The term “Sharia finance” may be a daunting one for certain groups of people. After all, with all the talk about finances and its many branches in this burgeoning field, it may be confusing to a layperson. The fact of the matter is, Islamic finance refers to how businesses and individuals raise capital in accordance with Shariah, or Islamic law.
With that being said, a common misconception is that Islamic finance is limited to Muslims. The fact of the matter is, Islamic finance is open to anyone. However, all of Islamic Finance is under Shariah law.
There are several advantages that Islamic finance offers and, in this article, we will go through the top 10 advantages in choosing Shariah finance.
1. Assisting financial inclusion
According to the World Bank, financial inclusion is defined as individuals and businesses having access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.
When using conventional banking systems, you will realize that the system is based on interest payments on rates as set on deposits on money. On the other hand, under Shariah law, payments and receiving interest is prohibited. This causes Muslims to abstain from banking. However, financial inclusion can still be promoted which brings a larger pool of savings in the local and global economy.
2. Reduce impact of harmful products and practices
Any transactions that support industries or activities which are forbidden in Islam such as gambling, usury (riba) and speculation (maisir) cannot be carried out as Shariah law forbids it. Islamic banking therefore only supports businesses that adhere to ethical and moral standards when it comes to investments.
3. Shariah compliant products
The demand for shariah compliant products continues to rise alongside a growing Muslim population. The Muslim population is growing twice as fast the world’s non-Muslim population and Islamic finance address this group’s need and natural inclination to prefer Shairah compliant financial products.
4. Principle of financial justice
Under Shariah law, financial justice is a requirement that helps Islamic finance products function. The conventional banking system looks at making a profit via interest payments and borrowers or beneficiaries are liable for any risk. In Islamic finance, the sharing of profit and loss as well as risk involved is shared in a proportional manner between the lender and beneficiary.
For example, if a financier is expecting a claim on profits of a project, it is also necessary that the same financier be liable for a proportional share of the loss of that project if the project goes south.
5. Global indexing
Conventional banks is able to track Islamic financing via international rating systems. By referring to benchmarks that track the financial industry, conventional financiers can easily assess the strengths, weaknesses and risk of bonds when purchasing Islamic bonds (sukuk).
6. Encouraging stability in investments
Investments in Islamic finance, is approached with a slower and more insightful decision making process as compared to conventional finance. It is normal for companies whose financial practices and operations that are higher in risk be kept away by Islamic financiers. Due to the constant promotion of the reduction of risk, intensive audits and analysis are constantly carried out. This, in turn, reduces risk and creates the space for greater investment stability.
5. Accelerate economic development
Islamic finance most certainly continues to have profit creation and growth as objectives. However, they choose to invest in businesses based on their potential for growth and success instead. Thus, each bank will invest in promising business ventures and attempt to out-perform its competitors in order to attract more funds from its depositors. Eventually, this results in a high return on investments for both the bank and depositors. At conventional banks, this is highly unlikely as depositors redeem returns on their deposits based on a pre-determined interest rate.
Although Shariah law when it comes to Islamic finance comes with its own set of complex rules, it is far simpler to understand as compared to conventional banking. Islamic financial institutions have scholars available who offer consumers guidance with every venture and proceeding to ensure that every single transaction is carried out in accordance to Shariah law. Islamic financing is stricter when it comes to contracts.
9. Attracts non-Muslim investors
Although currently still uncommon, non-Muslims are beginning to see the potential for profit in Islamic banking. As a rule, Islamic financial products carry lower risk investment whilst enabling them to earn a profit. This also diversifies their portfolio in order to further reduce their financial risk.
10. Oil wealthy GCC adopting Shariah financing
The Gulf Cooperation Council (GCC) is a political and economic union of Arab states bordering the Gulf. Countries belonging to the GCC such as Saudi Arabia, Qatar, Oman ad so on mainly want Shariah compliant products for investment. As other economies struggle, GCC nations are well-funded and their needs are well met by Islamic banks.
In conclusion, there are several reasons for choosing Shariah financing as we have discussed above. Whether you are Muslim or not, it is impertinent you consider Shariah financing as part of your financial portfolio.