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Understanding Islamic Finance

Published: 10/01/2012 02:50:00 PM GMT
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The science and processes including in the management of money and other assets relative to banking, investments in land, credit based upon transactions and the role of demand and supply under the rules of a corporate body is a term we know as Finance. Today all the biggest markets are running upon the capitalist rules and laws on dealing while dealing with finance, which is accepted by almost all Muslim states.

The reason being one that people don’t know how what the term Islamic finance means, the major setback is the education that does not provide any authentic teachings upon the necessary elements of Islamic finance, the Muslim world lacks in business institutes while not knowing that the biggest businesses are either run in the Muslim world or they are run through the Muslim world.

Majority of the graduates are not familiar with the term Islamic finance or system of Sukuk, which came into existence to structure financial instrument that are bound by the Islamic law (Shariah) that is based upon the teachings of Quran and Sunnah.

Now what does a common should know about the term Islamic finance or Sukuk, since it is the most talked about and well organized system for safe investments and to make a fortune through the legal and Halal patterns. Sukuk system is widely spread in the Middle East and it is called sometimes as Shariah-compliant finance which uses Sukuk as the financial instrument that runs the whole system of investments of any person interested. Sukuk seems a bit similar to debt while it does not include the interests.

Interests is termed as Riba in Islamic dictionary and is not allowed under any circumstances, and since the Arab world has been suffering a lot of financial losses due to the Westernized economic introduction of interest it was hated and had been seeking for an alternative and an independent system of managing funds and finances. As the Sukuk market and the Shariah law grew the assets of Shariah compliant grew by $550 billion in 2011 which was around $400 billion in the year 2008, although the situation is much worse than it was back than with no political unrests and no unstable markets, still it manages to give bigger and better figures annually.

How it does that is simple yet interesting, Islamic banks like banks in general also work and make profit by lending of the money but the difference is that they do not put an interest rate upon the loan, to avoid all these financial issues a system of Fiqh Al-Muamalat (rules of transactions) had been introduced that works upon techniques that shares the profit and loss. This is done through Mudharabah (profit sharing), Wadiah (safe keeping), Musharakah (joint ventures), Murabah (cost plus) and lastly Ijar (leasing).

Since Sukuk is Islamic finance that rests on the fact that profits and loss should be shared it has won the trust of all the big investors over the years and has developed its one of a kind Sukuk market than runs on the following types that are created to provide more efficient stability through the Islamic Shariah law, these are

1.       1. Partial ownership in debt (Sukuk Murabaha)

2.       2. Partial ownership in assets (Sukuk Al-Ijra)

3.       3. Partial ownership in project (Sukuk Al-Istisna)

4.       4. Partial ownership in a business (Sukuk Al-Musharaka)

5.       5. Investment based loans (Sukuk Al-Istithmar)

Al together they maintain the cash flow through conventional bonds and give the security to the investors which is why the Sukuk market is growing and gathering a better financial security from all ends of the globe.

Majority of the Muslim business students