3 Common Misconceptions About Islamic Finance You Should Know

There are several misconceptions about Islamic Finance because Islamic finance is one of the fastest-growing sectors in the world. It targets a vast majority of the global underserved population by the financial services industry. 

Some Statistics on Islamic Finance

Since its inception four decades ago, the Islamic financial services business has experienced rapid expansion. Islamic finance has developed at a rapid speed over the previous decade. The number of Islamic financial institutions in the world has increased from one in 1969 to over 500 in 2009, spread across more than 75 countries, with Bahrain in the Middle East and Malaysia in Southeast Asia serving as the most important centers.

Since its inception in the 1970s, Islamic financial organizations that provide Islamic financial services have grown considerably. There are about 500 Islamic financial institutions in 75 countries around the world. The world’s 100 largest Islamic banks have set an annual asset growth rate of 26.7%, according to the Asian Banker Research Group. Additionally, according to S&P Global Ratings, the worldwide Islamic finance industry is expected to grow by 10% – 12% in 2021-2022.

Common Misconceptions about Islamic Finance

– Islamic Finance is only for Muslims

One of the common misconceptions about Islamic Finance is that Islamic finance is only for Muslims. However, it is a wrong conception. Non-Muslims can save money, invest, and use Islamic Bank’s services; they can even work there. Islamic Banking is quickly expanding around the world, not just in Muslim-majority nations, but also in non-Muslim-majority countries such as the United States, Singapore, and the United Kingdom. There is a tremendous growth of Islamic Finance and Banking, although they are not Muslim-majority countries. Non-Muslims account for 15% of Islamic Bank customers in Malaysia. This obviously demonstrates the importance of Islamic banks among non- Muslims.

Although Muslims are the major customers of Islamic Finance providers, there are some reasons for non-Muslims to join as well. Islamic Finance services are not only competitive, but they might even be more appealing than conventional ones.

Islamic finance focuses on charitable activities

In the Islamic faith, charity is a core pillar, however, that’s not to say that any investments should not generate a profit. It is true that Islamic finance institutions aim to gain profit, but they cannot profit from interest (known as “riba”) or other activities prohibited by Islamic law. 

Shariah law essentially prohibits you from using money to make more money, so you can’t make a return by simply lending your cash to someone else. However, you can profit from doing “work” – so asset classes, such as equity, property, and commodities are generally permissible to invest in.

– Islamic finance more expensive than conventional finance

That is not the case. The cost of financing typically depends on the risk exposure or ‘credit’ involved. Where a financier considers that it is taking a greater risk, a higher rate of return would be charged. This is no different for the financier on an Islamic finance transaction.

With growing competition (particularly from international banks operating through “Islamic windows”) and enhanced Islamic product ranges, the Islamic finance industry has evolved into a worldwide phenomenon capable of competing with conventional financing. Products are particularly competitive in the Middle East, for example, where the Islamic finance market is strong.

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