The terms Islamic Finance and Conventional Finance are often used interchangeably. However, they are not the same. While both finance systems share similarities, there are significant differences between them.
Islamic finance has been gaining popularity in recent years due to the financial crisis. On the other hand, the conventional finance world was shaken up by the subprime mortgage crisis, which caused many investors to lose their money and trust in Wall Street. This is where Islamic Finance comes in, with its emphasis on fair trade and social responsibility. It doesn’t allow for financial practices like interest or speculation that align with the Koran’s teachings about acceptable business practices.
What is Islamic Finance?
Islamic finance refers to the application of Islamic law (shari’a) to banking and financing. It is similar to conventional finance in many respects but has some different underlying principles. The basic principle behind Islamic finance is that it should be based on risk-sharing and partnership, not speculation.
Moreover, Islamic finance is a subset of Islamic economics that describes the compatibility and overlap between Sharia (Islamic law) and conventional banking and financial principles and practices.
„It has been described as „a holistic economic system which is both ethical and legal in nature.“ — The Economist.
To be more concise, Islamic finance is a way of doing finance by Islamic law. It has been developing in recent decades, and its principles have started to influence non-Muslim financial sectors, both formally and informally, through the ethical investment movement.
What are some of the goals of Islamic Finance?
Islamic financing is an alternative to conventional financing that complies with the principles of Islamic law. Islamic finance often uses profit-sharing models because Islamic law prohibits usury or the charging of interest on loans.
There are several goals behind the rise in popularity of Islamic finance. Some Muslims believe that using this type of financial service helps them remain more devout by limiting their exposure to interest-based financial products. Others see it as a way to get fair returns on their money without paying excessive fees.
Other than that, Islamic finance is regarded as a way to achieve economic stability; the idea is that the financial system should work so that it reflects and promotes an ethical framework of Islam.
It has been growing in the global market and has become a competitive alternative to conventional finance. Islamic finance is based on Islamic law or Sharia, which prohibits any interest-based transactions, this means the financial system of an Islamic economy must be interest-free.
The main goal of Islamic finance is to create value for the company’s shareholders, and it aims to do this by building solid and sustainable businesses that are interested in growing with the industry. The principles outlined in the Quran are used as guidance for all financial transactions.
What do we know about Conventional Finance?
Conventional finance is not really a single financial theory but more of an umbrella term for the various ideas taught in traditional schools. The conventional approach uses formulas based on economic principles to help investors decide what to do with their money or assets. Conventional finance theorists focus on maximizing value through investments.
Conventional finance is the financial system we know and use today, and it’s made up of banks, investment firms, and other financial institutions that provide loans and lines of credit to both individuals and businesses. Conventional finance has existed for decades, but it wasn’t until the 1980s that it began to be referred to as „conventional.“
How does Conventional Finance differ from Islamic Finance?
Financial markets are based on the desire of investors to make money. On the other hand, Islamic finance is based upon the principles of not only making money but also doing good.
Islamic banking and conventional finance have many similarities in terms of their products and services. However, there are some significant differences between them concerning their underlying philosophies, objectives, and methods of operation. The most crucial difference between Islamic banking and conventional finance is that Islamic financial transactions are governed by Shariah laws that abide by equity (justice) principles, where God has given everyone an equal opportunity to use what they have.
It’s not just a matter of avoiding interest or banning people from trading in pork products. The investment industry has been built from the ground up with Islamic law in mind. One example is the prohibition of investing in companies that make alcohol, pornography, and other haram goods, which is why you won’t see any Islamic mutual funds invested in tobacco stocks.
Is there a Future for Islamic Finance in the West?
Since the economic crisis, non-performing loans have become an issue for many western banks. The debt crisis has led to the most extensive banking boom in history. Many economists predict that this crisis will last significantly longer than other boom and bust cycles throughout history.
Islamic finance offers Western countries an alternative to their failed financial systems. Islamic finance is based on Islamic beliefs, shared by 1.6 billion people worldwide, including 10% of all Americans. This makes it a huge market opportunity for companies to diversify their product line and grow their client base.
To wrap it up!
At the end of the day, it all boils down to how Islamic finance can be a better alternative for you. It provides many advantages over conventional forms of financing, and in some situations, can be more beneficial than using a standard bank account. As a result, we encourage you to look into this kind of financing in more detail before making your decision. And if you decide to make an investment, then Caizcoin is the perfect Islam Complaint cryptocurrency for you to invest in.
A: The only difference between Islamic and conventional finance is that Islamic finance follows the Sharia law strictly and some principles of traditional finance go against the Sharia.
A: Although there are some notable differences in Islamic and Conventional finance, conventional loans are deemed clean and halal by various Muslim scholars.
A: Islamic finance protects its consumers as it prohibits any uncertain transactions and is strictly against riba.