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KembaraXtra – Islamic Capital Market-What Does Islamic Finance Offer?
1. Role of Islamic Finance in Economic Development
- In many economies, micro, small and medium enterprises (MSMEs) are often neglected.
- MSMEs face difficulties such as:
- limited access to financing
- high borrowing costs
- lack of collateral
- Islamic finance prioritises the private sector, especially MSMEs.
- The objective is inclusive and sustainable economic development, not wealth concentration.
- Any development initiative in Islamic finance must be built on:
- Prosperity – wealth creation through real economic activity
- Equality – fairness between financiers and entrepreneurs
- Partnership – shared risk and shared reward
- These principles govern:
- financing structures
- profit distribution
- contractual relationships
- Islamic finance rejects the lender–borrower relationship.
- Instead, it promotes:
- partnership (e.g. Mudarabah, Musharakah)
- transparency
- mutual responsibility
- The bank and entrepreneur:
- share business risk
- share profits according to agreement
- bear losses according to capital contribution
4. Importance of MSMEs in Emerging Markets
- MSMEs contribute to:
- job creation
- income generation
- economic growth
- social stability
- private sector development
- Growth of MSMEs leads to:
- reduced poverty
- broader wealth distribution
- reduced dependence on government spending
- Islamic finance supports MSMEs because:
- they create real economic value
- they align with Maqasid al-Shari’ah
Islamic finance offers modern banking services structured in a Shari’ah-compliant manner, including:
- current accounts (Wadiah / Qard Hasan)
- payment services
- debit and credit cards (structured without interest)
- internet and mobile banking
- trade finance facilities
- business financing for MSMEs
6. Shari’ah Rules Governing Exchange of Countervalues
6.1 Currency for Currency Exchange
A. Same Currency Exchange
Examples:
- riyal for riyal
- dollar for dollar
- exchange must be spot (immediate)
- amounts must be equal
- ✔ 1,000 riyal exchanged immediately for 1,000 riyal
- ✘ 1,000 riyal exchanged for 1,200 riyal
- ✘ 1,000 riyal exchanged today for 1,000 riyal next month
B. Different Currency Exchange
Examples:
- riyal for dinar
- dollar for pound
- exchange must be spot
- amounts do not need to be equal
- exchange rate must be market-based
- ✔ 1,000 USD exchanged immediately for 4,700 MYR
- ✘ 1,000 USD exchanged today for MYR next month
A. Same Food Items
Example:
- barley for barley
Requirements:
- spot exchange
- equal quantity
Example:
- ✔ 10 kg barley for 10 kg barley (immediate)
- ✘ 10 kg barley for 12 kg barley
- ✘ deferred delivery
Example:
- barley for wheat
- spot exchange
- quantity can differ
- ✔ 10 kg barley exchanged immediately for 15 kg wheat
Riba is strictly prohibited because it:
- creates unjust enrichment
- transfers risk to one party only
- disconnects money from real economic activity
8.1 Riba Type 1 – Riba al-Fadl (Excess in Exchange)
Occurs when:
- same Riba-based items
- exchanged in unequal amounts
- ✘ 1,000 riyal for 1,200 riyal (same currency)
- ✘ 10 grams gold for 12 grams gold
- extra amount is unearned gain
Occurs when:
- exchange is deferred
- whether amounts are equal or not
Examples:
- ✘ 1,000 riyal today for 1,000 riyal next month
- ✘ 1,000 riyal today for 1,000 dirham next month
- delay creates interest-like benefit
8.3 Combined Riba (Most Severe Form)
Occurs when:
- unequal amounts
- deferred delivery
- ✘ 1,000 riyal exchanged for 1,200 riyal after 6 months
- Riba al-Fadl
- Riba al-Nasi’ah
9. Why Riba is Prohibited
- Money should not generate money by itself
- Profit must arise from:
- trade
- investment
- risk-sharing
- Riba:
- exploits the needy
- guarantees profit without effort
- destabilises economies
- Islamic finance:
- supports MSMEs
- promotes justice and partnership
- prohibits unjust exchange
- links finance to real economic activity
- The strict regulation of exchange and prohibition of Riba ensures:
- fairness
- stability
- ethical financE
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