Islamic Finance as an Alternative - Essay Example

Islamic finance By Capitalism Capitalism refers to social system that is mainly concerned with the principle of rights of an individual. When it sis viewed in the legal perspective, it is a system of objective laws and are not based on the rules of man but rule of law. In this economic system, all activities that are carried out are mainly based on making profit (Ayub, 2007). The system leads to an economy with free market. Capitalism is characterized by accumulation of capital, private properties and competition of markets. In this set of economy, there is determination of prices of goods and services that are produced by the parties that are involved in the market. Capitalism is common in the current economy despite frauds that come about. There are different models of capitalism with variation of regulations, degree of competition, scope of state ownership and the degree of competition that occur among industries that produce similar goods (Friedman, 2008). There are different perspectives of capitalism that is brought out by political economists. The different forms include welfare capitalism, state capitalism and crony capitalism. In the different forms, there is variation in the degree of dependency in the markets, inclusion of social policies in the economy and public ownership (Seldon, 2000). Politics and policies are the main consideration in capitalism when defining the extent to which markets are free and defining their private property. Capitalism became more common due to the reduction of feudalism and this has made it exist in many forms of the government, different cultures, places and time (Friedman, 2008). The economic form became more dominant in the western countries and has currently spread to other parts. Capitalism after being dominant in the western world was carried to other parts of the world through the process of globalization. Imperialism encouraged the spread of capitalism. Capitalism became dominant in the global economic system in the nineteenth century and through this, there was intensification of globalization and economic systems. Central planned economies received a challenge in capitalism in twentieth century making the system to be compromised in many countries in the world. Mixed economy was not much affected by the system and it remains to be used in more industrialized countries. There are different perspectives in capitalism and each perspective emphasizes on specific elements of the economy. In leissez-faire, there is mainly the emphasis of the degree of government intervention in the markets and importance of property rights. The intervention includes regulation of monopolies by the government. Capital accumulation is emphasized by Marxian economist. Private property is mainly emphasized by political economists. Although capitalism has been considered and widely used in many countries, there are critics against the system. The system is thought by economists to be associated with unfair distribution of power and wealth, social inequality imperialism, repression of workers, unemployment, materialism and exploitation in the cultures. Other factors that are contributed to by capitalism are economic inequality, alienation, and trade unionist. Application of capitalism is thought to be irrational such that the production and direction that is taken by the economy is not always planned. This leads to inconsistency in the economy. The system is thought to concentrate more on accumulation of capital and gaining profit without the consideration of the community in terms of social needs. This is seen in lack of including employees in making decisions in organizations. Capitalism is associated with labor that is not free from prisoners, slaves and servants. This makes the origin of capitalism to be traced back to slavery. The system results to institutional racism since in the system there is unequal distribution of rewards for labor that is applied in production. Capitalism has been blamed for several occurrences such as financial crisis that occurred in 2007. The occurrence was due to the mistakes that were made in the interests and government intervention in the economy. The system has destroyed the way of life that people in the country lived before the implementation of this model. In has also contributed to global poverty and increased inequality. The model has been opposed religiously as it has interfered with the cultures in the religious sector. In the traditional setting, there was no lending money at interest in Christianity and Islam (Hassan and Lewis, 2007). The model however lends money at different interest rates. The model is associated with economic instability and lack of well-being of people of a country and also extends to creating danger in the natural environment. Despite the criticisms that occur due to capitalism, there are components of the system that bring about different arguments to support the system. They support the system to have brought more prosperity in the economy as compared to all other economic systems. They also think that the benefits that are obtained in the system are mainly to the ordinary people and not only to some group of people. The argument comes to the conclusion that despite the model is superior to other systems; there should be resolution on the contradiction occurring in class interests (Balala, 2011). This will be solved by advancement in a current social system of production and distribution that makes everybody in an economy to be equal to the others and the means that is used in