Notwithstanding advantages offered by Islamic finance versus conventional finance, the rate of adoption globally remains limited. Islamic-based financial assets represents just 1% of total financial assets despite Muslims comprising over a quarter of the global population. Based on these statistics, the potential for growth in Islamic finance is huge. As the benefits of Islamic finance becomes widely understood, we expect the industry to rapidly grow over time.
What is Islamic finance?
Islamic finance is a subset of the Islamic (Sharia) law. It is by no means limited to Muslims only. The focus is on applying universally accepted values and ethics, such as fairness, into finance for the betterment of society.
With this mention, Islamic Finance is based on four cores principles – the prohibition of usury (interest), avoiding gambling, avoiding uncertainty, and being ethical. More info on each of these values are shared below.
Additionally, Islamic finance aims to contribute directly to the economic activities as Islam prohibits making money out of money without providing any degree of net benefit to the world. The hoarding of wealth is discouraged in Islam as well. It is better to donate money to a charitable cause or invest underutilized funds to productive activities that benefit society.
Advantages of Islamic investments
Based on the four core values mentioned above, we believe Islamic Finance offer the following advantages.
A holistic approach
Islamic finance offers benefits commercially and spiritually. On the commercial side, a person has the right to earn a return or profit from a financial transaction, although that needs to be done on the basis of fair and transparent exchange and risk sharing between parties. This is to ensure that the community benefits as a whole.
Helping one another by channeling your wealth into productive projects puts your money to work not only for your benefit, but for the benefit of others as well. This feel good feeling can uplift both emotional and spiritual wellbeing. And for Muslims, this is counted as a good deed which will contribute to a better life in the hereafter.
Several processes are followed in Islamic Finance to prevent excessive risk-taking. The Qur'an has strictly prohibited gambling and transactions related to chance. Additionally, we are asked to avoid uncertainty as the Qur’an states, "Eat not your property among yourselves unjustly by falsehood and deception, except it be a trade amongst you by mutual consent" (An-Nisa, 4:29). Therefore, transparency is a very important role in a financial transaction.
The use of asset-based and profit sharing transactions in place of pure debt structures also reduces insolvency issues in Sharia-compliant banks and corporates. A key component in Islamic Finance is risk sharing among parties.
Islamic finance prioritizes community growth over individual gains. Muslims are encouraged to spend of their wealth to help others instead of hoarding it. This does not necessarily mean that wealth should only be donated. Helping others can be in the form of investments in businesses through asset purchase or profit-sharing transactions among others. What is important is that all parties benefit from the transaction and risks are shared.
This is a key reason why interest or usury is prohibited in Islam. The charging of interests leads to economic injustice as one party is assured of gains regardless of the situation or outcome of the business venture. A legal maxim in Islamic jurisprudence which outlines the risk-reward relationship is al-ghorm bil ghonm or no rewards without risk.
Finally, the Islamic investments must also be legally practicable and abide with laws and regulations of the country where the transaction takes place, as long as they are not in direct conflict with the Islamic law.
Islamic ethics prescribe Muslims to zealously guard their behavior, words, thoughts, and intentions and observe certain norms and moral codes in their business transaction and any human relationship. Islam disallows investments in prohibited industries, which may be harmful to the community including tobacco, gambling, and adult entertainment. Additionally, financial or business transactions should not harm the environment as doing so will ultimately harm human life too. .
In the words of investment guru Warrant Buffet, "Someone is sitting in the shade today because someone planted a tree a long time ago."
Kapital Boost - offering goodness
As an Islamic crowdfunding platform, Kapital Boost upholds the 4 core values mentioned above, in order to reap the maximum advantages that Islamic investments have to offer. Our platform connects investors looking for attractive retail investments with SMEs looking for funding to grow their business.
Through our SME crowdfunding campaigns, we aim to grow wealth while growing communities.