Working with Islamic Finance means understanding its belief system. Islamic Finance is a lot different than Traditional Finance, so while the rules of Traditional Finance may be known to everyone, Islamic Finance rules and beliefs are different and don’t comply with the popular understanding of economics and what constitutes a good financial decision. There are even separate financial institutions that act only according to Islamic Finance rules and beliefs.
Here are some of the most important things to keep in mind when working with Islamic Finance that will help you understand and manage your economic decisions better.
One of the most important concepts you need to understand when dealing with Islamic Finance is Risk Sharing. This is extremely important for Islamic banking. According to Islamic finance,
the traditional dynamic between a lender and the borrower is unfair and unacceptable. In Islamic Finance the risks should be shared equally between the two parties, without exposing the borrower to additional risks and problems in the future. But it is not just about avoiding risks when you are looking for financial support. The approach is the same with profits. While the ratio should be decided in advance, the two parties should also be able to share profits when they decide to make a financial decision together.
Another important concept is Gharar – referring to the ambiguity of deception. In this case, Gharar is the risk of deception, coming from the financial transactions and decisions tied to non-tangible items. One of the examples of a non-tangible sales item is insurance since it means paying money in advance for something that may never happen. Insurance in the traditional sense of the word is not allowed in Islamic law. This is one of the most distinctive features of Islamic Finance. But this does not mean that Islamic Finance is against insurance of all kinds. The acceptable form of insurance is a cooperative one. This falls in line with the risk-sharing mentioned before. In this case, one side does not lose if the alleged risk never actually becomes a reality.
When it comes to investments, the approach is also different. Here the companies that you invest in have to share similar beliefs and act in line with Islamic morals. Companies should not engage in forbidden activities if they want to get investments from those who follow Islamic Finance beliefs and rules. The possible consequences of investing in the company are taken into consideration and affect the decision-making process.
Islamic Finance has many traits that make it stand out against the traditional understanding of Finance and business decisions. This belief system integrates personal morals into the equation and supports decisions that are made in line with Religion, instead of ignoring it and focusing on profits exclusively. Islamic Finance believes in sharing the risks that come with all big financial decisions and spendings and instead focuses on deals that distribute possible risks among the two parties involved in negotiations.