Nowadays,it seems that a lot of people have been confused and unaware about Islamicfinancial.
Some people thought that Islamic product is only can be used formuslims. So, people need to change their perception about Islamic product whichcan only be used by muslim. The truth is, it can be used by variety of people.When we talk about Islam, we know that Islam is not just about laws andreligion.
Islam is more than people think about. Islam is principle of lifethat deals with various aspect which are social, ethic, culture and economicmanner. In term of finance, the Islamic product that contributed is Islamicfinance.
Islamic finance is a financial system that operates according toIslamic law that based Syariah complaint which is Al-Quran and Hadis (source)while conventional finance is that we used now1(Islamic Finance for Dummies by Faleel Jamaldeen). There are several majordifferences between Islamic finance and conventional finance which are thefunction, risk sharing and interest. Firstly, the difference between Islamic finance and conventionalfinance is the function. The system of conventional bank that we used now that operatedbased on the principle while Islamic bank system that operated based on theprinciples of Islamic Syariah. In addition, the perception of Islamic productwere following the Syariah principle, ethical and fair practice and transparentin terms. In Islamic finance, they strictly follow the laws and regulationsbecause the key for imposing these laws and ethics are to promote justice. In Islam,justice is important to all people to protect the right of people and givingothers equal treatment.
Islam is promoted justice to all people is because toshow the moral virtue. Therefore, in order to protect the people right justiceis a key of Islamic finance industry grows and develops well in order tocompete with other products. On the other hand, conventional finance is essentiallybased on debtor and creditor relationship between depositors2.By the same token, in bank conventional systems they lend money to borrowers tomake a profit from the higher interest charged on the principle amount which isgive burden to borrower to pay back. By knowing with these different type ofbank functioning, people will learn a lot and aware in managing their wealth. Secondly, the different betweenIslamic finance and conventional is risk sharing. People can make an evaluationthrough this step what are the differences and it teach us about risk sharingin financial market.
In conventional financing, the customer bear all the riskof paying to bank the loan from the amount of money they borrowed while inIslamic financing promotes risk sharing between provider of capital and theuser of fund which are between investor and intrepreneur. For example, if thecustomer used conventional in finance had loss or bankcruptcy so they need tobear all the risk of paying back the loan or their name will be blacklisted. However,Islamic finance operates on the principle of profit and loss sharing becauseIslam hand encourage risk sharing in financing transaction. As we know, Islamis promoted justice so thebank will bear the halfof the risk that inherent by the customer.
For example, when a risk shared amongtwo or more parties, the burden faced by each party is reduced based on made offinance used “Mudarabah” and “Musharakah” (Islamic Finance for Dummies byFaleel Jamaldeen)2. Other example of Islamic product which is “Takaful”which they will bear the all risk that happened to their Takaful member or ifnothing happen they will give the profit of contribution amongst Takaful member.There will have something beneficial if we choose the right system that guaranteeour future.
Thirdly,the different between Islamic finance and conventional is interest. Inconventional finance, bank will charge additional money which is the amoutborrowed as a compound interest or penalty to customer if customer make loan incase of defaulters. While, in Islamic finance, the bank consider interest theycharged on loan or usury as “riba” and it does not mean in Islam. In term of”riba” has been subjected to various forms of regulations and restrictions.Islamic finance system is very concerned and strictly prohibit of takinginterest on loans. Otherwise, interest has given a burden to borrower to payback because the amount of money borrowed has increase so high which isincluding their interest. For example, in Islamic finance, they prohibit nousury or unlawful (interest) in term of “riba”, no certainty or trickery interm of “gharar” and no compounding of interest and unfair fees.
In Islam, ithas syariah principkle applied such as Akad Mudarabah (buy-sell), MusharakahMustanaqishah (capital sharing) and Ijarah Wa’iqtina (leasing with the optionof ownership) instead of interest (Islamic Finance for Dummies by Faleel Jamaldeen)2.Asa conclusion, in order to be good person an responsibility as a Muslim personwe know that Islam is prohibited against transaction that involve gambling,fraud and oppression toward people. Therefore, we need to be wise in managingour finance and wealth according to Allah’s commands which promoting justiceand prohibited certain activities. It is important to acknowledge the severalmajor differences between Islamic finance and conventional finance which are thefunction, risk sharing and interest. After all, as a consumer of financialproduct we need to be wise in managing our financial well and the mostbeneficial. It is no use crying over split milk if we have loss in managing ourfinance.