Islamic Finance principles are good for non-Muslims too

Islamic Finance principles are good for non-Muslims too
07 April 2013

Much is currently being written about Islamic Finance and the benefits of ethical investing. In business the Islamic bond, or sukuk, market has seen exceptional growth in the past few years, reflecting its importance as an effective alternative source of financing for new businesses, and for restructuring and refinancing existing debts.

For individuals, who are not Muslim, Islamic Finance could be a very attractive investment proposition, here we outline the three core principles you should consider when looking into Islamic Finance.

Writing for the World Bank in their 2006 paper - Emerging Islamic Capital Markets Iqbal and Tsubota said: The Islamic financial system: “can be fully appreciated only in the context of Islam’s teachings on the work ethic, wealth distribution, social and economic justice, and the expected responsibilities of the individual, society, the state, and all stakeholders.”

The authors also state that the essence of Islamic Finance is– “Promotion of entrepreneurship, preservation of property rights, transparency and the sanctity of contractual obligations, which are crucial to any sound financial system.”

To understand if Islamic finance is for you it is important to know that it supports the accumulation of wealth as long as the source of wealth generation does not breach Islamic principles; such that the activities are halal, or permissible, zakat (a tithe) is paid, and wastefulness is avoided.

Halal

The oversight of Shari’a law for financial institutions is to support Islamic financial practices that do not exploit or do injustice to the institution’s shareholders and customers.  The Islamic banking system also relies on Shari’a law through the concept of muamalat, which encompasses a broad range of activities -- political, economic, and social. Muamalat is concerned with the human-to-human relationship, hence the emphasis above on contractual obligations and society.

Through haram (forbidden products), Islamic finance prohibits trading in items such as alcoholic beverages, gambling, pornography and certain foods, which may be in line with your own values.

Zakat

The zakat system, which effectively redistributes wealth from the ‘haves’ to the ‘have-nots,’ is one of the five pillars of Islam. It is mandatory for every Muslim whose wealth has reached a certain level to pay zakat, which is fixed at a rate equivalent to 2.5% of a person’s or household’s financial assets or tradable goods. Zakat is a means of narrowing the gap between rich and poor and a way to help meet the needs of less fortunate members of society.

In the UAE the Zakat Fund is the federal authority: “specializing in the acceptance of Zakat and spending it on the needy in order to achieve widespread social development for individuals and families residing in the UAE, thus promoting mutual helpfulness and integrity within communities across the UAE.”

If you wish to calculate your Zakat, which depends upon investment products, you can at the Zakat Fund’s website where there is a very useful calculator.

Wastefulness

A fundamental principle of Islamic Finance is to encourage people to save regularly.

Shari’a teaches that money should not be spent in vain or ostentatiously. An individual is expected to have good money management to manage wealth and the discipline to save in order to support family and society. Islamic Finance states that by saving even a small portion of income and eschewing wasteful spending, an individual can help fight consumerism and inflation.

An interesting paper was written by Essam Al Tayar, Islamic Investment Funds and Their Role in Developing Savings, this is only 2 pages long but serves as a good foundation for deciding on an investment fund so you have the requisite questions to ask if you consider opening an Islamic bank account.

Do these principles appeal to you? Are you a non-Muslim who has experience with Islamic banking or a Muslim and could add your thoughts?

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Author
Head of Behavioral Finance
cashy
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