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The Contemporary Islamic Finance Essay

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Updated: May 5th, 2022

Contemporary Islamic laws have various principles that administrate how they account for their finances. One is abiding by the Islamic laws, also called sharia and the second principle is prohibition of giving and receiving of interest, also called riba. Third is avoiding any risk, speculation and uncertainty, also called gharar. For instance, sharia law prohibits practices like gambling and their funding. In Islamic finance, gharar entails essential events of uncertainty in a contract such as price, while riba entails the interest charged in lent money.

In Islamic financing, both rewards and risks are shared between the two parties in a contract. However, the degree of each person’s share varies from one contract to another. An example of a financing that involves a high degree of risk and reward is venture capital, while sale of assets on credit or installment is a low degree risk and reward financing.

The reason why contemporary Islamic finance incorporates Islamic financing in its product is to comply with sharia law in investing and financing. Banking emerged because of growth in businesses. First banks came from ancient temples around the Mediterranean Sea. The business transactions were between moneylenders and priests. In these transactions, deposit formed the basis of the first currency. These banks ushered in various types of products such as loans, credit facility and many others. The availability of cross-cultural coinage opened ways for international business, which allowed global exchange of currency.

Current Islamic banking movement began in 1963 with the setting up of Mit Ghamr Islamic bank in Egypt. The bank provided loans to its customers. Since then, developments in the Islamic financing have grown. For instance, in 1960s, Islamic faith financial practices experienced a revolution when political and socioeconomic factors merged. Hence, the finance system has progressed based on the faith of Islamic teachings including wealth distribution, social and economic justice, work ethics and expected responsibilities of the state, individuals, stakeholders and the society.

The tenets of the Islamic bank are to abide by the sharia laws in interest transaction, speculations, risks and uncertainties. Furthermore, financing structures complied with the doctrine and the religious beliefs of Muslim. Islamic financing objectives included ensuring equitable distribution of resources to all members of the society, ensuring resource optimization through financing of affable projects that have economic implication and social development by creating a fund to help the unfortunate in the society. Others included economic development aimed at boosting the economy, ensuring stability of money value and ensuring that every Muslim complied with the sharia laws, whereby, receipt and payment of interest was not allowed.

The five principles that govern the Islamic finance system include riba, which prohibits payment and receipt of interest, risk and return sharing that allows sharing of interest and returns instead of charging the interest. Moreover, it requires abiding by the sharia laws, ensuring sanctity of contract by disclosing all the information pertaining to a contract and avoidance of gharar or any deceptive activities.

Growth of Islamic finance has been achieved through setting up of transitional bodies such as Islamic Finance Services Board and Accounting and Auditing Organizations that have assisted in setting up accounting practices and policies that have supported the finance to grow. Others include market competition, which has contributed to production of new ideas, high skills of employees in capital markets, globalization that has widened the opportunities for Muslim countries and deregulation of global banking sector and advancement in technology that has ensured easy and effective operations.

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