the production. The system when much used in a country always drives the country in debts and the problem is only solved when there is adoption of other system rather that capitalism. Those that have gone out of the system are seen to be able to create money and capital from different aspects and then lend to other countries with interest and administration cost. This brings about fraud in some transactions and countries. Increase in debt that a country and the government undergo through capitalism leads to smash in the economy. Finance capitalism is not involved in the bottom line in actions that are taken in the financial system of the economy which leads to production of goods and services. Work efficiency is also an important aspect in the economy and it always involves everyone in the society. Capitalism does not put this into consideration and it is collapsing in the increase in debts making the economy worse. Islamic finance as an alternative Islamic finance is a system that defines corporations in the Muslim world and the principles are applied to banks, institutions that are concerned with lending and rising of money and resources according to the Islamic principles referred to as Islamic law. The laws also describe the principles that are in the law (Balala, 2011). The law does not separate to consider division that occurs between the common people and the spiritual people. The principle makes investment to be socially responsible. There are features that are associate d with Islamic finances. In the system, there is no denial of market forces and investments that are made to the market economy. There is provide motive in the system but the motive is only accepted up to some reasonable limit (Friedman, 2008). Private ownership in the system is prohibited. The basic difference that occurs between capitalism and Islamic finance are the profit motive and private ownership that dictates the economic decisions. Islamic finance is an alternative that is used for capitalism. Though it has not been implemented in many countries and economic systems, the approach has principles that are desirable as compared to capitalism. In the system, there is reduction of disparity that is able to occur in an economy. Islam as a religion encourages accumulation of wealth and promotes awareness of shared responsibility for those that are poor in the economy. In Islam, there is a principle of Zakat that brings the issue of giving a portion of ones wealth to those that are poor. Consideration of the Islamic principles in financial markets can result to putting in place investment that will benefit people at all levels. The situations leads to potential rewards and makes a community to be more stable and with less violence. When Islamic finance is implemented in an economy, there is invitation of more people in the market. Products that are obtained in Islamic financial system encourage more participation in the market. In the market participation, there are several issues that come about. The participation leads to having a captive market. The market through Islamic principles makes people to adhere to the religion hence avoid putting money into conventional products which are not compliment to the sharia (Hassan and Lewis, 2007). Inviting of more people into the market in the Islamic finance system benefits all classes in an economy. Both the poor and the rich benefit from the products. Those that have access to the Islamic goods are also able to enter into partnership with investors in the venture of an economy. Involvement of more people in the finance system keep credit sores in perspective. Those economies that use Islamic principles have additional considerations that are used indetermination of an individual’s participation in investments or another contact. Islamic finance promotes simplicity and transparency. Islamic financial products are always considered not to be simple but the products that are based on the Islamic principles are not difficult to understand as those that are involved in capitalism (El-Gamal, 2006). The simplicity and transparency in the economic system makes implication of Islamic finances it starts with stricter contracts, focus on assets, rely on scholars on advices and guidance and follow strict standards. Islamic finance can be considered a better replacement for capitalism as it connects financial markets and economic activities that happens in a country. Those that use the Islamic finance principles interact in the market as buyers and sellers or as those that are in a partnership. This is opposed to capitalism where most interactions are in terms of lenders and borrowers. The interaction in Islamic approach is maintained even when one is involved in transactions in a bank or a large investment firm (Reisman, 2004). The distinction between the two approaches is crucial since in Islamic finance system, the money is used to support specific economic transaction. The contract that is signed in Islamic finance brings out the activity in which the money is used. Islamic finance serves to link savings and investment that occurs in a society. When one puts money in the Islamic savings account, there is no guarantee of asset rate of return on the savings. This makes the approach better than in capitalism (El-Gamal, 2006). The investment that is placed shows the close relationship between markets and real activities that occur in the economy. In the approach, money that is saved is not separated from economic activities as it occurs in capitalism. Another key advantage feature is avoiding economic bubbles