Islamic Banking and Finance or Shariah-Compliant part 2 (the ways of Non-Interest Work)
In our last blog I tried my best to explain you that why Interest is prohibited in Islam, and as I promised now its time to discuss what is the solution Islamic Finance has instead of Non-Interest Activity, in case you have missed the earlier part you can read it here Islamic Finance or Shariah Compliant and you must read that to understand the current blog.
Lets understand it from two aspects first investing into businesses through banks and financial institutions and second is investing through the capital market and you must know that ultimate purpose of all banking and financial activities, investments are to support the businesses so it will keep running smoothly. But, investments through Shariah-Compliant perception is that only those businesses which are ethical and their product or service are not harmful for the society should be considered (the more details about this concept i will cover in upcoming part)
While banks provides capital to entrepreneur with interest, instead of imposing interest Banks can become the partner into the business and share the profit and loss proportionally. In this case there is no possibility of one sided win or lose situation if entrepreneur makes profit both(Banks and Entrepreneur) will enjoy win-win situation if he makes loss both will bear lose-lose situation and standing together in all the situation is the best for humanity and the goal of Islamic Finance. Yes, its also called Equity Finance.
If I go in deep about the Equity Finance so there are few things which I feel to mention here. If you look upon current investment principles so you will find that banks are not investing capital into the ideas or business because they ask for any property or something as a security to their investments, again it is like they are taking your benefit but not helping you that is why with the help of Equity Finance investment can be made gently in several ways as follows:
- Banks can make partnership contracts with entrepreneur for certain period of time by investing some part of amount from required capital. Suppose if an entrepreneur required 50 lacs as initial capital and bank is providing him 10 lacs bank’s contribution would be 20% and later bank will get 20% as return out of the Net Profit or bear the 20% of loss by not getting any return.
- If an entrepreneur has no capacity to purchase certain asset so bank can provide him but return should be finalized by mutual understanding on certain basis.
- Bank or Financial institutions can help an entrepreneur by partnering him in one particular project and should take the return from the profit made by that particular project only and the return should be decided in the percentage only as what percentage of capital they contributed in that project.
- After providing the funds banks too can co-ordinate in the operational activity of the company or helping them in the market research or promotional strategy which, will bring more transparency between them and among the other investors.
shariah-compliant and the capital market is another important aspect to understand which that is we will learn in the next part.