One Of The Key Component Of Islamic Financing

It is very important to know and understand as to what makes Islamic finance stand out from other conventional finance. One of the most important characteristics of Islamic financing is that it is an asset backed financing. On the other hand, conventional financing is that the banks and financial institutions deal in money and monetary papers only. This is why they are forbidden, in most countries from trading in goods and making inventories.

Islam, on the other hand, does not recognize money as a subject matter of trade, except in some special cases. Money has no intrinsic utility, it is only a medium of exchange, each unit of money of 100 percent equal to another unit of the same denomination, therefore, there is no room for making profit through the exchange of these units inter. Profit is generated when something having intrinsic utility is sold for money or when different currencies are exchanged, one for another. The profit earned through dealing in money or the papers representing them is interest. Financing in Islam is always based on liquid assets which created real assets and inventories.

The real and ideal instruments of financing in Islamic rules or Shariah are Musharakah and mudarabah. Profits are generated through the sale of real assets. Financing on the basis of salam and istisna also created real assets. Islamic financing is one of the best financing as opposed to conventional financing. For example, if one considers leasing then in leasing, financing is offered through providing as asset having usufruct. The risk of the leased property is assumed by the financier throughout the lease period in the sense that if the leased asset is totally destroyed without any misuse on the part of the lessee, it is the financier who will suffer the loss.

Secondly, in an interest bearing loan in conventional system, the amount to be repaid by the borrower keeps on increasing with the passage of time. In Murabahah, a selling price once agreed becomes and remains fixed. As a result, even if the purchaser does not pay on time, the seller can not ask for a higher price, due to delay in settlement of dues. This is because in shariah there is no concept of time due of money.

Most important of all is that it is one of the basic requirements for the validity of murabahah that the commodity is purchased by the financier which means that he assumes the risk of the commodity before selling it to the customer. The profit claimed by the financier is the reward of the risk he assumes. No such risk is assumed in an interest based loan.

There are many other benefits with shariah financing and above mentioned are few of them.

By: Ramsha Amir