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Islamic Financial Principles: A Comparative Strength

Existing models of capitalist systems have proven to be failures, creating disasters after disasters. Now, an environmental collapse looms upon us due to maximal extraction of profits without any regard for social and human considerations or future generations. This is because they teach at Harvard that your job is to maximize profits regardless of social consequences. Hence, there has been an increasing interest in Islamic sharia principles of finance. However, if we try to mould Islamic Economics under any pressure to match current conventional finance practices, it will take away the crux and true beauty of Islamic Economics Principles. This is the main issue facing the Islamic world today that there are two versions of Islamic economics ideas, which are at battle with each other. One of them is the group of Islamic economists who say that we need not use the word Islamic we can just call it “ethical finance.” It is a cost-benefit analysis and involves social accounting. So in essence, what they were saying is that Islamic ideas are nothing new and these ideas already exist in western finance.

This idea is emphatically false, but unfortunately, Muslims are so under the spell of the Western ideas and institutions that they try to modify Islam to make it fit into Western models. To understand true Islamic financial models, we first need to go to the underlying spirit of the transactions. It is not the form but the spirit that matters. In markets, there reigns an adversarial mentality. For example, for an interest-based transaction, you give a loan to a person to buy a house. The mortgage loan uses the house as security. If the person doesn’t pay back the loan then you cease the house. In this situation, the bank is perfectly safe and it can give loans to anybody at all. And this is exactly what is happening. Their interests are exactly opposite to each other.

If we try to mould Islamic Economics to match the conventional finance practices, it would take away the crux and true beauty of Islamic Economics.

The global financial crisis occurred because the banks gave the loans to the people knowing that they will fail to pay back and then the bank would cease both the house and the deposits. This was an adversarial transaction. Opposed to this, if we made a diminishing musharika type loan where both the parties–the bank and the buyer–own the house jointly and if the housing market collapses, both will suffer, the bank no longer has the interest to give the loan to someone who will fail because they will also lose if there is a problem.

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Similarly, Takaful and insurance also show the difference between adversarial (market) and cooperative (Islamic) transactions. In insurance, a company that is selling insurance is gambling against you that if you sell them a claim the company will try to minimize the damage you have suffered. On the other hand, you will try to maximize the damage.

Here again, their interests are in a crossword position. This kind of transaction creates hostility and animosity in society. As opposed to that Takaful is a group of people who get together to try to help each other in their time of need. Everybody puts in some money in a common pool. If one suffers damage in an Islamic framework, people in the cooperative will try and convince him to take the money from the common pool and he will use it sparingly so as for other brothers to have in time of need.

“Bank and waqf” is another example. A person in a capitalist society puts his money in a bank to try to make even more money, but a person who has excess money in an Islamic society tries to make it available to others via ‘waqf’.

So if you have one million dollars, capitalism says make another million with it. In Islam, Prophet Muhammad (PBUH) was approached by someone that I have a lot of money. He (PBUH) said, “Create a ‘waqf’, you will do well and this goodwill last until the ‘waqf’ lasts.”

So this is the key difference between the spirit of transactions in Islamic finance which is “cooperation, generosity and social responsibility: and the spirit behind capitalism is “greed, competition, individual pursuit of pleasure and hedonism.”


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