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KembaraXtra- Islamic Finance - Islamic Capital Market -Banking and Riba (Interest)
- Among all components of Islamic finance, Islamic banking has experienced the most significant growth, largely due to its unique operational philosophy, which fundamentally differs from and cannot be replicated by the conventional banking system.
- The conventional banking system is based on the assumption that money has the ability to generate more money by itself, which forms the core rationale for charging interest on loans and deposits.
- In conventional finance, interest or usury is treated as a legitimate premium earned on money, allowing financial institutions to profit merely from the passage of time rather than from real economic activity.
- This practice of earning income through interest is known in Islamic terminology as Riba, and it is regarded as completely incompatible with Islamic financial principles.
- Riba is considered the direct opposite (antithesis) of Islamic finance, as the Islamic financial system has explicitly prohibited any form of interest since its very inception.
- Islamic finance rejects the idea that money itself can be treated as a productive asset or commodity, meaning money is not viewed as something that should generate profit independently.
- Placing a price on money, such as charging interest for its use, is not acceptable under Islamic financial dealings, as it contradicts the ethical foundations of Shari’ah.
- In Islam, money is assigned a strictly functional role rather than an intrinsic productive value.
- Money in Islamic finance serves three primary purposes:
- As a medium of exchange to facilitate trade and economic transactions
- As a store of value to preserve wealth
- As a unit of measurement to price goods and services
- Since money cannot generate profit on its own, Islamic finance focuses on creating a legitimate and ethical link between money and profit, ensuring that returns arise only from real economic activity.
- The Islamic financial system aims to design pathways that connect capital with productive ventures, such as trade, investment, and asset-backed financing, rather than interest-based lending.
- While Islam does not prohibit profit-making, it strictly prohibits using money as a justification for charging interest, emphasizing that profit must be earned through risk-sharing and participation in economic activity.
- The foundational objective of Islamic banking is therefore not to eliminate profit, but to ensure that profit generation is tied to Shari’ah-compliant activities involving assets, trade, or shared business risk.
- This distinctive approach explains both the ethical orientation of Islamic banking and its increasing global appeal, as it offers an alternative financial system grounded in fairness, transparency, and real economic contribution.
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