Open Learning INCEIF: Islamic Finance (Shariah) Part 1 Lesson 1

Balancing

Islamic finance is the system that operates according to Islamic law/shari'ah, the system have to adhere to certain principles:prohibit riba (interest), gharar, gambling & unethical investment and those how Islamic finance differs from its conventional counterpart.

Today, Muslim looking for barakah ways to have the assets and to invest. Islamic Finance as an alternative approach. When people get a loan from conventional bank and thing go wrong people delay payment, the bank imposing the penalty. Islamic Finance, on the other hand, when people delay the payment, they will pay certain amount to a charity and not income of the bank. The charity fund might be maintain by the bank which will be used for charitable purposes approved by the shariah.

Islamic economics is based on core concepts of balance, which help ensure that the motives and objectives driving the Islamic finance industry are beneficial to society.

• Balancing material pursuits and spiritual needs
  
• Balancing individual and social needs
  

I believe Islamic finance applied to be beneficial to society.

Challenges You May Face

I agree that terminology, understanding the definitions, pronunciations, spelling, traits between Arabic words and English version and the synonim of terms are challenges in learning Islamic Finance.

I found the word "Murabahah", "mudarabah", "musharakah" from some articles ends without "H" and the using of "sh" and "sy" in musharakah.

The Terminology Land: Tips for Managing the Challenges

Maslahah literally means benefit, the synonim of manfa'ah. Maslahah prioritize the needs of the public / public interest. Al - Ghazali defined Maslahah as the consideration which secures a benefit or prevent harm, but is, in the meantime harmonious with the aim and objectives of the shariah. Those objectives consist of protecting the five essential values:

1. Religion/ Ad - Din / Faith
2. Life
3. Intellect/ Aqal / Rationality
4. Posterity/ Progeny
5. Wealth / Property

Ladin (2006) scholar have divided Maslahah into three categories:

1. Maslahah Mu'tabarah - which the Qur'an and Sunnah has expressly upheld and has enacted a law for its realisation
2. Maslahah Mulgha - which the Qur'an or Sunnah has nullified either clearly or by indication that could be found in shariah, for example: the practice of usury in transactions
3. Maslahah Mursalah - can be observed in different enactments of the laws, which benefits the people and prevents them from harm, for example traffic regulations, regulations related to financial management, regulations related to family matters

In finance, application of Maslahah, for example collecting usury will lead to the exploitation of the rich against the poor which would worsen the state of society and proverty, Ghofur (2008), so that the prohibition of usury would lead to great Maslahah for the ummah, Al - Qadrawi (2001).

At the same time, to prevent harm/loss, for example in doing business, in case where Islamic banking and Finance are not available, Muslim are permitted to deposit their money in Conventional Bank as long as they not breach the shariah principles.

Another definitions says that Maslahah is the benefits or interests which are deemed necessary from shariah perspectives to protect and preserve the five darurah (Al - Mansul, Fakhruddin Ar - Razi, p.24)



Islamic Finance and Conventional Finance

There are some differences between Conventional Banking and Islamic Banking, i want to share the table below:

Conventional Finance	Islamic Finance
Earning interest, the basis calculation of interest is time value of money	Earning profit, prohibiting usury (interest), instead of interest charged, the islamic bank makes “ a profit on the sale of goods”
No concept of sharing loss/risk	Encouraging sharing risk
The loan given not backing by assets or services	Assets and service backing
Based on loan which is represent the underlying contract of the activities	Contractual certainty, contract is the important thing in Islamic Finance to avoid ambiquity or uncertainty, profit rate is defined in the contract and contract also promote risk sharing between provider of capital and the entrepreneur
Conventional Finance does not care of the type of investment wether halal or haram	Some investment are prohibited, it is prohibited to invest in activities deemed contrary to Islam such as selling alcohol, pork industry, pornography and other haram investment
Money as commodity, this condition leads to inflation	Money as the medium of exchange, this situation contributes to economic development due to trading the real sector
No space for shariah board to monitor & advised	Shariah board monitor and advised

An Islamic bank different from conventional counterpart by the basic principles. The basic principles of Islamic bank that govern 80% of all Islamic transactions are: Riba free transactions, risk sharing, asset & services backing and contractual certainty.


Takaful and Insurance

Conventional Insurance

is a way to provide security and compensation to what is valuable in the event of its loss, damage or destruction based on risk taking and speculation. The practical aspect of conventional insurance includes elements qimar or maysir (gambling) and riba (interest).

- The premium is paid to conventional insurance and is owned by them in exchange for bearing all expected risk. Premium paid by the policyholder is considered as income to the company, belonging to the shareholder.
 - In conventional insurance, risk is transfered from the insured to the insurance company (the insurer) in consideration of insurance premium paid by the insured. It contains an element of gambling i.e “maysir” in that the insured pays an amount (premium) in the expectation of gain (compensation/payment against claim). If the anticipated loss (claim) does not occcur, the insured loses the amount paid as premium. If the loss does occur, the insurer loses a far larger amount than collected as premium and the insured gains by the same.
- All surpluses and profits belong to the sharehoders only. The insured is covered during the policy period but is not entitled to any return at the end of such period.
– Funds are mostly invested in fixed interest bearing instruments like bonds, securities, hence these contains the elements of riba (usury)

Takaful

Islamic system of insurance based on the principle of “ta’awun” (cooperation) and “tabarru” (gift, give away, donation) where the group voluntarily shares the risk collectively.

– There is full segregation between the participants takaful fund acoount and shareholders' account. The portion of investment is based on an underlying contract of musharakah/mudarabah to invest in halal business and earn a halal profit. Any ratio of profit between the policy holder and managing partners (takaful company) can be determined on the basis of the principles of musharakah or mudarabah
– In case of insufficient assets and reserves of the waqf to compensate the policyholders of takaful, the takaful company may arrange a financing or re-takaful for the waqf as per rules of the takaful company wetted by the shariah supervisory board of the company
– Any surplus in the takaful fund is shared among participants only and investment profits are distributed among participants and shareholders on the basis of mudarabah or wakalah models
– The takaful fund, consisting of the contributions paid as tabarru, will be invested by the company based on the principle of islamic modes of trade, through which the element of interest (riba) will be replaced. The capital of waqf can be invested into halal and secured schemes of investment

Source: 

https://www.openlearning.com/inceif/courses/intro-to-islamic-finance1/tips_to_manage_the_challenges