Islamic finance is one of the strong positive effects of the global economic crisis after it destroyed the foundation of the global financial system, the American economy. Emphasis on the principles of Islamic finance emerged due to the discovery of the catastrophic failure resulting from the principles of usurious (Riba) interests in economic banks.
The concept of the Islamic finance sector dates back to the founding of Islam, i.e. it is not recent. However, it is worth noting that global Islamic finance has been adopted only since the twentieth century and extends to the present era.
This is a result of the proven ability of Islamic finance to face financial challenges and solve difficult ones. This appears in the fact that Islamic finance is governed by a set of honorable rules and laws based on the principle of justice among all the participating parties.
Following the above, and because the mechanisms of Islamic finance have become applied worldwide, whether, in Islamic or non-Islamic countries, we have done our best to provide you with a short and comprehensive guide to Islamic finance and its related types and principles.
What is the Islamic Finance System?
First of all, no institutions or companies, whether local or international, can create projects and invest in them without the presence of many sources of funding. This is regardless of the types and nature of these sources, whether non-Islamic or Islamic finance.
At this point, any financing process follows the approach of tracking project costs, identifying the scope of the financial needs necessary to complete the project entirely, and devising ways to collect them. This approach may be by referring to the companies’ cash flow statement, borrowing from a traditional bank, or resorting to financing sources that require a return to be agreed upon between the two parties, and this is generally the case.
In particular, Islamic finance has several special considerations for financing projects. In other words, Islamic finance completely follows the provisions of Islamic Sharia, so do not deviate from them.
Highlighting this point, Islamic financial institutions do not adopt any of the principles adopted in conventional finance. For example, receipt of interest (Riba), financing through speculation (Maysir- Gambling), or taking a fixed percentage of the project’s resources, regardless of the fit or loss.
On the contrary, Islamic financial institutions depend on financing by sharing the loss or benefits of agreed commercial programs. Moreover, the Islamic bank requires the economic purpose to be accurate and accurate to involve any exploitation operations against any project parties. This has made Islamic finance and supports more popular than other types of finance.
What are the main types of Islamic Finance?
There The Finance Bank relies on a set of financing types s operations. Within this paragraph, we will mention the most commonly used and popular Types because we cannot discuss them all within a few lines.
Murabaha
It is one of the first tools of Islamic finance to appear and is relied upon by local and international banks to finance investment or commercial projects. Its principle is to sell the commodity, property, or the like, according to the first purchase price plus a certain amount of profit determined by the seller. But this is provided that the buyer is told the cost of the first commodity and the amount of profit that the seller will receive.
Musharaka
It is one of the essential and widely used types in the Islamic finance market. It depends on providing a certain amount of financing needed to cover the main costs of the project in return for a certain percentage of the profit it requires while the project is making profits. But, on the other hand, if the project loses, it also shares the negative consequences of that.
Mudaraba
The Mudaraba financing type is nothing but a model that is a contract between two parties, one of which saves money, and the other saves effort. Meaning: A person who cannot invest his money himself deposits his money to the Islamic Development Bank. His goal is to achieve growth in his money through trade and investment, but with the condition that both parties bear the loss if an,y. The loss failure is represented in: the first is the loss of his money, and the second is the loss of his effort.
Ijara
Any Islamic public bank owns, in one way or another, the services related to finance by lease. This includes the purchase of assets, whether real estate, vehicles, equipment, or any assets necessary for the establishment of the project, and investing them by subordinating them and employing them to serve the lessee, i.e. the owner of the project idea and the person working on it, whether a company, institution or even an investor.
This type of contract gives the lessee the full right to dispose of these assets in line with the industrial or commercial plan compatible with the idea of his project. This happens in return for paying a certain amount of money per month for a certain period called the contract period, which is the period it takes to pay the following costs:
- Money spent on purchasing project assets.
- The disruptive value of the assets.
- A specific profit rate.
- Insurance value to ensure the preservation of the investment.
In Conclusion–
We are not only well aware of the role of Islamic finance mechanisms in facing and avoiding financial crises but also their role in solving thousands of economic problems at the individual and societal levels.
Islamic finance tools enabled companies to develop their money and profits and increase job opportunities, which was positively reflected in the advancement of the international and local community.
In other words, the future of Islamic finance is beginning to flourish all over the world wonderingly; it has become necessary to delve into the sea of its rules and concepts needed more projects than before. However, it doesn’t seem easy to become familiar with and understand without attending specialized training courses such as Accounting Training Courses in Paris.
