Islamic Finance: A Blueprint for Utopia?

By Dr. Guidance College Instructor Basil Alqudwa      Oct. 16, 2017

Anyone with the little exposure to accounting principles today must know the concept of double entry accounting. This concept simply accounts for all money transactions by registering steps in two folds, positive and negative. By the end of the day, all activities have to balance and give the registrar a result of all actions. If we followed this simple concept, we have kept a healthy bookkeeping habit. As Adam Smith once said, “All money is a matter of belief,” Muslims believe Islamic money habits is a matter of double-entry lifestyle, here and in the hereafter. Brian B. Kettell, Islamic Finance in a nutshell: A Guide for non-specialists, said, ” Islam is not only concerned with the relationship between man and God, but it is also a system of beliefs, justice, equity, fairness, and morality, these being the values that underpin the entire Islamic way of life. ” These beliefs are governed by the body of Islamic principles which are referred to as Shari’a, which is, not surprisingly, the basis for the creation of Islamic financial products.
So, what is Islamic Finance? It is the system with provisions of financial activities based on Islamic jurisprudence (Shari’a).
For those who are non-Muslims, Shari’a is the collective knowledge based on the holy book the Quran, the Sunnah, the guidance of prophet Mohammad PBUH, and the scholarly knowledge based on the authenticated body of work by the companions and every one of related expertise to a subject matter relates to individuals and society.
Thus, Islamic Finance is the field of money that bans the use of interest, excessive uncertainty, gambling, and money activities that are considered harmful to individuals and society. That ban is met with an entry on the other side of bookkeeping that represents honorable dealings, fair treatment, and sanctity of a contract. Islamic Finance activities must represent real economic activities where the sharing of risk and rewards is based on equitable distribution amongst the parties that are involved in the contract. Islamic Finance products are contract based.

There are several categories in terms of use, some are for profit and others are for non-for profit. Some are for a service, others are for safekeeping a product and delivery. However, at all times, debt cannot be the real underpinning of a contract for the use of money lending; in other words, no money trading as a commodity by itself can be performed. There has to be a real commodity and activity in exchange, where ownership and possession are clearly established to verify a real financial activity. Debt-like funding is structured based on the principle of trading a real tangible commodity with deferred delivery of a product or payment. Leasing is established with options to creating real value for the contracting parties, like buying. Profit and loss activities are organized and structured around profit sharing and loss bearing, where the investors or funding entity to such transaction is in a contract with an agent or skilled labor to share the profits, yet as an investor, you bear the loss of capital. To avoid or minimize what economists call agency problems and cost, negligence and misconduct are born by the agent. Also, there is pure profit and loss sharing where all parties are represented in a partnership contract based on real equity. Other partnership contracts can be established to motivate ownership with ease of periodical paybacks. At all times financial institutions are not engaged in conventional lending, and the returns are based on profitable transactions that represent sales or equity partnerships. In doing so a systematic flow of information amongst the parties has to be established to protect the sanctity of any contract, failing to meet this condition may nullify a contract. Based on this brief description, we see a Muslim following Islamic Finance is following the commands of beliefs and the conduct of high frequency of market activities. Sitting idle in society is not an option; real productivity is motivated by the constant pursuit of growth to create real value, preservation of wealth, to meet the demands of charitable obligations and maintain purchasing power. A Muslim doing his or her duty toward society, keeping a pace of investing and trading drive is reflective of a double entry lifestyle; one is earthly, and the other is heavenly.