Islamic finance implies to the way businesses and individuals choose to raise capital in accordance with Sharia, or Islamic law. You can also use this term in reference to the types of investments that are permissible under this form of law.
Most people regard Islamic finance as a unique form of socially responsible investment. This subbranch of finance is a burgeoning field that seems to attract the attention of many. In this blog post, we share an overview of what Islamic finance entails. Read on below!
The Big Picture of Islamic Banking
Even though Islamic finance dates its roots to the seventh century, it has been formalized gradually since the late 1960s. This was as a result of the tremendous oil wealth that fueled renewed interest in and demand for Sharia-compliant products and practice.
The concept of risk sharing is key to Islamic banking and financial. No wonder you should take it upon yourself to understand the role of risk-sharing in raising capital. It doesn’t end at that since Islamic finance calls for the avoidance of riba (usury) and gharar (ambiguity or deception).
Profit and Loss Sharing Contracts (Mudarabah)
An important point worth mentioning is that the Islamic bank pools investors’ money and assumes a share of the profits and losses. Keep in mind this process is agreed upon with the depositors. That leaves many wondering about what the bank invests in.
Well, the answer is in a group of mutual funds screened for Sharia compliance. They filter company balance sheets to determine whether any sources of income to the corporation are against the law. Any company that holds too much debt or partakes in forbidden lines of business is excluded.
In addition to actively managed mutual funds, passive fund also apply. Actually, they are based on such indexes as the Dow Jones Islamic Market Index and the FTSE Global Islamic Index. It pays off to have an insight into what these indexes entail.
There you have it, some of the things you probably didn’t know about the increasingly popular Islamic finance.
