Islamic finance offers an alternative approach to banking and investing from "summary" of How Finance Works by Mihir Desai
Islamic finance offers a unique perspective on banking and investing, rooted in the principles of Islamic law, or Sharia. This alternative approach places an emphasis on ethical and socially responsible investing, as well as risk-sharing between investors and borrowers. Unlike traditional banking systems that rely on interest-based transactions, Islamic finance prohibits the charging or receiving of interest, known as riba. One of the key principles of Islamic finance is the concept of profit-sharing, which is based on the idea that both parties should share in the risks and rewards of an investment. This principle is reflected in the practice of Mudarabah, where one party provides the capital while the other provides the expertise to manage the investment. Profits are shared based on an agreed-upon ratio, while losses are borne solely by the capital provider. Another important concept in Islamic finance is the prohibition of investments in businesses that are considered unethical or harmful, such as those involved in alcohol, gambling, or pornography. This ethical screening process, known as Sharia-compliance, ensures that investments are made in accordance with Islamic principles and values. Furthermore, Islamic finance promotes transparency and accountability in financial transactions, as well as the concept of asset-backed financing. This means that investments must be backed by tangible assets, such as real estate or commodities, to ensure that they have intrinsic value and are not based on speculative or uncertain ventures.- Islamic finance offers a holistic approach to banking and investing that is rooted in ethical principles and values. By promoting risk-sharing, profit-sharing, ethical investing, and transparency, Islamic finance provides an alternative model that aligns with the beliefs and values of Muslim investors.
