The role of Islamic finance in economic stability and social justice

One of the most significant times for the Islamic housing finance industry in the United States began in February 2007. The Federal Home Mortgage Corporation (Freddie Mac) sent a press release announcing that it would no longer buy the most risky substandard mortgages and secured by mortgage securities. Two months after the announcement, a leading mortgage lender filed for insolvency protection under Chapter 11. Three months after the insolvency, the national funding organizations warned of “difficult conditions” to come. Manifestations of such difficult conditions emerged on the horizon of the financial market when once established mortgage companies suddenly began to apply for Chapter 11. Similar circumstances reached the United Kingdom when the Bank of England allowed liquidity support to Northern Rock, the fifth under size mortgage lender in the country. Five months later, the UK Treasury became the owner of Northern Rock.

Until now, the gravity of these “difficult conditions” has not been fully understood by the majority of the population. At the end of 2008, the Federal Reserve Bank of New York received permission to grant AIG $ 85 billion. This was the beginning of the most severe recession in the United States since the Great Depression. A chain reaction ensued, leading to an unprecedented global financial crisis as the world suffered from rising unemployment, frantic foreclosures and serious skepticism about financial instruments.

This led to the renewal of the spotlight on an unfamiliar market segment that seemed relatively more stable and, more importantly, far more ethical: the Islamic financial sector. From financial centers in Malaysia to the Middle East, covering more than seventy countries, Islamic funding in the United States increased from $ 5 billion in the 1980s to $ 1 trillion in 2010. This phenomenal growth has attracted the attention of global investors seeking to protect their investments through more ethical and reliable financial instruments. When financial sector workers realized that these Sharia-compliant instruments avoided many of the worst effects of the global financial crisis, it became an attractive investment tool to support a more diverse portfolio. The Sharia-compliant financial sector avoids investing in predatory lending businesses and over-attracted financial instruments due to the strict ethical nature of the Sharia management system. The news and media began to cover this ancient but unfamiliar industry, hoping to learn from the mistakes of the conventional banking sector.

The concept of the modern Islamic financial services industry is rooted in the principles of Islamic legal jurisprudence, which deals with financial transactions, a branch of Islamic jurisprudence called Fiqh Al Muamalat. Fiqh Al Muamalat is a framework under Islamic law that depicts the behavior of Muslims in commercial or economic endeavors. Islamic financial products and decisions are based on specific orders from the Qur’an, which prohibit certain characteristics of financial transaction patterns and related economic activities.

The Qur’an forbids interest, also called usury or fish. The main argument is that Islam considers lending to be a charitable act to help another member of society in his / her time of need – therefore profit from someone’s work is strictly forbidden. In a conventional banking system, when interest is charged on a loan, the risk of that transaction is transferred to the borrower while the lender benefits from an interest-based transaction. The difficulties experienced by the borrower in case they suffer any loss from the transaction are not taken into account.

In essence, Sharia law prohibits unethical financial practices. It also promotes the distribution of wealth among all people to reduce poverty and inequality. This is reflected in the bans on activities such as excessive speculation, gambling and investing in products that are harmful to society, as considered by Islamic law (alcohol, pornography, etc.). The structure of Islamic financial products and services, especially its ban on speculative transactions, has helped the industry avoid most of the adverse effects of the global financial crisis. The governance model of Islamic financial institutions has been assessed as an ethical alternative by institutions such as the International Monetary Fund and the World Bank. Economic experts suggest that Islamic financial principles can be used to promote financial inclusion, which improves the quality of life in developing countries. Islamic financial principles can also contribute to financial stability and economic development around the world.

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