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KembaraXtra- Islamic Banking - Introduction- Islamic Financial Institutions (IFIs)
The emergence of modern Islamic financial institutions dates back to the 1940s, when scholars and practitioners identified the need for Islamic economics to offer alternative solutions to economic and financial challenges distinct from those of Western financial systems. Islamic economics is rooted in an Islamic worldview that recognizes religious principles as integral to economic, commercial, and financial activities.
According to Islamic teachings, human beings are endowed with intellect, free will, and divine guidance, enabling them to distinguish between right and wrong in their worldly actions. Muslims believe that these actions are ultimately assessed according to Shari’ah, which serves as the criterion for attaining God’s pleasure in the Hereafter.
In Islam, human beings are regarded as servants of God Almighty and are required to conduct all aspects of life, including economic and financial pursuits, as acts of worship. This entails complete submission to God Almighty and adherence to Shari’ah, as revealed in the Qur’an and exemplified through the practices of the Prophet Muhammad, as recorded in his traditions.
The foundations of Islamic financial law and guidance are derived from two primary sources: the Qur’an and the traditions of the Prophet Muhammad. Based on these sources, certain elements commonly found in financial activities are strictly prohibited. These include usury (interest) and financial involvement in unlawful activities such as the production and trade of pork, intoxicants, and gambling. The prohibition extends across the entire economic chain, encompassing production, storage, transportation, marketing, and advertising.
Considerable effort has been made by Muslims to address the challenges posed by interest-based and other non-compliant economic transactions. Consequently, Islamic financial institutions have developed specialized processes, contractual frameworks, and operational systems to ensure that all financial activities comply with Shari’ah principles. Several of these mechanisms are examined in this module.
Key Points
- All economic and financial activities must adhere to religious injunctions prescribed by Shari’ah.
- The legal framework and guiding principles of Islamic finance are derived primarily from the Qur’an and the traditions of the Prophet Muhammad.
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