Islamic finance refers to a system of banking that complies with Islamic law also known as Shariah law. Over the years, Islamic finance has grown progressively and has spread over the world.
Moreover, Islamic banking is secular, it is open to everyone not just Muslims.
1. A fair wealth management system
Islamic finance contributes to a holistic and fair wealth management system. It places an emphasis on the need for financial transactions to be supported by genuine trade or business related activities.
Through Islamic banking, financial inclusion can be promoted and provides an active boost for economic activity and consequently, the economy.
2. High ethical standards
Islamic finance principles do not allow participation in ambiguous and uncertain transactions. The Shariah law considers an agreement with excessive uncertainty or speculation invalid.
The principles forbid any transactions that are harmful to the people and the society and that includes ambiguities and faults in the terms of the contract. It is not allowed as well as the usury and gambling.
3. Profit-and-risk-sharing partnership
In Islamic financing, both parties, investors (you) and entrepreneur (bank) have proper control over the business. They will share their profit and loss according to the part they play in the business. There will be no guarantee on the rate of the returns. The bank is not regarded as a creditor, and the customer is not a debtor.
It encourages risk-sharing in economic transactions. Both parties involved in an economic activity share the risk to reduce the burden of the risk faced by each party.
4. No interest
In Islamic banking, you do not have to worry about increasing interest rates. Islamic banks determine a profit from the very beginning. Even for floating profit rates, there is a limit that it cannot exceed. Floating interest rates have no limits.
Islamic banks also prohibit extracting of surplus value. According to Islamic principles, the practice of paying and receiving interest is unfair. Interest-based financing concentrates wealth in the hands of the few and causes recessions and inflation.
5. Encouraging stability in investments
In Islamic finance, investments are approached with a slower, insightful decision-making process when compared to conventional finance. Companies that are too risky as in the financial practices and operations are usually kept away by Islamic financing companies.
Islamic finance promotes the reduction of risk by performing intensive audits and analyses thus creates the space for greater investment stability.