventional Finance is based on man-made laws.
Secondly, within Conventional Financing we notice that the lender does not bear any risk, all the risk is on the consumer, however in Islamic Financing, the financial institute does not borrow or lend funds but rather it assumes the role of a business entity or partnership until the consumer buys back his shares of the business from the financial institute. In this scenario the financial institute shares the risk with the partner (consumer).
Thirdly, both conventional and Islamic financial institutions offer financing for a reward, however the difference is that IFS charge a fixed profit percentage whereas CFS offer loans bearing fluctuating interest rates.
Lastly, IFS only agree to finance businesses whose activities are in conformance with the Shariah whilst CFS issue financing to businesses in all sectors, regardless of the activities.
In conclusion, the above mentioned are just a few differences between Islamic Financial Systems and Conventional Financial Systems. There are many other differences which we can find, for example we notice that IFS encourage for money being used to create social value. Hence it is necessary for us to get a complete and proper understanding of how IFS are better than CFS, not only for Muslims but for humanity at large. CFS may provide what looks to be a “sweet deal” however the long term effects of such a financing strategy can be harmful to community whilst on the other hand IFS looks out for the welfare of the community.
May Allah accept our efforts from us and grant us understanding In Sha Allah!
