The modern Islamic financial industry has grown rapidly throughout the world since its first inception in 1960s. The first Islamic bank was established in 1975 is Dubai Islamic bank. The industry has got the attention and interest among Muslims and non-Muslims alike. The vision of earlier Muslim economists was to establish a robust, viable and competitive financial system which would be the better alternative of conventional financial system. But what is a financial system?

Moving Money Where It's Needed

A financial system is a set of financial markets (places where people buy and sell) and institutions (businesses). These markets and institutions help to bridge the gap between those who don't have enough, and those who have extra. In economic terms this is called deficit income units and surplus income units.

The financial institutions and markets help money and resources to flow from those who have extra money and channel that money to those who need money. Some examples of financial institutions include banks, insurance companies, mutual funds, capital markets, and money markets.

The flow of money in an economy plays a vital role in the development and economic growth of companies. When an financial system works well , it channels money towards the business entities to produce goods and services, and that in turn leads to employment, productivity and economic growth.

Islamic Financial System

An Islamic financial system plays the same role, but is governed by additional rules designed to help a society establish social justice and eliminate financial exploitation. These rules and guiding principles are termed "Shariah" and includes a number of unique and distinctive characteristics not found in conventional financial systems. It includes rules such as:

  • Prohibition of fixing a predetermined rate of interest ("riba")

  • Prohibition of excessive ambiguity or uncertainty in contracts ("gharar")

  • Prohibition of gambling ("maysir")

  • Prohibition of economic activities which harm the society such as alcohol and pornography

  • Prohibition of monopoly and the goal of providing equal opportunities to everyone in the society, and establishment of a social safety net for the poor ("zakah")

The Islamic financial system aims to facilitate and mobilize resources for all legitimate and socially responsible business and trade activities.

Examples of Islamic financial institutions include Islamic banks, takeful insurance companies, Islamic mutual funds, Islamic capital markets, Islamic microfinance institutions, and Islamic crowdfunding platforms.  We'll explain more about these types of institutions in a future article, inshallah.

System Designed for Social Justice

The Islamic financial system is not just a system without charging interest; it's a system with the goal of creating a just society by promoting beneficial socio-economic activities conducted with fairness, fraternity, and cooperationand to remove all illicit and harmful activities.

In the coming articles, we'll discuss the core Shariah principles and rules which govern Islamic financial system, inshallah.