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6 Common Misconceptions about Islamic Finance

Thursday, May 3, 2018

Global Islamic finance assets have grown from $2 trillion in 2016 to $2.6 trillion in 2017. Despite its growing practice, the industry is still surrounded by misconceptions about Islamic finance. This article aims to tackle the common misunderstandings so that one can truly appreciate what Islamic finance is.

1. Exclusively for Muslims

Islamic finance industry is not exclusively for Muslims but is open to everyone. Although the products and services are catered primarily to meeting Muslims’ financial needs, there are no restrictions should a non-Muslim wishes to utilize the same. Muslims believe that ethical values and principles that underpin Islamic finance are in fact good for all of mankind.

2. Islamic and conventional finance are one and the same

It is easy for one to conclude that Islamic and conventional finance displays no obvious difference when compared at a very superficial level. There are some similarities in terms of economic objectives as well as product types being offered by both Islamic and conventional banks. On top of that, both are similarly priced in order for Islamic banks to remain competitive.

However, when one looks deeper into the mechanism and contracts being used in Islamic financing products, then the differences becomes much clearer. Where interest-bearing agreements are prohibited, Islamic finances utilizes an array of contracts such as sale-based, lease-based and partnership based contracts. These enables consumers to undertake financing in a manner where there is risk-sharing and interest or riba is avoided.

Another point of obvious difference is in the underlying philosophy, which is manifested in the kind of industry or sectors which Islamic finance can operate in. Islamic finance cannot engage in industries deemed unethical such as weaponry, adult entertainment and tobacco. This is unlike the conventional finance that places no such restrictions.

Read Also : KapitalQuiz - 5 Facts about Islamic Finance

3. Spreading Islam to the world

Some may think that Islamic finance is a vehicle to spread Islamic power throughout the world. This is a misconception as Islamic finance came into being primarily to fill the gap in financing solutions available for Muslims to undertake. It strives to be an alternative to and co-existing with conventional finance, since the latter is likely to remain the dominant system in the whole industry. One is free to utilize either conventional or Islamic finance.

In addition, Islamic finance assets is still a small fraction of global financial assets, at about 1%.


4. Islamic finance funds terrorism

Terrorist acts are committed by groups of people who does not represent Islam. Additionally, Islamic finance strictly prohibits the use of funds for transactions related to crime and violence. It is against the values and principles of Islamic finance to participate in unethical activities.

5. Powered by the petroleum industry

The petrodollars may have boosted the Islamic finance industry but it’s growth today has been sustained by the increasing awareness and demand for Islamic financial products around the world. Islamic finance is also evolving with innovative financial products for new market segments, such as Islamic crowdfunding.

6. Islamic finance only focuses on charitable activities

While Islamic finance emphasizes on ethical and social impacts, it is not a charitable organization. Islamic financial institutions are profit-driven entities which aims to facilitate real and productive activities for a profit. This also ensures that they remain commercially sustainable to serve the demands and needs of the market.

(Article has been adopted from an original version written by INCEIF titled Misconceptions about Islamic Finance)

Read Also : 6 Differences between Conventional and Islamic Economic System


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