Islamic Finance is peculiar in its basic principles and norms on which it is grounded. In this respect the harmful effect of the world economic crisis touched upon it is different a bit in contrast to Western-style finance. It is no surprise, however, where the main controversial factor lies when comparing two financial systems. The main reason for different rates of losses that were experienced in two financial systems is in their characteristic features.Let our writers help you! They will create your custom paper for $12.01 $10.21/page 322 academic experts online
The philosophy of Islam touches specifically the issues of financial economical relationships between individuals. In this case the main approach is to neglect (for Quran prohibits it) the Western interest-based (riba) model of investment (Usmani & Zubairi, 2010). On the other hand, the Islamic world of finance is historically and traditionally based on asset management (Obaidullah, 2002). Thus, the financial system in Islamic countries is largely based on:
Thus it is vital to compare/contrast two main financial systems in their characteristic features. First, it is about time to mention the main four factors driving capitalist countries toward profit gains. These are, as Usmani & Zubairi (2010) admit, as follows:
Thus, financial, human, and natural resources are conjugated to make aims as closer as can be, notwithstanding any secondary factors (especially concerning human beings). To make it clear, the thirst of lucre in capitalistic countries seems to be above all. The crisis which took place in 2008 had been generated by a greed and irresponsibility that people in the West had while taking mortgage loans. Proportion between needs and opportunities is, unfortunately reduced in the Western “consuming world.”
Conversely, Obaidullah (2002) calls the Islamic financial and banking system as one based strictly on ethics. It is no wonder that the pivot of Islamic trade and financial relationships in the Middle East, particularly, grounds on religion. Usmani & Zubairi (2010) remark only three means for production in Islamic countries, namely:
Despite the quantitative difference in two systems there is a qualitative factor that alters attitudes toward Islamic finance. For instance, the capital is the means of production which should guarantee that money were wholly invested or changed in their form during the process of production (Usmani & Zubairi, 2010). Thus, there are no debt issues between two parties agreed to use capital properly. Hence, summing up all assets Islamic finance provides a specific but quite logical scheme for provision of relationships between all parties involved in the process of production. Three shares are combined, as stated in Usmani & Zubairi (2010):Order now, and your customized paper without ANY plagiarism will be ready in merely 3 hours!
- Obtain profit (not interest) from Capital;
- Rent a part of Land;
- Give wages for Labor.
Looking at the main reason which reflected the crash on world stocks and crisis, as a result, was as has been mentioned before, the mortgage problem. El-Gamal (2006) admits that Islamic finance follows the principles of credit sale (not loan) when proposing mortgagee to purchase the property with the title on the same level of interest rates (muharaba alternative) that are guaranteed by the bank. Thus, any volatility of rates is excluded and mortgagor can be sure to have money back from a mortgagee on such lucrative conditions. Thus, the banking system in accordance with the Islamic finance is more protected from spontaneous bangs of mortgage “bubbles”. Furthermore, it becomes more attractive for clients of different shape in terms of social stratification.
The crisis of 2008 shook economies of many countries in the Western part of the world. It was a challenge for checking out either Islamic finance is resilient and ready to resist harmful outcomes of the crisis. In this respect one should know that Bahrain is the center for financial operations and accumulations in the Gulf and across the Middle East. Due to the well-crafted attitudes between banks and clients in Islamic model there are more points focused more on trade and Shariah. Thereupon, close relationships with clients decrease the risks of falling down. The pivot of religion is still strong. Moreover, the Bahrain Monetary Agency (BMA) has been playing an active role in promoting the liquidity of the Islamic financial market (Hassan & Lewis, 2007).
Furthermore the closeness of businesses and their syndication in the Islamic world also influences the firmness of Shariah-compliant model of financial relationships. Thus, Islamic companies are also united under the main rules of non-Riba agreements. Hence, Shamil Bank of Bahrain “has managed more than 20 deals totaling over US$2 billion” with 56 different Islamic financial and conventional institutions (Hassan & Lewis, 2007, p. 387). This only example shows the immense growth of Islamic finance. This model has proved to be a “safety belt” for financial institutions in terms of minimizing risks and maximizing banks’ accountability in operating their funds. Thus, in situation with the global economical crisis Islamic is underlined as the recession-proof incentive for the financial world.
Following the terms of Shariah, Muslims appreciate the prohibition of riba. However, it does not mean that Islamic finance seeks for no shares in business and investments. In this respect Zaher & Hassan (2001) outline the specific form of banking relationships, as Profit-Loss Share (PLS). It means that “the Islamic PLS-banking allocates financing to the most productive business ventures, as the share in returns is more promising” (Zaher & Hassan, 2001, pp. 157). Due to such a winning attitude toward the financial agreements, Islamic contractors cannot be persuaded in the fact that their investment will be reimbursed if there is no signal of a business to be on tops.
Islamic system does not also prohibit making money from “all-cash or barter” forms of financial and economical relationships (Qorchi, 2005). It presupposes that when Western-style finance tries to make more profits solely by means of interest-based agreements, Islamic finance goes forward by means of other ways to make agreements and hold country economy firm and stable in growth. Moreover, the researchers provide a survey that Islamic banking is likely recession-proof. As concerned with the crisis of 1998, the only exclusions touched upon “the Dubai Islamic Bank in 1998 and Ihlas Finans in Turkey in 2001” (Qorchi, 2005, pp. 1).
To sum up, the future of Islamic finance has lots of arguments to be sustainable and recession-proof for countries using it to date. It is well-described on the economies of the Islamic countries in the Middle East and South-East Asia with hubs in Bahrain and Malaysia respectively (Zaher & Hassan, 2001). The further development of Islamic finance in terms of the crisis of 2008 will definitely go by the way of an ethical approach. In this respect the religious aspect is too significant and helps keeping finance and economies stable more effectively than any business agreement. Shariah hereby is a regulatory measure to drive and verify the lawfulness and appropriateness of financial relationships between Muslims. Thus, financial and banking systems have fewer problems than Western-style finance model. The main construct to ground this assumption is by current high and stable development of Islamic finance in various Islamic countries.We'll complete your 1st custom-written order tailored to your instructions with 15% OFF!
Obaidullah, M 2002, Islamic Financial Services, Islamic Economics Research Center, King Abdulaziz University, Jeddah, Saudi Arabia, Web.
El-Gamal, A 2006, Islamic finance: law, economics, and practice, Cambridge University Press, Cambridge.
El Qorchi, M 2005 Islamic Finance Gears Up, Finance & Development, Vol. 42, No. 4, pp. 1-7.
Usmani, MIA & Zubairi, Z 2010, Meezan Bank’s Guide to Islamic Banking, Web.
Zaher, TS & Hassan, MK 2001, A Comparative Literature Survey of Islamic Finance and Banking, Finnacial Markets, Institutions & Instruments, Vol. 10, No. 4, pp. 155-199.