Common Islamic instruments in financing

Most widely used in Islamic financing are musharakah and mudharabah. Both are the pioneer instruments applied during the early days of Islamic financing. However, due to several constraints new instruments have been introduced such as Salam, Istisna' and murabahah.

Whatever the instruments applied, the financing is always backed with asset. The asset is real asset and needed to generate profit in the transaction. Conventional financing or loan has no asset backed even though the loan is used to purchase an asset.

We will explore all the details in coming articles.

Basic Difference Between Capitalist & Islamic Economy

Capitalist or conventional economy focus solely or mainly on profit motive which always lead to 'end justifies the mean'. This objective is not controlled by any divine injunctions. Islamic economy, on the other hand, set the divine injunction as the ultimate objective which cannot be breached in any circumstances. Board of Directors (BOD) is the highest authority in capitalist organisation whilst Shariah Supervisory Council (SSC) rank at par (at least) with BOD in an Islamic organisation. The ideal situation is that SSC must be the highest authority however in reality they stand at par with BOD.

BOD members mainly dedicate their responsibilities to enhance the shareholders value. One may argue that the non-independent BOD members are responsible to balance the objective for shareholders and other stakeholders but in reality those members have insignificant vote in the board meetings. Thus, SSC members play the role to oversee with respect to the benefits attributable to other stakeholders especially society at large. They should not in any circumstances be victimized for the sake of profits.

Let's evaluate based on simple example as follows:

A company applies a loan or financing from a bank to setup it's business or for business expansion. Under conventional bank, feasibility study of the bank mainly in terms of ability to repay the debt is the main concern. Should the study confirm to be positive then the application may likely be approved. Similar concern is also applicable in an Islamic financing process however SSC will also evaluate the type of business whether any element of detrimental to the society will result besides all prohibitions or 'haram'. In other words, the Islamic economy will protect the public at large in any business transaction. As for conventional insurance and takaful, similar process of consideration applies.

Capitalist economy lead to monopoly environment whilst Islamic on free market based on demand and supply.

Interest Free Loan/Financing

Perhaps many of us still confuse between interest bearing loan and interest free loan which is one of the main concept of Islamic finance. We have been living in an interest bearing environment for decades and we find it rather weird to offer a loan without the interest. What is the rationale?

Perhaps we can look at it as follows. There are only two legitimate reasons for you to give some money to someone else. You may give because you want to help him or gain some profit out of his activities which involve your money. Should you give just to help him then you are ONLY entitle for the principal given with no additional above it. In other words, if you give RM1000 then you have the right to receive RM1000 back with no condition on the time frame. Next, if you give the money with the intention to enjoy some of the profits then you must also be willing to share the losses if any. For instance, if you give RM1000 and agreed for a 50/50 distribution basis on the profit then if the activity resulted in RM200 profit you are entitle for RM1000 + RM100 = RM1100. On the other hand, should the activity lead to a loss of RM200 then you are entitle for RM1000 - RM100 = RM900.

I guess the above examples are simple and easy to understand by all. We will discuss more on several methods and concept pertaining the Islamic Finance in future articles. The most common arrangements are mudharabah and murabahah concept however there have been several 'innovations' in Islamic Finance today arising from extensive researches by scholars and professionals.

Thus, interest free financing does not mean that the financier cannot make any gain from his initiative to lend the money to the other party. We will explore all those methods in Islamic finance which permit such exchange of money between two parties.

Introduction

I am an insurance/takaful professional however there has been dramatic transformation from conventional to syariah or Islamic finance in the business world. Perhaps due to the recent global financial crisis which rocked the entire financial market all over the world.

Thus, I will try to post interesting articles pertaining syariah or Islamic finance as knowledge sharing. Islamic finance has become a popular topic not just among Moslem but also non-Moslem evidence by increasing number of non-Moslem students enrolled in Islamic finance studies offered by many institutions like INCIEF, universities, etc.

I would also wish to invite you to participate with me and share your thoughts.

TQ.