HOW ISLAMIC FINANCE HAS MADE A NICHE IN UAE?
How Islamic Finance has made a niche in UAE?
Either you want to start your own business in UAE or you are looking to build your own home in the heart of Dubai, you need a solid capital to make your dreams come true. Well, you are not alone as there are some powerful financial instruments that can help you to achieve the objective. As you are in UAE you have an option to select Conventional finance or Islamic finance.
Conventional VS Islamic Finance:
The conventional banking system is based on interest payments at a rate pre-set on the deposits of money. While payment and receipt of interest is prohibited under Islamic finance. However, through Islamic banking, financial inclusion can be promoted and bring a larger pool of savings in the local and global economy. It is also defined by World Bank in 2017.
Working of Islamic Finance:
Islamic finance is deep, complex and based on faith and believes, so certain financial instruments were developed to comply with the Islamic Principles. We may easily understand these instruments and these are as followed:
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Murabaha:
Under this transaction the asset is purchased by the financial institutions on behalf of client and are resold at a pre-determined price. The payment by client could be in lump sum or in installments and ownership of the asset is transferred at the end when final payments are made.
Mudaraba:
In Mudaraba one party contributes capital while the other party contributes Knowledge and expertise. Profits are shared according to a predetermined ratio. The investor is not guaranteed a return or bears any financial loss.
Sukuk:
Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, legal rights and services and the assets of particular projects. The returns on the certificates are directly linked to the returns generated by the underlying assets. Get to know more about Sukuk!
Ijara:
Under this instrument the bank purchases asset on behalf of client and allows usage of asset for a fixed rental payment. This rental includes part rent and part capital. The ownership of the asset remains with the financier but it gradually transfers to the client who eventually becomes the owner. Get to know more about Ijara!
Musharaka:
In this concept different parties contribute capital and profits are shared as per the pre-determined ratio, although the losses are shared in proportion to capital contributions. Get to know more about Musharaka!
A Riser in 2008 Crisis:
It is believed that during the Global Economic crisis in 2008, Islamic banking displayed stable positions against the risks and became more attractive leading to an increase of its share. Therefore, the non-Muslim population as well as those Muslim, utilizing conventional banking system started inclining toward Islamic banking system.
Prospects of Islamic Finance:
However, the recognition of Islamic finance is recent, the growth is remarkable and promising. With hundreds of specialized institutions located in more than 80 countries, this sector is expected to be $3.9 trillion by the end of 2024.
The Concept of Islamic Finance:
With the evolution of Islam, the concept of Islamic finance came into existence. The core concept of Islamic finance is ‘Allah is the owner of all wealth’, and humans are merely its trustees. Therefore, humans need to manage wealth according to Allah’s commands, which promote justice and prohibit certain activities.
Islamic finance is a way of doing financial transactions and banking while adhering to Sharia (Islamic law). Sharia means clear path. Islamic finance is a guide to establish social and financial objective determined under Islam. As Social and financial strength is the key feature of Islamic finance, it is based on some basic principles:
Profit and loss sharing:
In Islamic law the concept of profit and loss sharing is simple, it is based on the part played by the parties.
Shared risk:
Risk sharing is promoted unlike the conventional banking where risk always lies with the party not the financial institution. Burden of risk divided.
Prohibition of Riba:
There is no concept of earning money by charging interest (Riba) and fees for services. Islamic banks earn their money by profit and loss sharing, trading, leasing, charging fees for services rendered, and using other sharia contracts of exchange.
Prohibition of Gharar:
The rules of Islamic finance doesn’t allow for participation in contracts with excessive risk or uncertainty (gharar). It is forbidden in Islamic finance.
Prohibition of gambling:
Acquisition of wealth with illegal mean is prohibited Islam prohibit speculative activities. Gambling is one of them it is strictly prohibited.
Investment in Prohibited industry
There are certain activities which are harmful for the society investment in such activity is prohibited in Islamic law.
Zakat:
Islamic law believes in balance distribution of wealth. A certain percentage of the profit earned for zakat so that the under privileged gets benefit.