In the name of Allah, Most Gracious, Most Merciful

Praise be to Allah, the Cherisher and Sustainer of the worlds And Peace and blessings be upon Prophet Muhammad (SAS), His Family and His Companions...


Throughout the past century, there evolved many economic theories, such as, communism, socialism, laborism, capitalism, etc. - all claiming to achieve betterment of societies and nations.

With the sequential fall of some of the above models throughout the past decades, a worldwide consensus gained support that the capitalism model is the ultimate choice for humans, and this conviction was evidenced through the transformation of some major socialist and communist economies to capitalism.

By the end of 2007, it was apparent that all modern economic theories, including capitalism, fail to meet with the basic target of preserving the wealth of nations and betterment of people�s lives.
While on one hand, the recent financial crisis has been damaging to the capitalist model, it has created an unprecedented opportunity for the Islamic financial system. From China to the US and from Europe to Central Asia, Islamic finance is gaining extraordinary popularity.

There is a formal recognition of the Islamic financing principles in many countries; with some countries, like France for instance, has undergone considerable debate on having its financial system based on Islamic principles.

Irrespective of whether such propositions will materialize or not, we are currently experiencing the core Islamic finance principles being implemented worldwide anyway in an unintentional manner whereby the interest rates in almost every major country in the world having been brought down to near zero, and we all know that Sharia supports zero interest rate philosophy.

What makes the Islamic financial system any different from the other systems? The basic answer lies in the fact that the Islamic financial system is an equity-based system; as opposed to an interest bearing debt-based system. Islamic finance allows no over leveraging and prohibits any form of interest based lending since it leads to exploitation of people.

Hence, all transactions should be asset based, and money per se should not be considered as a commodity to be bought and sold at premium or discount. Accordingly, shareholders in an Islamic bank share the risk of their equity with the depositors who also contribute and the resultant profit is distributed as per a pre-agreed profit distribution ratio or loss, if any, is absorbed pro-rata.

Thus, in an Islamic bank, it is not lending-borrowing relationship but a kind of partnership between the shareholders and depositors. Additionally, funds raised from depositors should be invested in real transactions and assets in order to generate return for the investors. As a result, the inflation is easily controlled in an Islamically run economy.

As evidenced from the above, there is no shifting of risk in the Islamic financial system, however there is sharing the risk; Sharing the risk between depositors and the shareholders of the Islamic bank first and subsequently between the bank and the customer who is seeking finance.

In the conventional financial system, depositors are lending their money to conventional banks at pre-defined interest rates who are in turn lending the finance to the needy customers also according to interest based loan. This means that the bank is not bearing or sharing any risk, and the whole risk is shifted to the customer. Islamic banks, on the other hand, share the risk and profit or genuine loss with the customer.

Finally, it should be clear that the Islamic financial system promotes transparency, equality, fairness and the ownership rights, and prohibits any form of deceit, ambiguity, or abuse. Apparently, a system with such values can only be expected to weather the adverse changes of economic conditions and expected to create more equality and prosperity among nations.