22 mai 2019

3 Facts About Halal Financing You Should Know

World’s finance is very volatile and depends on factors such as international world treaties and oil prices. Several big economies can manipulate the prices of various commodities at will. The economy has been capitalistic and this has resulted in unfair trade practices, and the rich have continued to accumulate wealth at the expense of the poor.

One of the most exploited avenues has been the financing of various projects. Financial institutions have been cropping up on a daily basis and rolling out loans to people at high-interest rates. Islamic finance seeks to solve this problem which is already affecting millions of people. Most financial institutions are driven by greed, but Halal Financing seeks to bring sanity in financing in the following ways.

Finance products that are Sharia-compliant

When you request a loan from a conventional bank, its focus will be on how much interest it will earn from the loan. Such a bank does not care to know whether the services or products you seek to offer will improve the livelihoods of people. Halal Financing goes a step further to investigate where you want to invest your money. There are those things that are prohibited by the Sharia laws, and they are known as Haram. An Islamic financial institution should not finance activities such as opening a gambling firm or a liquor store because these are Haram activities.

Money is a medium of exchange
In today’s world, when you approach a bank to advance you a loan, you pay back the loan with some interest after a given period. This means that the bank treats money as a medium of exchange and a store of value as well. Halal financing under Islamic banking principles takes another approach and does not recognize money as a store of value. Charging interest is prohibited, and thus the financial institutions charge a facilitation fee. People should thus invest their money in good causes and not keep their money idle as it is not a store of value.

Risk sharing
Borrowers suffer a lot when their intended investments fail to take off or suffer from a natural catastrophe. Take for instance when a conventional bank loans you to buy a car and then you are engaged in an accident that an insurance company cannot compensate. You not only lose your investment, but the bank also expects you to back the premiums and interest without default.

Halal financing operates on a profit-loss sharing basis, and this means that losses and proceeds are shared on a pre-agreed basis. The financial institution should become a party to the agreement as stipulated by the contract. It is for this reason that most Halal financiers take it upon themselves to check whether the product or investment you want to put the money in is viable and safe. Islamic banking intends to bring solutions to the problems that affect the society and not proceeds.

Even though Islamic finance has been in existence since 1960s, adoption is still low. The situation is changing, and conventional banks are opening Islamic windows as well. Dedicated Islamic banks are also opening more branches to enhance the spread.