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 financial tools 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 conventional financing looks forward to profiting through interest where the beneficiary becomes liable for any risk, Islamic Finance paves the way for sharing the profit and risk involved in a proportional manner between the capital provider and the beneficiary.
In addition, Islamic Finance also promotes social justice. Islam permits a free-market economy in which the forces of supply and demand shape the market, but it also guides the function of the market system by implementing certain rules and ethics that promote social justice. In this context, social justice is the equitable distribution of wealth that helps to alleviate the disparities of welfare. The Islamic rules, such as zakat, prohibition of riba (interest) and encouraging shared risk, advocate financial and social justice.
2. Islamic Finance Lowers the Impact of Harmful Products and Practices.
Shariah principles forbid any transactions that support industries or activities which Islam forbids, such as usury, speculation and gambling. Even if these activities are legal in some regions, it is in contrast with Islamic principles. Islam prohibits industries that are harmful to society. The prohibited businesses under Shariah law include interest-based finance, conventional insurance, alcohol, prostitution, pornography, 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. Islamic Financing institutions usually avoid companies whose financial operations are over risky. This approach promotes risk reduction and creates the opportunity for more stability through analysis and performing intensive audits. Islamic financial products aim to eliminate the dependency on interest-based debt contracts. Islamic finance emphasizes asset-backed transactions and is based on the risk-sharing principle.
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