5 Common Questions In Islamic Finance People Often Ask About

We often receive questions about Islamic finance. Here we tell you the answers to the five common questions In Islamic Finance that people frequently ask.

What is Shariah?

Shariah refers to Islamic religious laws that include a set of principles and guidelines for Muslims. Shariah guides its followers in their day-to-day activities, including financial decisions. Islamic Finance and Banking carry out activities based on the established rules of Shariah. For instance, haram businesses that deal with alcohol, pork, and collecting interest are prohibited according to Shariah principles. Shariah-compliant finance is rapidly increasing business among banks and investment houses.

What is Islamic Banking?

Islamic banking refers to the banking activities that follow shariah rules. Particularly, there are two basic principles in Islamic banking: the sharing of profit and loss and the prohibition of interest. That is, Islamic banks allow to earn profit through equity participation rather than paying interest. Nowadays, some conventional banks have started to establish Islamic Banking windows that offer Islamic banking services to their customers.

What is Riba?

Riba is an Arabic word, meaning in English usury or interest. We use this term in Islamic finance to describe the amount of interest. Usury, or the charging of unnecessarily high-interest rates, is another term for it. According to Islamic Jurists, Riba also refers to the exchange of goods with unequal quantities or qualities

What Are the Main Differences Between Conventional and Islamic Banking?

Islamic banks operate following Shariah principles, while conventional banks follow traditional finance rules. Islamic banks do not engage in activities forbidden in Islam. For example, Islamic banking prohibits usury, maysir, gharar, and investments involving forbidden things (such as alcohol, pork, etc.) in the Qur’an. The most distinguishing factor between the two is the contract used to form their financial product. Islamic banks develop their financial product based on Islamic financial contracts. While conventional banks offer their financial product based on interest.

What Is the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)?

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a not-for-profit organization established to provide Shariah standards for Islamic financial institutions in 1990. The organization ensures that participants follow the rules specified in Islamic finance. Furthermore, the founding and associate members of the organization define the acceptable standards for various functions, including accounting, governance, ethics, transactions, and investment. Besides, AAOIFI constantly updates its guidelines to respond and adjust for innovations.

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