FAQs on Islamic Financing

Shakira
Post : November 5, 2022

When it comes to Islamic Financing, so many queries run through the mind of Muslims. To make it easy and clear, we have listed below answers to some of the most important FAQs based on Islamic  Finance. 

What is Islamic Finance?

Islamic Finance is a form of banking based on Islam's principles, which comply with Sharia's laws. The basic principle of Islamic Finance, which differs from other kinds of financing, is that it does not pay or receive interest. 

Instead of the concept of interest, Islamic Banking is based on profit sharing. Lending and borrowing money based on interest is not allowed in Islam. 

Why is interest forbidden in Islam?

Islam forbids both receiving and paying interest (Riba). Riba is discouraged in Islam and is considered one of the major sins. The Quran mentions Riba in the following verse:

ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَـٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَـٰٓئِكَ أَصْحَـٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَـٰلِدُونَ ٢٧٥

Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan's touch. That is because they say,

"Trade is no different than interest." But Allah has permitted trading and forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever. (Quran 2:275)

It is clearly mentioned in the Quran in Surah Baqarah:

يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ ٱتَّقُوا۟ ٱللَّهَ وَذَرُوا۟ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓا۟ إِن كُنتُم مُّؤْمِنِينَ ٢٧٨

"O believers! Fear Allah, and give up outstanding interest if you are true believers" (Quran 2:278)

فَإِن لَّمْ تَفْعَلُوا۟ فَأْذَنُوا۟ بِحَرْبٍۢ مِّنَ ٱللَّهِ وَرَسُولِهِۦ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَٰلِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ ٢٧٩

If you do not, then beware of war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm. (Quran 2:279)

Islam forbids Riba as it goes against Islamic finance principles based on equitable transactions and justice. 

Allah also mentions in the Quran: 

يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوا۟ ٱلرِّبَوٰٓا۟ أَضْعَـٰفًۭا مُّضَـٰعَفَةًۭ ۖ وَٱتَّقُوا۟ ٱللَّهَ لَعَلَّكُمْ تُفْلِحُونَ ١٣٠

"O believers! Do not consume interest, multiplying it many times over. And be mindful of Allah, so you may prosper." (Quran 3:130)

The concept of Riba, which makes the rich richer and the poor poorer, creates and increases the gap between humans in society and is one of the main reasons it is prohibited. Islam always guides people to be just, and this inequality in the dealings of Riba is totally frowned upon. 

What are the different types of Riba?

There are two types of Riba:

1. Riba Al-Nasiah

Riba Al-Nasiah is derived from the Arabic root word 'nasa'a', which means to delay. 

This kind of Riba refers to the practice of lending money to a borrower for any length of time under the condition that the borrower returns the original amount with an increase at the end of the given time period. 

2. Riba Al-Fadl

Riba Al-Fadl, also known as an increase in quantity, is a term that describes the deal of exchanging commodities of the same type in different quantities. In this kind of Riba, one of the parties involved is favoured, which is strictly forbidden in Islam. This means that the items exchanged in the deal are of the same type but in different quantities. Which means one of the items is higher in quantity than the other. 

What are the basic principles of Islamic Financing?

While executing any transaction in Islamic financing, the basic principles considered are:

  • No interest/Riba: Riba-related transactions cannot be involved in Islamic financing. Money cannot be lent to earn additional amounts. 
  • Risk sharing: In every transaction made through the Islamic financing system, the institution and the deposit holder has to take the risk of ownership of the capital, tangible assets and real services before earning profit from it. 
  • Sanctity of the contract: Before executing any transaction in an Islamic financing system, it has to be made clear that the transaction is halal in the laws of Islamic Shariah. 
  • Purpose: Every Islamic financing transaction has a purpose backed by real service or tangible assets. 
  • Just: Islamic financing is based on just and fairness. Any transaction that takes place unjustly will not be considered a part of the Islamic financing system. 

What are the modes of Islamic Financing?

Mentioned below are the major modes of Islamic financing:

  • Murabaha
  • Ijarah
  • Musawamah
  • Salam
  • Mudaraba
  • Musharaka
  • Istisna

What is meant by Islamic Sharia law?

According to Islam, Sharia refers to the laws and guidance mentioned in the Quran. Islamic Sharia is derived from the following sources:

  • The Noble Quran
  • Sunnah of the Prophet Muhammed (Peace Be Upon Him)
  • Ijma
  • Qiyas

Islamic financing looks the same as conventional banking. How is it different?

The process and activities throughout the transaction rather than the result make it halal or haram. Even though the result may seem similar to conventional financing, a transaction made according to Shariah's rules is considered halal. 

How are the customers paid if Islamic financing is not based on interest-related activities?

To earn money without charging interest, Islamic financing institutes use the system of equity participation, which is similar to profit sharing. The funds in Islamic finance institutes are used in various investments, trade and services compliant with the laws of Islamic Shariah to earn profit. 

The profit earned through Shariah-compliant activities is then according to the agreed terms and conditions passed on to the depositor. 

If you need help with what to do and how to take loans to purchase your home, we'll help you. Afiyah Financial Services is here to help you with halal home loans. This, too, with simple and quick procedures. Does it feel like something you want to try? Let us know, and we'll get in touch with you

 

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