Finance is an integral part of life and business and especially when you have to make bigger purchases you need financing. People look for viable finance options for purchasing. Orthodox Muslims are prohibited from seeking financing options because Islam does not approve of riba, which means interest. A Muslim must not charge or pay interest. In every economy banks play a very important role in financing families, individuals and businesses. So that is how eventually even the Islamic banking field developed. One could not do without financing. It may be a .little different than the others.
In order to understand Islamic system of banking one should also understand the religion itself. In Islam even trade, finance and business are a part of the religion. Islamic finance is very complicated because it includes several principles and practices and they include injunctions and prohibitions. Under Islamic law, there are several sectors of business that are strictly prohibited. For instance, alcohol, gambling, pornography and insurance are not allowed. Financing for such businesses or even carrying out transactions is not allowed when it is related to such products.
Riba or the practice of taking interest is not allowed under Islamic laws. Any transaction that includes interest is considered unlawful practice in Islam. Even banking or financing which includes interest is to be strictly avoided.
Debt also known as “dayn” even in the form of a loan is not recognizable under the Islamic laws. If there has to be a loan, it has to be a qard al hasana, which means a charitable organization which gives interest free loans. No Muslim can earn a profitable income out of loans or interest based schemes. They also do not allow any fixed returns or depository accounts. Moreover, Islamic principles are so strict that financing contracts are not permissible. For instance, if the product that is being sold by the businessman is not in possession of the buyer at the time when the financial transaction takes place, then as per Islamic laws, this transaction is not permitted.
Also, any contract which is uncertain, also known as gharar or speculation, is not allowed under the Islamic laws. Some items like gold, silver and other food items cannot be traded in Islam.
Islamic laws state that every financial account should be on a profit or a loss sharing business. Most of the Muslim investments are based on equity. Generally most transactions require being fair and valid.
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