Convenient Capital is also Sharia and Islamic Finance platform; we respect these principles and laws.
Islamic finance refers to how businesses and individuals raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible under this form of law. Islamic finance can be seen as a unique form of socially responsible investment. This sub-branch of finance is a burgeoning field. We offer an overview to provide elementary information and serve as the basis for further study.
The Big Picture of Islamic Banking
Although Islamic finance began in the seventh century, it has been formalized gradually since the late 1960s. This process was driven by the tremendous oil wealth that fueled renewed interest in and demand for Sharia-compliant products and practice.
The early Islamic caliphates had better-developed market economies than the nations of Western Europe during the Middle Ages.
The concept of risk sharing is central to Islamic banking and finance. It is essential to understand the role of risk-sharing in raising capital. At the same time, Islamic finance demands the avoidance of riba (usury) and gharar (ambiguity or deception). Islamic law views lending with interest payments as a relationship that favours the lender, who charges interest at the borrower’s expense. Islamic law considers money as a measuring tool for value and not an asset in itself. Therefore, it requires that one should not be able to receive income from money alone. Interest is deemed riba, and such practice is proscribed under Islamic law. It is haram, which means prohibited, as it is considered usurious and exploitative. By contrast, Islamic banking exists to further the socio-economic goals of an Islamic community.
Accordingly, Sharia-compliant finance (halal, which means permitted) consists of banking in which the financial institution shares in the profit and loss of the enterprise it underwrites. Of equal importance is the concept of gharar. In a financial context, gharar refers to the ambiguity and deception that come from the sale of items whose existence is uncertain. Examples of gharar would be forms of insurance. That could include the purchase of premiums to insure against something that may or may not occur. Derivatives used to hedge against possible outcomes are another type of gharar.
The equity financing of companies is permissible, as long as those companies are not engaged in restricted businesses. Prohibited activities include producing alcohol, gambling, and making pornography.
Barry R Rogers
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