Islamic finance and conventional finance - Research Paper Example

There is a growing global concern of the inequity in the allocation of wealth and income in the modern world, between and within countries, than has been witnessed before, with little hope of bridging the disparity. In this perspective, this essay will discuss ways in which Islamic finance can be seen as an innovative way that could substantively redefine finance and why it is different from conventional finance. Islamic finance is distinguished from conventional finance by the key attribute of adding moral and ethical aspects to fiscal transactions, hence providing a practical alternative to promoting responsibility in a free-market economy (Warner 301).

Unlike the conventional financial and banking system, Islamic finance prohibits the opportunities for gambling-like speculation (or maysir), exchanging money for money (or riba) and making profit maximization the only endeavor for investment managers while disregarding other human perspectives of wealth. Instead, Islamic finance has innovatively introduced financial products based on Islamic law and also regulated and reciprocated by conventional monetary rules and regulations. Islamic Finance Products From the below examples, one can see that Islamic finance is geared towards reducing financial exploitation, especially among the less privileged.

All rates of return are determined by the asset transaction, unlike conventional finance systems that base the returns on the interest accrued from loaned money (Warde 124). This is why it is increasingly appealing not only to non-Muslim countries, but also non-Muslim individuals, by redefining the way they perceive financial transactions. Istinaa: Also known as Commissioned Manufacture, Istinaa is a contract for the manufacture of goods under the perspective that speculation avoids the sale of a product that a person does not own yet.

A promise under agreed specifications is arrived at, and a bank commissions the manufacture, hence undertaking the risk, and later sells to the buyer at agreed profit (Timur 799). Ijara: This is a leasing contract in which a party obtains an asset under lease for a specified cost and time from another, often a bank. All the risk is borne by the bank while a portion of the installments pay towards completion of the purchase at the time the asset will be transferred. Mudaraba: This is a trustee-type partnership financing whereby one party offers capital and another labor.

Musharakha: This is equity participation whereby the involved parties contribute capital in terms of technical expertise or assets and set an agreed percentage of the risk and returns. If a bank is involved, it purchases property alongside the customers, and repayments are partly constituted of payback and rent. Differences between Islamic Finance and Conventional Finance In Islamic finance, there is the notion of a captive market, where products are based on Islamic principles and the market comprises of customers willing to adhere to the concepts of their religion.

All transactions are based on the principle of sharing profit and loss, with returns varying depending on a bank’s performance. Customers can take part in profit sharing in more equitable ways than getting predetermined returns. On the other hand, in conventional finance and banking, customer returns are irrespective of a bank’s profitability or performance (Kadri 53). The banks only treat customers as depositors who do not receive any compensation apart from interest. Unlike conventional