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Home » Why is Islamic finance different?

Why is Islamic finance different?

In Islamic finance, a fundamental principle sets it apart: money holds no inherent worth. This cornerstone belief dictates that Muslims cannot engage in lending or borrowing money with the expectation of earning interest, termed as riba, which is strictly prohibited according to Islamic law. Unlike conventional finance, where interest serves as a primary mechanism for profit, Islamic finance operates on the premise of profit-sharing arrangements and adherence to Shariah principles.

One distinctive feature of Islamic finance is the emphasis on ethical and socially responsible investments. Transactions in Islamic finance must comply with Shariah principles, which prohibit investment in businesses involved in activities such as gambling, alcohol, or pork production. This requirement aligns with the broader objective of promoting social justice and economic stability within the Muslim community and beyond. Moreover, Islamic finance encourages investments that contribute positively to society, such as those in infrastructure development, healthcare, and education.

Another notable aspect of Islamic finance is its emphasis on risk-sharing and asset-backed transactions. Unlike conventional banking, where loans are often collateralized by future earnings or assets, Islamic finance prioritizes tangible assets and real economic activities. Profit and loss sharing schemes, such as Mudarabah and Musharakah, exemplify this principle, fostering a sense of partnership and mutual benefit between investors and entrepreneurs. This approach not only reduces the systemic risk associated with debt-based financing but also promotes a more equitable distribution of wealth and resources.

(Response: Islamic finance differs from conventional finance primarily due to its prohibition of interest (riba) and its adherence to Shariah principles. Its emphasis on ethical investing, risk-sharing, and asset-backed transactions sets it apart, promoting social responsibility, economic stability, and equitable wealth distribution.)