Principles and Practice of Islamic Finance Systems

Abstract

This paper aims to highlight the Islamic finance systems in the Arab world. Specifically, it answered the following: a) principles and prohibitions, b) traditions and practices; and c) global challenges and opportunities. The Islamic Finance was embraced by the Muslims in the Arab world for the purpose of lending money to others for their start-up capital or for other personal needs. The general concept of Islamic Finance it is based on Shariya Law prohibits imputing a fixed rate of interest; acceptance of fees or charges on loans is called Riba or usury. The practice of usury or charging of interest on loans is contrary to the Islamic principles of the Muslims called haraam or forbidden. This ideology was adopted by the Islamic banking, financial institutions, and non-profit organizations within the Muslim community. It is an Islam dogma forbidding lending out money with interest rate. The Islamic rules on transactions are provided for in the Fiqh al-Muamalat. Monies lent out earn benefits through profit and loss sharing of Islamic financing which is commonly called as Mudharabah in Arabic. Wadiah is the Islamic term for safekeeping. Musharakah is a joint venture of any particular business in the Arab countries. Murabahah refers to cost plus contract, and ljar for finance lease. The financial systems in the Arab countries operate under the provisions of the Shariah Law. Therefore, Shariah Law in the legal point of view are more focused on banking industry, micro financing, entrepreneurship, politics, economics, as well as religion as the bottom line of this Islamic law, and considers the guiding principle of the Muslims in the real life situation (Silva, 2006). Hence, this article is based on qualitative-quantitative research approach of investigation.