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The concept behind Islamic banking and finance
The phrase "Islamic finance" refers to any form of economic transaction that does not run against to the tenets of the Shariah law system. Conventional finance, and especially conventional banking activity, is predicated on soliciting deposits from the general public and extending credit to that same group. Because of this, the relationship between a banker and a consumer is always one of a debtor and a creditor. The payment and receipt of interest is a fundamental component of traditional banking, despite the fact that Shariah expressly forbids both of these activities. For instance, the fixed deposit product offered by traditional banks is predicated on the borrower, which in this case is the bank, making a commitment to the lender, who is the depositor, to repay the loan together with a certain interest rate. A system that is based on interest essentially functions on the principle that money deposited will result in additional money; this is the fundamental framework of such a system.
Conventional products and services, such as insurance and capital markets, could be based on aspects that are forbidden by Shariah principles. For example, uncertainty (Gharar) in insurance, and interest arising in conventional bonds or securities, are two examples of these types of aspects. When it comes to insurance, the protection that is offered by the insurer in exchange for a premium is always subject to uncertainty, both in terms of how much it will cost and when it will actually take place. The principle amount of the bond as well as any accrued interest is typically repaid to the bondholder by a traditional bond.
Conventional practices may also involve the purchase or sale of items and services that, from a Shari'ah point of view, are not permitted. Foods that are not considered halal, such as pork, animals that are not slaughtered or animals that are not slaughtered in accordance with Islamic standards, alcohol, and services related to gambling, pornography, and entertainment may also fall into this category. In a nutshell, conventional business practices may not be compliant with Shari'ah law if their contractual structures are based on interest and uncertainty, and/or if they are involved in the production, sale, or distribution of goods and services that violate the Shari'ah's legal precepts in some way.
The phrase "Islamic finance" refers to any form of economic transaction that does not run against to the tenets of the Shariah law system. Conventional finance, and especially conventional banking activity, is predicated on soliciting deposits from the general public and extending credit to that same group. Because of this, the relationship between a banker and a consumer is always one of a debtor and a creditor. The payment and receipt of interest is a fundamental component of traditional banking, despite the fact that Shariah expressly forbids both of these activities. For instance, the fixed deposit product offered by traditional banks is predicated on the borrower, which in this case is the bank, making a commitment to the lender, who is the depositor, to repay the loan together with a certain interest rate. A system that is based on interest essentially functions on the principle that money deposited will result in additional money; this is the fundamental framework of such a system.
Conventional products and services, such as insurance and capital markets, could be based on aspects that are forbidden by Shariah principles. For example, uncertainty (Gharar) in insurance, and interest arising in conventional bonds or securities, are two examples of these types of aspects. When it comes to insurance, the protection that is offered by the insurer in exchange for a premium is always subject to uncertainty, both in terms of how much it will cost and when it will actually take place. The principle amount of the bond as well as any accrued interest is typically repaid to the bondholder by a traditional bond.
Conventional practices may also involve the purchase or sale of items and services that, from a Shari'ah point of view, are not permitted. Foods that are not considered halal, such as pork, animals that are not slaughtered or animals that are not slaughtered in accordance with Islamic standards, alcohol, and services related to gambling, pornography, and entertainment may also fall into this category. In a nutshell, conventional business practices may not be compliant with Shari'ah law if their contractual structures are based on interest and uncertainty, and/or if they are involved in the production, sale, or distribution of goods and services that violate the Shari'ah's legal precepts in some way.
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