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What could be the differences between conventional and Islamic financial systems?
Let's Find out, how these systems approach loans and investments, from interest-based norms to profit-sharing principles. Learn why Islamic finance shuns forbidden industries, offering a unique perspective on wealth management.
Kaan Doluner
Director
Let us dive into the key disparities, shedding light on how they approach loans and investment funds. In the conventional system, interest-bearing loans are the norm, with interest being the price paid for borrowing money. However, Islamic finance prohibits interest (riba), instead emphasising profit-sharing arrangements such as Mudarabah and Musharakah, which foster a more equitable distribution of wealth and risk between the lender and borrower.
Quranic References: ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَـٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَـٰٓئِكَ أَصْحَـٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَـٰلِدُونَ ٢٧٥ (Quran 2:275) Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allāh has permitted trade and has forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. But whoever returns [to dealing in interest or usury] - those are the companions of the Fire; they will be there forever. For investment funds, conventional finance often relies on speculation and interest-based transactions, whereas Islamic finance adheres to Sharia principles, avoiding investments in industries deemed impermissible (Haram), such as alcohol, gambling, and tobacco. Understanding these differences is crucial for individuals and businesses navigating the global financial landscape, enabling informed decisions aligned with their values and principles.
Upcoming Topic: Comparing Conventional and Islamic Financial Systems
Author: Kaan Doluner (Director, Purewealth Services)
