In this article, we will discuss why Islamic banks are better than conventional banks.
Islamic banking is gaining traction around the world, with the number of Islamic financial institutions in the Middle East and Southeast Asia skyrocketing. The international financial institutions in Europe and the United States started to recognize Islamic financial instruments. The goal is to attract investors who prefer Islamic credit instruments such as Murabaha, Mudaraba, Musharaka, and Ijara.
Why Islamic Banks are Better Than Conventional Banks?
1. The Concept of Financial and Social Justice
Without financial justice, Islamic Finance products cannot operate in a Shariah-compliant way. When it comes to Islamic Finance products, financial justice is one of the most basic requirements. While Western or conventional financing looks forward to profiting through interest where the beneficiary becomes liable for any risk, it paves the way for sharing net profit/ and the risk involved in a proportional manner between the lender and the beneficiary.
In addition, Islamic Finance also promotes social justice. Islam permits a free-market economy in which supply and demand are determined by the market, but it also directs the function of the market mechanism by enacting certain rules and ethics that promote social justice. Social justice is the balanced distribution of wealth that helps to alleviate the imbalance of welfare. The Islamic rules in promoting financial and social justice such as requiring zakat, prohibition of riba (interest), and encouraging shared risk.
2. Islamic Finance Lowers The Impact of Harmful Products and Practices.
Shariah principles forbid any transactions that support industries or activities which Islam forbids. For example usury, speculation, gambling. Even if these activities are legal in certain cases, it is in contrast with Islamic principles. Islam prohibits industries that are harmful to society. The prohibited businesses under Shariah law include alcohol, prostitution, pornography, weapons of mass destruction, pork, tobacco, and illegal drugs.
3. Promotes Stability in Investments
One of the main things about Shariah-compliant finance, within it, you can approach the investments with a slower, well-thought decision-making process. However, in conventional finance, it is totally opposite. Islamic Financing institutions usually keep away companies whose financial operations are too risky. It encourages the decrease of the risk and creates the opportunity for more stability through analysis and performing intensive audits. Islamic financial products are designed to reduce the dependency on interest-based debt contracts. Islamic finance emphasizes asset-backed transactions and is based on the risk-sharing principle. It also prohibits the use of excessive debt and various complex securitization.
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