Why is Islamic finance important? Many people ask this question because they are curious about Islamic law and their practices. Islamic law prohibits gambling, bartering (foreign exchange) and alcohol. Although some regions have relaxed these laws for tourism purposes, Islamic law severely punishes any non-payment of debts. Because of these practices, many non-Muslims are apprehensive to invest in Islamic finance.
Islamic finance is different than conventional banking. Islamic finance still places importance on the principle of sharing responsibility between individuals and groups. Islamic law encourages economic efficiency and development by providing opportunities to buy products and services from small businesses at reasonable prices. Islamic banks are very successful because they provide services at very low cost and they are able to attract investors from all over the world. Islamic banks make use of Islamic instruments in order to create a stable environment for lending and are also able to attract a large number of customers.
Islamic finance follows two major investment vehicles: interest-free economic system and the ability of individuals to borrow from a trust-worthy and liquid secondary market. The interest-free economic system is based on Islamic principles and the principle of Zakat which state that Muslims are always entitled to an interest free loan from a Muslim investor who can repay the loan at interest. This loan is used to purchase goods or services that are not marketable in the country where the buyer resides. An interest-free loan is also known as a “dubit” in Arabic and is a temporary agreement.
The second type of Islamic financial system known as the mbas is a form of financial service provided in areas outside of Pakistan. This type of Islamic finance market is known as a career, or commercial exchange, and is open to all qualified Islamic traders from abroad who wish to establish a business in Pakistan. A trader in a man is allowed to have access to a broad range of resources such as shares, foreign currency, interest rates and a variety of financial products such as loans and insurance.
Both types of systems have their benefits but with the advent of globalization and rapid urbanization in developing nations such as Pakistan, traditional Islamic banking principles are being replaced by a new model called sharia Islamic finance. This model is based on Islamic principles and concepts of property, loans and transactions. Sharia Islamic finance is based on Islamic principles of property, money and transactions and are considered relatively more efficient and secure than conventional banking systems. It is also believed to be less risky.
Islamic financing is not associated with any central body or regulator; therefore the protection it can offer to a business is limited. However, there are several Islamic financial institutions that have been set up in Pakistan to cater to the needs of the traders in various provinces. These means are run by Muslims with an imam as the head. Since these are not state institutions, there are no government restrictions on their operation. The only regulation they have is to have a written Islamic financial policy that everyone involved signed.
Islamic finance markets are slowly expanding all over the world. There are many advantages that traders in countries like Pakistan can get from opening their own by institutions. With the opening of these Islamic financial institutions, more people from other countries will have the opportunity to participate in the Islamic economics. They will gain knowledge and experience on how to run their businesses in accordance to the Islamic principles and laws.
Many non-muslims are also becoming interested in investing in Islamic banks. They are looking at the various benefits that they can gain by opening their own Islamic bank. Also, they are learning more about the different Islamic monetary products and how they can benefit from it. This is important since the misuse of these Islamic products by non-Muslims can lead to an increase in their losses. Hence, it is important to implement Islamic banking because it is one of the safest investment vehicles around.