and burst. Islamic finance in this concept is viewed to be anti-crisis. The evidence of the argument can be dated back to 2007 when there was financial crisis but those that implemented the principles of Islamic finance experienced an increase in the value of assets by 25 percent. This is the time when most countries were battling for financial crisis (Wolff, 2013). To maintain the principles, companies that come up in economies that implement the principles makes sure that organization comply with sharia and those that do not do so are pushed out of the market. Islamic finance makes profit with consideration of other social factors in the economy. They aim in making profit so that they stay in the market. The profits that are made in the approach are linked to responsibilities that affect more people and not only the stakeholders that are in the profit making sectors. In making profit, Islamic financial institutions always have respect bad develops strong partnership relation with the consumers. In the system, it must well determine and select investments founded on their agreement with sharia law as well as possibility for growth and success (Ayub, 2007). The bank must provide ways for movement of money from the wealthy to the poor and from those looking for to fulfilling the obligation of zakat to those seeking resources to build a better life. Encouraging long time investment is a factor in Islamic finance that is not seen in capitalism making Islamic a better alternative. In the approach for investment, there is a decision making that is slow but sure as compared to capitalism. In investments that are made with consideration of Islamic principles, there is avoidance of companies and investments that tend to degrade the environment. There is also elimination of those companies whose financial systems are too risky thus reducing risks and create stability in investments that are made (Hassan and Lewis, 2007). Screening that is done in the financial system make social responsibility, increases stability and reduce risks in an economy. Economy that uses the Islamic principles in their investments encourages more thoughtful selection and also encourages commitments that are long term. Islamic finance reduces the impacts of harmful products and practices in an economy. Sharia laws that are used in the system prohibit the engagement of business in transactions that supports industries and activities that are considered to be harmful to those that receive the actions. Sharia also prohibits involvement in gambling, speculation and interests. Other practices that are prohibited by sharia include cloning, weapons and mass destruction. Striving for a greater is a characteristic of Islamic finance. In the whole world, everyone is striving and long for economic stability. After times of crisis in countries, there is always the need of change. They recognize that something is inherently flawed in the conventional financial system that has let them down, and they want a system that’s more just, transparent, responsible, and sturdy (Hassan and Lewis, 2007). The stability that is desired in the countries is always achieved through by treating money as a medium of exchange rather than an entity with value in and of itself; by viewing profit as just one of many reasons to engage in investment activity; by helping all people that live in a community and not just only those who are wealthy; by laying dollars directly behind the appropriate economic activities that create actual jobs and actual products by these incomes and others, Islamic finance is able to promote the type of responsibility that everyone in every place in the world are craving from their financial institutions. Conclusion Islamic finance have been used for centuries and gained recognition in almost all parts of the world. The ethical issues that are associated with the system have drawn the attentions of even those that are not Muslims. The form of economics associated with Islamic finance has brought rapid evolution as it enables the addressing of challenges of integration the unequal worlds of theology and modern selection theory. In comparison between Islamic finance and capitalism, though capitalism is used in many economies in the world, Islamic finance has more advantages as compared to capitalism in terms of the distribution of wealth and maintenance of economy. Application of capitalism is thought to be irrational such that the production and direction that is taken by the economy is not always planned. Islamic finance is an alternative that is used for capitalism. Though it has not been implemented in many countries and economic systems, the approach has principles that are desirable as compared to capitalism. References Ayub, M. (2007). Understanding Islamic finance. Hoboken, NJ: John Wiley & Sons. Balala, M. (2011). Islamic finance and law. London: I.B. Tauris. El-Gamal, M. (2006). Islamic finance. Cambridge [UK]: Cambridge University Press. Friedman, M. (2008). Capitalism and freedom. [Chicago]: University of Chicago Press. Hassan, K. and Lewis, M. (2007). Handbook of Islamic banking. Cheltenham, UK: Edward Elgar. Hassan, K. and Lewis, M. (2007). Islamic finance. Cheltenham, Glos, UK: Edward Elgar. Lewis, M. and Algaoud, L. (2001). Islamic banking. Cheltenham, UK: Edward Elgar. Rajan, R. and Zingales, L. (2003). Saving capitalism from the capitalists. New York: Crwon Business. Reisman, D. (2004). Schumpeters market. Cheltenham: Edward Elgar Pub. Seldon, A. (2000). Capitalism. Oxford, UK: Basil Blackwell. 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