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KembaraXtra-Islamix Finance-Islamic Finance vs. Conventional Finance
Core Principles
Core Principles
- Prohibition of Interest (Riba):
- A fundamental difference. Money cannot generate income simply by being lent.
- Islamic banks cannot rely on interest earned on loans.
- Profit must be generated through real economic activity, such as trade, lease, or investment. This involves converting money into a tangible asset before engaging in contracts like sale or lease.
- Avoidance of Uncertainty (Gharar):
- Prohibition of Gambling (Maisir):
- Activities considered "zero-sum games" are forbidden.
- Ethical Investments:
- Investments in unlawful activities (e.g., alcohol, weapons, gambling) are prohibited.
- No Capital Guarantees in Equity-Based Products:
- Distinct Contractual and Transactional Features:
- Focus on Asset-Backed Financing: Islamic finance emphasizes linking financing to real assets and economic activities.
- Profit Generation through Trade/Investment: Instead of interest, profit is generated through legitimate business activities.
- Example: Credit Sale (Murabaha):
- A customer (Z) needs equipment.
- An Islamic bank purchases the equipment from a vendor at a certain price (e.g., €100,000).
- The bank then sells the equipment to Z at a higher price (e.g., €100,000 + a 4% profit margin per annum), with payment deferred.
- Z doesn't pay interest, but the bank earns a profit on the sale transaction.
- Ethical Considerations: Aligns with Islamic principles and values.
- Real Economic Activity: Focuses on financing productive assets and businesses.
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