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Islamic Financing: a different approach to banking and poverty alleviation

Islamic Financing: a different approach to banking and poverty alleviation

Islamic law, also known as Shariah law, serves as the foundation for the financial system known as Islamic financing. Islamic financing’s main objective is to advance economic development and prosperity while making sure that all financial dealings are done in accordance with the values of fairness, justice, and social responsibility. Through its focus on microfinance, Islamic financing is assisting in the reduction of poverty in a number of important ways.

A type of financing called microfinance is intended to assist people who are too poor to use standard banking services. Low-income people are given access to small loans, savings accounts, and other financial services through microfinance companies, which helps them start enterprises and improve their economic standing. Islamic financing is especially well suited to microfinance since it places a strong emphasis on civic engagement and community improvement.

The idea of Zakat, which calls on Muslims to donate a percentage of their money to aid those in need, is one of the fundamental tenets of Islamic finance. This philosophy is closely related to that of social responsibility, and it strongly encourages Islamic financial organizations to concentrate on eradicating poverty. Islamic microfinance organizations enable individuals to escape poverty and raise their level of living by giving small loans to low-income people and assisting them in starting enterprises.

Its focus on equity and justice is aiding in the reduction of poverty. Interest rates in conventional banking systems can be excessively high, making it impossible for people with modest incomes to acquire loans. On the other hand, the foundation of Islamic financing is the idea of profit sharing. Islamic financial institutions provide money in exchange for a portion of the profits made by the borrower’s company rather than charging interest. This strategy is more egalitarian and ensures that people with modest incomes have access to the capital they need to launch and expand their enterprises.

Furthermore, through encouraging financial inclusion, it is aiding in the reduction of poverty. Low-income people are frequently shut out of traditional banking institutions because they lack the security or credit history needed to obtain loans. On the other side, Islamic microfinance organisations are made to be more inclusive, offering loans to people who might not have access to standard banking services. Islamic finance works to combat poverty and advance economic growth by increasing financial inclusion.

Islamic finance differs from traditional finance in a number of ways. For instance, it outlaws the payment and receiving of interest. This is due to the fact that interest is viewed as unethical and a form of exploitation. Instead, this finance is based on models where the lender and borrower split the benefits and risks of a transaction. Investment in sectors like gambling, alcohol, and tobacco that are deemed detrimental to society is also prohibited by Islamic finance. This is so that Islamic finance can encourage morality and social responsibility. Transactions must be supported by genuine economic activity or movable property. This means that financial transactions cannot be solely speculative and must be connected to legitimate economic activity. Social justice and equity are prioritized by Islamic funding. This is accomplished by the Zakat principle, which calls on Muslims to donate a portion of their wealth to aid the less fortunate. Islamic financial firms frequently donate a percentage of their earnings to charity and work to advance social welfare.

Individuals and enterprises in Pakistan have access to a range of funding options, including both conventional and Islamic financing. Banks and other financial organizations offer personal loans for a range of needs, including debt consolidation, home improvements, and higher education costs. For entrepreneurs and business owners who require funds to launch or grow their companies, business loans are also an option. Islamic finance has become more well-liked in Pakistan recently in addition to these choices. A variety of financing solutions based on profit- and risk-sharing models, such as Murabaha, Musharaka, and Ijarah, are provided by Islamic financial institutions in Pakistan. Consumers who wish to follow Islamic financial principles and shun interest-based financing are using these solutions more and more frequently. In Pakistan, the Islamic finance sector has seen recent significant expansion, with assets in the sector expected to reach Rs. 4.4 trillion in 2020, up 20% from the previous year. Consumers’ growing awareness of and interest in Islamic finance, as well as the government’s attempts to assist the sector through laws and regulations, are the main drivers of this expansion.

Although there are some significant changes, the procedure for obtaining Islamic funding is similar to that for conventional financing. To start, the person should look up Islamic financial institutions to see which ones provide the kind of finance they require. You can do this by conducting online research or by asking friends and family for advice. Once possible institutions have been found, the person should examine the eligibility standards to make sure they comply with the needs of the particular financing they are looking for. This may take into account elements including income, collateral, and credit history. The person should then submit an application to the institution of choice together with all required paperwork and documents. Plans for businesses, financial reports, and evidence of income all fall under this category. The applicant will get a finance agreement outlining the terms and conditions of the funding when the application has been evaluated and accepted. Before you sign the contract, it’s crucial that you read through the terms completely and comprehend them. Finally, the borrower will get the money and start making payments in accordance with the terms arranged. The values of Islamic finance, such as social responsibility, equity, and justice, should be kept in mind at all times.

About the Authors

Muhammad Abeer Farooq is an Individual Researcher

Dr. Mudassar Rashid is Associate Professor, COMSATS University Islamabad

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