Islamic financial system is a special environment in which the observance of religious principles is the basis for fulfilling obligations that both credit institutions and users of financial services are obliged to fulfill. Muslim finance can prevent economic instability by considering money as a means of exchange rather than as an object of value in itself. But this does not mean that only followers of Islam can use the services of Islamic financial organizations. In this article, we will look at the main advantages and ways of interaction provided by the Islamic financial system for both muslims and people of other religions.
1. Reducing economic inequality
Traditional financial markets tend to be aimed at enriching the rich, while Islamic financial markets promote an even and fair distribution of wealth and ways to share risks. Islam does not prohibit the accumulation of wealth, but regulates awareness and responsibility for the poor in a completely different way.
Everyone knows that the riskier the investment, the higher the yield. Only high-risk investors can afford to lose money. However, people with low incomes cannot afford to lose money, so they often do not invest. Islamic financial products encourage altruism, economic activity and social responsibility. Those who need money (for example, for the production of goods and services) share risk and profit with those who provide funds for this (investors). Islamic principles in financial markets can benefit people of all income levels.
2. Transparency and honesty in financial relations Islamic financial products are not as simple as it may seem. But they definitely provide users with a more transparent and honest mechanism of interaction. Most Islamic financial products are based on contracts corresponding to the Shariah (mudaraba or ijara), in which schemes containing uncertainty in financial relations are excluded. Islamic financial products are focused on real assets, not speculation.
The Shariah councils overseeing each Islamic financial institution ensure that an Islamic company promotes only products that meet the requirements of Islam. And representatives of all religions can use them without having to put themselves at risk.
3. Linking economic activity to real financial markets
In traditional financial markets, lenders and borrowers are those who have money and those who need cash. The lender (the credit card company) often doesn’t know how the borrower spends the money, and it doesn’t matter to them. The lender is only interested in being paid interest on the loan. The users of Islamic financial products are buyers, sellers or partners, the transaction, and not lenders or borrowers. And this is more fair to both sides.
Individuals and institutions that invest in Islamic financial products use their money to support specific economic transactions. The contracts they sign indicate what the money is spent on (for example, the materials needed by the manufacturer to manufacture a certain product). Islamic investments contribute to real economic activity, so investors can directly influence the local, regional or national economy.
4. Improving the processes of saving and investing
When you deposit your salary into a savings account at the bank, the bank promises to keep it intact and pay you interest. An Islamic savings account is also an investment tool. By signing a contract with an Islamic bank, you know that it plans to actively invest your money (in ways consistent with Shariah Law) in order to make a profit, which it will share with you.
Islamic investment instruments illustrate the concept of connecting financial markets with real economic activity. If you are saving money in the Islamic financial system, you are not isolating it from economic activity, as does a regular savings account in a traditional bank. You do not get a guaranteed refund in an Islamic account, but as long as your bank does its job well, you profit from transactions that support economic transactions in the real world, and not from transactions that occur only on paper and use money only to make money, which is prohibited by Islamic law.
5. No financial bubbles
By encouraging simplicity, transparency and strengthening the link between financial markets and economic activity, muslim finance reduces investment market fluctuations to unacceptable highs and destructive lows. When investors know where their money is going, they are more likely to understand the value of a business, project, product or other asset.
It can be argued that the Islamic financial industry has an unspoken “anti-crisis code” that prevents financial bubbles. It includes a financial verification process that Islamic investment funds use to determine compliance with Shariah. First, it filters out companies with too much debt compared to their market capitalization. A company with too much debt cannot invest in Islamic markets.
In other words, Islamic financial institutions are committed to the principles of social and economic development and bear more responsibility than their traditional counterparts.
6. Long-term investments support
In conventional markets, investors always want a quick return. The “buy and sell” investment philosophy seems strange in an era when people can make online transactions at any time. Unfortunately, quick decisions do not always bring profit and it is very difficult to choose a profitable industry for investment.
The Islamic approach to investment encourages slower and more thoughtful decisions. Muslim investors tend to avoid companies that harm people or the environment. Each Islamic foundation selects such companies as a first step. Further, eliminating companies with risky financial practices reduces risk and creates investment stability. Intensive checks, risk reduction, greater stability and socially responsible investments are not quick actions or (usually) quick returns. Investors who follow Islamic principles make more thoughtful choices and take on long-term commitments.
7. Reducing the adverse effects of harmful products and practices
Shariah law prohibits supporting harmful industries or activities (for people or the environment). Muslims cannot eat pork, drink, watch porn or gamble. Shariah Law also prohibits interest, speculation and gambling, cloning and much more. Islamic institutions create Shariah-compliant banking and investment products so that Muslims and followers of other religions can make reasonable and safe investments. Islamic financial products prevent the production and distribution of alcohol, which improves public health. By limiting investments in the production of weapons, Islamic financial products prevent their use during wars, protecting civilians from death and destruction. Islamic investment solutions contribute to the strengthening, stability of society and a healthy economy.
All over the world, people are striving for greater economic stability. After numerous crises, many countries want positive changes. They understand that there are inherent flaws in the traditional financial system. They want a fairer, more transparent, responsible and reliable system. Muslim finance cannot resolve economic crises, but it can prevent economic instability. By considering money as a mean of exchange rather than as an object of value in itself, considering profit only as one of many reasons to participate in investment activities, serving all people, muslim finance encourages the type of responsibility that people around the world really deserve.
IslamicCoin is the first project to provide the community with powerful financial technology that allows for seamless transactions, support innovation and charity. The project is 100% compliant with Shariah law and benefits the community. Developers focus on sustainable development and use technology and innovation to ensure financial sustainability.
“At the heart of Islamic finance is the prohibition on charging interest. Muslim finance has always been focused on not shifting most of the risks to one side of the financial relationship. In muslim finance, balance and transparency of transactions should be observed, which can negatively affect our society,” says Mohammed AlKaff AlHashmi, one of the founders of IslamicCoin.
IslamicCoin is aimed at 1.1 billion Muslims using the Internet. The project creates convenient tools designed for users who have never been owners of cryptocurrencies. Thus, the creators of IslamicCoin are expanding the capabilities of the Muslim online community by providing it with opportunities to use a new form of digital money and involving them in the modern digital world.