Financial Crisis and Islamic Finance – 5 Major Reasons of Resilience

The global financial crisis affected all major banking and financial institutions, but some countries were obviously affected more than others. In both terms of initial impact and speed of recovery, the Islamic banking and finance industry has surpassed all Western, conventional numbers. Just why is the Islamic banking industry so success and what makes them so different from conventional banks? Let’s understand the financial crisis and Islamic finance, and find out top five major reasons of resilience of financial crisis in shariah finance.

financial crises and Islamic finance

1. Shariah Justice:

The basic premise of a bank is the same throughout the world, but how they function can be completely different. In the case of Islamic finance, banks must abide by the rules of Shariah law. The bank is more than just a business that operates to make a profit in Islam, it is seen as a form of justice. Everyone is supposed to give and take under the same rules and interest does not play a role, as it an unfair rule that only one side gets to benefit from.

Shariah prohibits usury, speculation, gambling, and unethical predatory practices. These things are, ironically, the very causes of what rots and eats away at the foundations of countries that operate under the rules of Western banks.

2. Relationships:

The citizens’ relationships with conventional banks is always in the form of a creditor to debtor, unlike Islamic banks. Everything revolves around interest rates and credit worthiness. This prevents any real relationship with a bank, thus its lack of contribution to the communities around them. Islamic banking has to provide an equal service and maintain a trust with the community in order to prosper.

3. Investments in the Bank:

When one deposits their money into a conventional bank with the intent to save and earn an interest, that bank must pay back those monies in the event of a financial collapse. This is law under the FDIC minimum. Islamic banks do not have such a law, nor do they have the guaranteed interest for keeping said money in a savings account. This may seem bad for the customer, but it is also what allows their banking industry to prosper with confidence.

4. Treatment of Money:

Unlike Western countries, Islamic finance does not see money as a commodity in of itself to be sold or traded at a higher value than what it is printed at. Money is merely a tool to promote economic activity and freedom to exchange goods more efficiently, as money does. Islam sees other valuable commodities, like silver, gold, and raw materials as money, but important food staples, like rice, wheat, and salt will not be tolerated.

5. Economic Development:

Instead of growing bank’s reserves through all the frauds, scams, and predatory practices that are common in conventional banks, Islamic banks grow their profits by investing in tangible businesses. This creates more growth in the economy, while turning a profit from the initial investment. It’s a win-win for banks and their stakeholders. Conventional banks are mostly looking for short-term returns on their investment, so it is rare to see banks make large investments with their own money in the West.

Conclusion

Islamic banks prosper because of all of these things, but what it really comes down to is simply trust. Public trust with conventional banks continues to fall, especially when lending practices have not improved with the public, despite economic growth. When banks follow a law that is built around justice, they don’t invest all their resources into earning more from less, everyone prospers. AIMS' diploma in Islamic banking and finance is playing an important role in the development of Islamic finance professionals. It is best suited for those who wishes to study Islamic finance courses online.

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