Islamic Finance System/Islamic banking

islamic finance

Islamic finance system has its basis in great Islamic values. It is Riba-free system (Riba means Interest) which ensures the abolition of profit-sharing from the whole financial system.

Islamic Finance System (IFS) can be pigeonholed with absence of:

–          Interest based transactions

–          Interest based financial institution

–          Unethical and doubtful transactions

–          Companies’ stocks involved in unlawful activities

–          Market manipulation

And so on and so forth.

Islamic Financial System is opposite of Conventional financial System i.e. system which is based on interest/Riba. The Riba-based financial system has been proven as inefficient for the economic balance which is needed in any society. The conventional banking is also of 2 types: Socialistic and Capitalistic.Insocialistic system, government gets to enjoy freedom whereas in capitalistic system, individuals get to enjoy freedom. But in the light of Shariah in Islamic finance system, restrictive freedom is allowed for both government and individuals.

In Islamic finance system, solutions of economic problems are derived from Al-Qur’an and from Ahadith of Prophet (s.a.w).It focuses on providing economic opportunities in the society by keeping in consideration political, social and other cultural factors.


The basic principles of an Islamic financial system can be summarized as follows:

It involves zero Riba and it is the central tenant of Islamic financial system. This system has been designed after the consensus of leading and authentic Islamic Scholars.

The Riba/interest is clearly prohibited based on the arguments of dangers of usury /interest and understanding of concept like social justice, equality and rights.


This prohibition is based on arguments of social justice, equality, and property rights. Islam encourages the earning of profits but forbids the charging of interest because profits, determined ex post, symbolize successful entrepreneurship and creation of additional wealth whereas interest, determined ex ante, is a cost that is accrued irrespective off the outcome of business operations and may not create wealth if there are business losses. Social justice demands that borrowers and lenders share rewards as well as losses in an equitable fashion and that the process of wealth accumulation and distribution in the economy be fair and representative of true productivity.


It is the demand of social justice that lenders and borrowers share the reward and losses alike and contribute to the fair economy.

In Islamic financial System, money is treated as capital and it becomes actual capital when it is combined with other productive activities. Islam discourages hoarding, gambling and transactions which involve risks and uncertainties.

In Islamic finance system, investment process is done through halal sources and anything dealing with alcohol and casinos is not accepted. Everything from the contracts is written down.

The Objectives of Shariah-based Islamic Financial System

Al –Ghazali explained that the very objective of the Shariah is to promote the welfare of the people which lies in safeguarding their faith, their life, their intellect, their posterity, and their wealth. Whatever ensures the safeguarding of these five serves public interest and is desirable.

Islamic finance system is response to conventional system and its hazards. It is aimed at the welfare of human society dealing with the non-Islaimc problems of production, distribution and consumption of wealth and money.

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