If we ask someone what “finance” is, we will probably get a number of responses such as: “It is all about money.” and “It concerns resource allocation, management, acquisition and investment.” Whatever response we get, it will be more or less correct. This is because “finance” is a broad term and takes into account many aspects of the economy and financial system since it deals with matters related to money.
Now if we ask the question: What is ‘Islamic finance?’, many people will be taken by surprise. They would come up with diverse answers depending on their level of exposure and understanding. To some, Islamic finance is just another religious doctrine to provide financing for mosques, charities or funding for Muslim entrepreneurs. Unconvinced secularists as well as other critical observers would go further to argue that Islamic finance is a broader political agenda to transform the present state of the world or at least some aspects of it to accord more closely wiht the principles of Islam.
Increasingly, however, people have discovered that Islamic finance appears to be far removed from politics or philanthropic endeavours. In fact, Islamic finance practitioners including bankers, fund managers, economists and regulators would perhaps hesitate to categorise themselves a social or philanthropic movement. Instead, the rapid growth of Islamic finance since its first inception in the 1960s witnessed the growing concern and interest among Muslims and non-Muslims alike whether academicians, practitioners, professionals, or the general public towards establishing a more viable, robust and competitive Islamic financial system that may eventually become the best alternative to the conventional system in the future.
The emergence of Islamic finance as a new phenomenon within the long-established and deep-rooted conventional finance for the past four decades is of particular significance to Muslims whose lives are governed by the rules and values, prescribed by Islamic law and principles, also popularly known as Shari’ah. It is estimated that there are over 550 financial institutions worldwide, with assets in excess of US$1 trillion which adhere to Islamic finance principles, operating in 75 countries encompassing most of the Muslim world, along with Europe, North America and various offshore locations.
Therefore, for better comprehension of the subject matter, the expression “Islamic finance” suggests to significant meanings. The noun “finance” suggest that Islamic financial markets and institutions deal with resource allocation, management, acquisitions and investments. It also inevitably deals with the fundamental issues in finance which is risk transformation and management. Therefore, Islamic finance is expected to essentially functions similarly or at least produce the same economic effect to that of its conventional counterpart. However, the adjective “Islamic” implies some fundamental differences between Islamic finance and its conventional counterpart. Indeed, Islamic finance is built upon some distinctive and unique characteristics which are based upon certain principles underlined by Shari’ah. Some of the prominent elements constituting parts of its characteristics include: the prohibition of riba or pre-determined rate of interest, the prevention of gharar (ambiguity) in contracts, the prohibition of gambling (maysir), the prohibition of conducting economic or investment activities which are ethically and socially unacceptable albeit profitable (e.g., pornography, gambling, alcohol and prostitution), the prohibition of monopoly, the introduction of a religious levy or alms-giving (zakat) and co-operation for the benefit of society and development of all religiously legitimised (halal) aspects of business trade and investment.
Taken from “Islamic Financial System, Principles & Operations” by International Shari’ah Research Academy for Islamic Studies (ISRA)