The Garden of Knowledge

بسم الله الرحمن الرحيم

 22 Shabaan 1443/25 March 2022

All praise is due to Allah, the Cherisher, Sustainer, Nourisher and Provider of the entire creation. May peace, blessings and salutations be upon our Beloved Prophet Muhammed ﷺ.

The first of many significant differences is that Islamic Finance is based on Divine Law whilst Conventional Finance is based on man-made laws. 

Secondly, within Conventional Financing we notice that the lender does not bear any risk, all the risk is on the consumer, however in Islamic Financing, the financial institute does not borrow or lend funds but rather it assumes the role of a business entity or partnership until the consumer buys back his shares of the business from the financial institute. In this scenario the financial institute shares the risk with the partner (consumer).

Thirdly, both conventional and Islamic financial institutions offer financing for a reward, however the difference is that IFS charge a fixed profit percentage whereas CFS offer loans bearing fluctuating interest rates.

Lastly, IFS only agree to finance businesses whose activities are in conformance with the Shariah whilst CFS issue financing to businesses in all sectors, regardless of the activities.

The above mentioned are just a few differences between Islamic Financial Systems and Conventional Financial Systems. There are many other differences which we can find, for example research studies show that IFS are usually more profitable than CFS. What we notice is that IFS push and encourage for money being used to create social value. Hence it is necessary for us to get a complete and proper understanding of how IFS are better than CFS, not only for Muslims but for humanity at large. CFS may provide what looks to be a “sweet deal” however the long term effects of such a financing strategy can be harmful to community whilst on the other hand IFS looks out for the welfare of the community.

We ask Allah to accept our efforts from us and grant us understanding In Sha Allah!