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of finance. The global Islamic finance industry
is growing at a rapid rate, with an
increasing number of countries recognizing it as a legitimate alternative to
conventional finance. The history of Islamic finance is rich and diverse, and it
continues to evolve with the changing needs of the global economy.
Islamic finance refers to financial systems that abide by Islamic law, also
known as Sharia. Sharia law includes rules for economic and financial conduct,
which are intended to promote social justice, fairness, and ethical behavior.
Islamic
finance prohibits interest (or riba), speculation (or gharar), and gambling (or maisir).
Therefore, Islamic finance is based on shared risk and profit, as well as the concept of
asset backing.
- Islamic banking: Islamic banks operate under the principle of profit-sharing
rather than charging interest on loans. Islamic banks also provide a variety of services
similar
to conventional banks, including current and savings accounts, investment
accounts, and credit cards.
- Islamic bonds (or sukuk): Sukuk are financial instruments that represent
ownership of an underlying asset or project. Sukuk provide investors with a share of
the profits generated by the underlying asset.
- Islamic insurance (or takaful): Takaful is a cooperative risk-sharing system
that protects individuals and businesses against loss or damage. Takaful follows the
principles of mutual help and cooperation.
- Islamic investments: Islamic investments are made in accordance with Sharia
law, and typically focus on ethical investments that have a positive social impact.
Islamic investments may include real estate, stocks, and other financial instruments.
Overall, Islamic finance aims to promote social welfare,
ethical behavior, and
financial stability. Islamic finance is a growing industry,
and is increasingly
becoming a mainstream financial system worldwide.
Islamic finance refers to financial systems that abide by Islamic law, also
known as Sharia. Sharia law includes rules for economic and financial conduct,
which are intended to promote social justice, fairness, and ethical behavior. Islamic
813
from issues such as unclear interpretation of Shariah, differences between Shariah
scholars, or lack of expertise in Shariah compliance.
2. Credit Risk: This is the risk that a borrower may not be able to repay their
debt, resulting in a loss for the lender. This risk is faced
by both conventional and
Islamic finance, but in Islamic finance, the ruling on interest or riba may affect the
repayment process. The borrower must pay back the principal amount and, in some
cases, a predetermined or agreed-upon profit margin. In case of default, the lender
may bear the loss instead of charging interest.
3. Market Risk: Market risk refers to the risk of losses due to changes in market
conditions. In Islamic finance, market risk is associated with commodity-based
transactions such as murabahah or mudarabah, where the
price fluctuations of the
underlying asset can impact the profitability of the transaction.
4. Liquidity Risk: Liquidity risk refers to the risk that an investor may not be
able to sell an asset or access funds when needed. In Islamic finance, liquidity risk
can arise because of the lack of a secondary market or limited participation of
conventional banks.
5. Operational Risk: This is the risk of loss due to internal operational failures
such as fraud, errors, system failures, or human errors. Operational risk in Islamic
finance is similar to conventional finance, but the application
of Shariah-compliant
methods and processes may require additional due diligence and monitoring.
In conclusion, Islamic finance faces risks like any other financial system.
However, the specific nature of Shariah compliance and the use of profit-and-loss-
sharing arrangements can lead to unique challenges in managing risks. Appropriate
measures such as having a strong governance framework, due diligence of Shariah-
compliance, and providing adequate liquidity can mitigate these risks and promote
sustainable growth in Islamic finance.
