Islamic finance refers to how businesses and individuals raise capital in accordance with Shariah, or Islamic law. It also refers to the types of investments that are permissible under this form of law. While the term Islamic finance may conjure up notions of exorbitant interest rates or shirking of taxes and other required payments, many misconceptions exist regarding its practices and rules. Here is an overview to provide elementary information and serve as the basis for further study.
Origins of Islamic Finance
The earliest origins of commercial transactions date back to the time of the Prophet Muhammad in the 7th century. Trade was conducted through barter, or the exchange of goods and services until the concept of currency developed. The first Muslim currency was introduced in AH 77 (696–697 CE), after the Prophet’s death, and was called the dinar. It was made of gold and silver and was equal to 4.3 grams of gold or 23 grams of silver.
According to the Quran, Allah has given humans the power to earn and own property. The act of earning money is considered a gift from God that should be used wisely and in accordance with His laws. Money should not be hoarded; rather, it should circulate for the good of society. Furthermore, money should not be used to exploit others or to gain an unfair advantage.
Islamic laws, or Sharia, were gradually codified beginning in the 8th century. While there are many interpretations of Sharia, the Quran and Sunnah (or traditions) of the Prophet Muhammad are the primary sources. The four Sunni schools of jurisprudence, Hanafi, Maliki, Shafi’i, and Hanbali, as well as the Shia school, all provide rulings on economic transactions
General Rules Of Shariah:
There are two general principles of Sharia that apply to finances and investments: the prohibition of riba, or usury, and the prohibition of gharar, or excessive uncertainty. These concepts will be discussed in more detail later. In addition, Sharia requires that all financial contracts be documented in writing
Prohibition of Riba:
Riba refers to the act of charging interest on a loan. This practice is prohibited in Islam because it is considered to be exploitative. The Quran states, “O you who have believed, do not consume riba, doubled and multiplied, but fear Allah that you may be successful” (Quran 3:130).
Prohibiting riba has led to the development of alternative financial products and services compliant with Sharia. For example, instead of charging interest on a loan, some Islamic banks charge a fee for the service of providing the loan. This fee is typically calculated as a percentage of the principal amount.
Basic Financing Arrangements:
Islamic finance has three basic financing arrangements: murabahah, ijara, and mudarabah.
1) Murabahah:
Murabahah is a type of sale where the seller discloses the cost of the goods being sold and marks up the price to be paid by the buyer. Both parties must agree upon the markup before the transaction takes place. This financing is often used to purchase homes, cars, and other durable goods.
2) Ijara:
Ijara is a form of leasing. The lessee makes periodic payments to the lessor for the use of an asset, such as a car or a piece of equipment. At the end of the lease period, the lessee has the option to purchase the asset or return it to the lessor.
3) Mudarabah:
Mudarabah is a partnership between two parties, where one party provides the capital, and the other party manages the investment. The profit is shared between the two parties according to an agreed-upon ratio, and the loss is borne by the party who provided the capital.
This type of arrangement is often used in venture capital investments.
Shariah-Compliant Investments:
A variety of Shariah-compliant investments are available, including stocks, bonds, and real estate. In order to be considered Sharia-compliant, an investment must meet certain criteria. First, the asset must be permissible under Sharia. This means that the asset cannot be used for activities that are prohibited, such as gambling or alcohol production. Second, the asset must be free of riba. This means that the investment cannot involve interest payments or other forms of financial exploitation. Finally, the asset must be free of gharar. This means there must be no excessive uncertainty or speculation involved in the investment.
Examples of Shariah-Compliant Investments:
One example of a Shariah-compliant investment is an Islamic bond or Sukuk. Sukuk are similar to conventional bonds, but they are structured to avoid the payment of interest. Instead of paying interest, Sukuk holders receive a share of the profits generated by the underlying asset. This makes Sukuk a more attractive investment for those who wish to avoid riba.
Another example of a Shariah-compliant investment is an Islamic mutual fund. These funds invest in a variety of different assets, including stocks, bonds, and real estate. Islamic mutual funds are subject to the same criteria as other Sharia-compliant investments, such as the avoidance of riba and gharar.
Many other Shariah-compliant investment products are available, including Islamic ETFs, indexes, and REITs.
Shariah-compliant Banking:
Shariah-compliant banking is a type of banking that adheres to the principles of Islamic law. This includes the prohibition of riba and the promotion of socially responsible investments. Shariah-compliant banks offer a wide range of products and services, including savings accounts, checking accounts, and investment products.
The Global Islamic Banking Industry
The global Islamic banking industry is currently estimated to be worth $2 trillion. This figure is expected to grow to $3.4 trillion by 2023. The industry is concentrated in the Middle East and Southeast Asia, but there are a growing number of Islamic banks in Europe and a trillion by 2023.
Shariah-compliant Banking in the United States:
There are a number of Islamic banks in the United States, including the American Muslim Bank and the First Islamic Investment Bank. These banks offer a wide range of products and services, including savings accounts, checking accounts, and investment products.
The Future of Shariah-compliant Banking:
The future of Shariah-compliant banking is expected to be strong. The industry is projected to grow at a rate of 10-15% per year over the next decade. This growth will be driven by the increasing demand for Islamic financial products and services, as well as the expansion of Islamic banking into new markets.
Conclusion
Islamic finance is a growing industry, and it’s important to understand the basics of Sharia-compliant investments. We’ve provided an overview of Islamic investment principles and some examples of how you can get started in this exciting field. Contact us today if you want more information or are ready to take the plunge into Islamic finance. We would be happy to help you get started on your journey to success in this rapidly expanding market.
About Limra Assets
Limra Assets is a Shariah-compliant financing solutions financier that provides loans for property financing, SME businesses loans and gold investment. We offer a range of financing options to help individuals and businesses, including alternative financing for businesses that are unable to obtain funds. Our goal is to provide access to funds for investments in a Shariah-compliant manner that focuses on transparency, customer service, and competitive rates, Limra Assets can be a valuable partner in your gold investment journey.
If you’re interested in learning more about Limra Assets and our Shariah-compliant financing solutions for property purchases, gold purchases or business loans, please contact us for more information.
Disclaimer:
It is important to note that taking out a loans for any purchases and gold investment, whether through Limra Assets or any other lender, carries risks and should be approached with caution. It is important to carefully consider your financial situation and investment goals before taking out a loans, and to ensure that you fully understand the terms and conditions. Additionally, investing in gold carries its own risks and should be done with the guidance of a financial professional. This information and all external links are provided for educational purposes only and should not be considered financial advice.