Question

Answer the question below Please in 150 - 200 words atleast

1. Explain the Principles of Islamic Financial system

Answer 1

Islamic Finance

Islamic finance is based on Sharia(Islamic law). Islamic finance banking or Sharia complaint finance is banking or financing activity that complies with Sharia (Islamic law) and its practical application through the development of Islamic economies.

To ensure that all Islamic finance products and service offered follow principles of Sharia Rules, there is a board called Shari board. It overseas and reviews all new product offered by financial institutions.

In Islamic finance, money is considered as medium of exchange, store of value or unit of measurement only, hence Riba is considered Haram i.e. unfair reward to the provider of capital for little or no effort or risk undertaken. Riba is equated with wrongful appropriation of property belonging to others and hence Muslims are asked to accept principal only and forego principal even, if borrower is unable to repay the same.

The principles of Islamic finance are as follows:

• Islamic finance promotes just, fair and balanced society.
• It is structures on ethical and moral framework of Sharia. Verses from the holy Quran and tradition from Assunnah are two divine guidance.
• The financial transactions should be free from the element of uncertainty (Gharar) and gambling (Maisir).
• Islamic finance must not be involved in any transactions not allowed as per Islamic principles such as alcohol, armaments, pork and other socially detrimental products.

Mudaraba, Musharaka, Sukuk, Ijara, Murabaha, Istisna and Salam are the Islamic financial instruments. Since, interest is not allowed in Islamic finance, depositors are rewarded by a share in the profit from the underlying business after deduction of management fees in which the funds of depositors have been channeled. Thus, it can be said that money has no intrinsic value i.e. time value of money.