3 Opportunities for Islamic Finance You Should Know

Islamic finance is deemed to expand due to the economic growth in countries with a significant Muslim population. Furthermore, Muslims seek Shariah compliant financial products. Hence, there will be opportunities for Islamic finance to grow overtime. In this short article, Musaffa attempts to highlight three opportunities for Islamic finance.

Islamic finance is a type of financing that aligns with Shariah rulings. Furthermore, the purpose of Islamic finance is clearly to promote equity and bring social justice. That is why the element of riba, gharar, and maysir does not exist in Islamic finance.

In contrast to conventional finance, Islamic finance has a unique arrangement in its transaction. The 3 widely common arrangements are:

  • Profit and loss sharing partnership (Mudharabah).
  • Profit and loss sharing joint venture (Musharakah).
  • Leasing (Ijarah).

You can read the article about Islamic finance products here

The practice of Islamic finance gives an alternative way for Muslims to participate in the market. Furthermore, the demand for Islamic finance by Muslim and perhaps non-Muslim investors creates an opportunity for Islamic finance to grow further and develop.

3 Opportunities for Islamic Finance

1- Demand from Muslim populations

Islam prohibits Muslims from engaging in transactions that involve interest (riba), gambling (maysir), and excessive uncertainty (gharar). However, conventional finance includes these elements in its transaction. Therefore, the need for Islamic finance among Muslims gradually increases due to this issue. Furthermore, oil-exporting regions are dominated by Muslim countries where Muslim investors require Shariah compliant products. Hence, the demand for Islamic finance will contribute to the development of Islamic finance.

2- Promoting macroeconomic and financial stability

Islamic finance incorporates the principle of risk-sharing and asset-based financing in its products. This principle assists financial institutions and customers in having better risk management. Furthermore, it will mitigate the occurrence of credit booms.

Again, in Islamic finance, a vast portion of bank deposits operate under a profit-sharing and loss-bearing basis and are explicitly subject to “bail-in” measures in the event of a banking sector facing distress. Last but not least, Islamic finance also upholds a high level of ethical conduct, governance, and consumer protection.

3- Contributing to economic growth

As stated above, Islamic finance operates on the principle of risk-sharing within its products. This principle will be particularly suitable for small and medium enterprises (SME) and start-ups contributing to the promotion of economic growth.

Sukuk, as an example, is introduced as an Islamic alternative to bonds. This product has its significant value in the Islamic finance industry. Hence, it has the potential to bolster investment and contribute to economic development.

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