Who is Islamic finance for?
Contrary to popular belief, Islamic finance or banking is not just for Muslims but for a ethical & fair financial structure that consequently affects the socio-economic system of a country. Islamic financing hence can aptly service everyone irrespective of religious beliefs, wealth status, ethnicity, caste or creed.
Yet, this stance is not even as clear as it should be in a Muslim country like ours much less to the outside world where century old conventional financing methods are deep rooted within the global economic system.
One of the reasons for this lack of awareness is that the concept of Islamic banking is its fairly recent commercialization. Banks and asset management companies in Pakistan are still struggling on how to portray their Islamic product better for the general population’s understanding in minimal ad spaces & an obvious gap between the Shariah Councils issuing the Fatwas and the managers drafting the communication.
A recent survey published in a popular monthly magazine stated that most of the respondents did not know what difference was there between the two and most thought there wasn’t any & ‘Islamic Funds’ was a marketing gimmick.
But a bigger issue that I experiences personally is the lack of awareness even at the financial advisors level. A question I recently asked a Finance Expert while deciding upon the funds in which I could make some investments was “What’s the difference between conventional funds and Islamic funds?” and disappointingly he said “Nothing”.
For a person who did their background research on the differences and is keen on not having any interest income enter their household, this Expert just lost a customer.
So what’s the difference between Islamic finance and conventional finance?’
An instant answer is “Islamic products don’t give Interest (Riba)” which is without a doubt true, but that is where the knowledge for most ends.
Where Riba/Interest is deemed haram in Islam, the reason behind it is its exploitive nature. Why exploitative? Because where the lender will have the return of his money guaranteed plus the extra, the borrower will have to work harder to return not just the principal amount borrowed but also the interest / mark-up levied.
And where does the rising level of interest ultimately stop? No where; because it’s a man made rule which treats money as a trading entity while money is the most volatile entity in fluctuating markets.
Then how does Islamic Finance work?
“The conventional / capitalist concept of financing is that the banks and financial institutions deal in money and monetary papers only” – Mufti Taqi Usmani.
Islamic Financing is asset-backed & believes that only assets with an intrinsic value maybe sold for a profit instead of exchanging money with no intrinsic value for Interest. Each unit of money has the same value as the other of the same denomination, which is simply why there can not be a profit on its exchange. Hence Islamic finance lays its foundation on real non-liquid assets, the exchange and sales of which results in a justified profit earned.
The Pakistani financial industry today offers various Islamic products, both in wealth management, asset management and banking; spread over short, medium and long term funds. All investments in such schemes are made strictly in Shariah-compliant instruments under the supervision of a Shariah Advisory Board which comprises of renowned Islamic scholars.