Beyond Interest Avoidance: Understanding the Principles and Values of Islamic Finance!
It is a misconception to believe that Islamic finance is solely based on this avoidance of interest. Instead, it is based on the principles of fairness, equity, and mutual benefit, and seeks to create financial products that are in line with these principles.
In Islamic finance, the charging of interest is prohibited because it is seen as exploitative and unjust, as it allows the lender to make a profit simply by lending money, without bearing any risk. This is considered to be a violation of the principle of risk-sharing, which is at the core of Islamic finance.
To overcome this limitation, Islamic finance utilizes a range of alternative financing structures, such as profit and loss sharing (PLS) arrangements, where the lender and borrower share the risks and rewards of a business venture. Other common structures include Mudharabah (profit-sharing), Wakalah (agency), and Ijara (leasing).
Islamic finance also places a strong emphasis on ethical and socially responsible investments and prohibits investments in businesses that are considered harmful to society, such as those involved in gambling, alcohol, tobacco, and arms production.
While the avoidance of interest-based transactions is a central aspect of Islamic finance, it is not the only defining characteristic. Instead, Islamic finance seeks to create financial products that are fair, equitable, and socially responsible, and that align with the principles of Islamic law.
