The Role of Islamic Finance in Promoting Social Justice and Economic Stability

Shakira
Post : March 18, 2023

Islamic finance has been in practice in some form or the other since the beginning of Islam. However, its practice in the modern financial world came to recognition in the 1980s. In recent years, Islamic finance has gained the interest of many worldwide and has made its way among the world's leading conventional finance methods.

How does Islamic finance promote social justice and economic stability? 

The term Islamic finance refers to financial activities that comply with the rules of Islamic law (Shariah). One of the main principles of Islamic finance is that it prohibits paying and receiving interest (Riba) in any financial transactions. The term Riba is not only limited to excessive interest or usury but it covers all forms of interest. 

The key principles of Islamic finance

The prohibition of riba - all interest-based transactions. Islamic finance is linked to real assets. It is not allowed to involve in businesses that are ethically questionable or immoral. For example, tobacco or alcohol production. In Islamic finance, returns are linked to risks. 

The use of Shariah-compliant modes of financing helps to reduce poverty, expands access to finance by all and develops the financial sector of any country by building stability and economic growth. 

The direct link to the real economy and physical assets makes Islamic finance significantly contribute to economic development. The arrangement of profit and loss sharing results in increased output and also generates jobs by encouraging and providing financial support to enterprises. 

It discourages financial speculation by emphasising tangible assets which ensure that transactions with only real purpose are supported by industries. Islamic finance also promotes the development of the financial sector and expands financial inclusion.   

Why does Islam prohibit Riba?

The reason why Islam bans interest is that Islamic finance based on Islamic law recognises money as a medium of exchange and not as a commodity. Therefore any return must be bound to an asset or risk-taking as a partnership. 

In addition to Riba, several other prohibited factors such as Gharar (uncertainty), gambling, hoarding and also trading in unlawful commodities (pork, alcohol, etc) can affect financial transactions.  

The principles of Islam greatly emphasise social justice and sharing resources between the ones who have and those who do not. Access to finance in Islam is in two ways:

  • One through proper distribution of wealth among the society.
  • The other is through risk-sharing contracts as an alternative to conventional financing. 

The risk-shared financing method offers Shariah-compliant finance for small and medium entities to get access to finance. Methods of distributing wealth such as Zakah, Sadaqah, Qard Al-Hasan and Waqf target the poor to eradicate poverty and build a stable economy. This is the beauty of Islam and Islamic finance. 

These methods used by Islamic finance have strong roots in history that have been applied in various Muslim communities throughout history. The initiatives taken by Islamic finance, if implemented genuinely and in the true spirit, can reduce poverty in Muslim countries and also inequality among people. 

There are several reasons why many people are preferring Islamic finance methods above other traditional ways. Let us look further into Islamic finance and its role in the financial world.

Islamic finance within the global financial system

Islamic finance has now become a productive financial tool worldwide, including in non-Muslim countries. Significant financial markets have discovered that Islamic finance can boost shared growth and also end extreme poverty. 

Over the past decade, Islamic finance has grown rapidly. Islamic banking has expanded faster than conventional banking assets in many major Muslim countries.

Overall, Afiyah Financial Services' adherence to ethical, socially responsible, asset-backed, sustainable, and equity-based finance makes it a valuable and reliable financial institution that strives to promote social welfare and financial inclusion while connecting with the real economy and promoting risk-sharing.

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