FYI/FYA The Reason Islamic Finance Standing For

Welcome to this introductory on Islamic banking and finance. This article will be an overview of Islamic finance and the main principles behind it. Islamic finance, in general, is a set of moral principles supported by a comprehensive legal system governing and guiding economic and financial activities. It emphasizes the balance between for-profit or market activities on one side and non-profit philanthropic activities on the other. By nature, it's a universal system. The main principles behind Islamic finance are universally accepted by major faiths throughout the world.

 If we look at economies all over the globe and throughout histories, we will find that no matter where we look at, each and every economy would have two broad domains of economic activities. These are for-profit or market-based activities and non-profit, philanthropic activities. Regardless of
what system is adopted, what paradigm is followed, these two domains are always there. Now the problem is that how to reach the balance, how to achieve the balance between these two domains. Islamic finance provides the necessary principles and guidelines that would help balance these two domains of activities.

Then, If you look at modes of finance in Islamic finance we will find for example deferred sale or mark up sale. It's a sale transaction in which let's say the buyer will get the good and the buyer will pay on deferred payment basis. This deferred payment will include a markup because of the time  value. So time value is acknowledged in Islamic finance as long as it is embedded into a real transaction. So this will be a valid way to do financing even though there is an element of debt in the markup financing or a deferred sale, but it is part of a real transaction.

In this manner at least in principle wealth creation and debt creation they are in harmony, they go hand in hand. Debt is not allowed to grow on it's own, because the moment we allow debt to grow on it's own it will go beyond wealth and income and therefore it will be a burden on the economy.

The same thing for other instrument of Islamic finance for example leasing and Salam, which is the reverse of deferred sale. We find that there is always an element of financing, however this financing is always embedded within a real economic activity. So we can see how we can reach the goal of financing economic activities without allowing debt to grow on its own. Time value is important, is acknowledged in Islamic finance as long as it is coupled and integrated with economic value, so time value and economic value they have to go hand in hand. We cannot separate these two from each other.

So when we say...so in the conventional finance they talk about time value of money. It should be economic value of money, because money cannot generate a return only through time. It has to be coupled and integrated with real economic activity. So we talk about economic value rather than just simply time value. Now in this manner Islamic finance strikes the balance. It doesn't eliminate finance altogether. It doesn't open the door for any kind of financing on the other hand. It allows for

certain kind of financing, such that this financing is well related and linked with economic activities. So we have two types of debt, good debt and bad debt. So economic history shows that debt could lead to disastrous results.

this article take from Islamic Banking and Finance Course

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