Sharia compliant banking is a fast growing segment of the financial sector in Kenya.
Islamic finance is a unique financial system operating in accordance with the principles of Sharia Law. Much like conventional financial systems, it encompasses banks, capital markets, fund managers, investment firms, and insurance companies. However, what sets Islamic finance apart is its adherence to both Islamic law and the regulatory norms of the financial industry, ensuring compliance with ethical and religious values.
Principles Underlying Islamic Finance:
Islamic economics is firmly rooted in the principles of balance, aimed at ensuring that the objectives of the Islamic finance industry benefit society as a whole. Let’s delve deeper into these principles:
1. Balancing Material Pursuits and Spiritual Needs:
In Islam, economic activities conducted in accordance with Sharia are seen as acts of worship. Muslims believe that such activities can earn them rewards similar to those obtained through acts of worship to Allah (God). Striking a balance between economic endeavors and spirituality is crucial. It means that a devout follower of Islam should not prioritize business success to the extent that it hampers their religious obligations.
2. Balancing Individual and Social Needs:
Muslims are expected to consider the well-being of society when enjoying the blessings bestowed upon them by Allah. This entails promoting justice in all economic dealings, recognizing the shared responsibility among individuals, and using the Earth’s resources wisely. Islam advocates for moderate consumption and prohibits extravagant spending, not only on permissible products and activities but also on those prohibited. Despite the world’s limited resources, Muslims believe that Allah has provided everything humans need in the right quantity. Therefore, Islam encourages responsible resource use by advocating moderation in consumption.
3. Requiring Zakat:
To address wealth distribution equitably, Islam mandates a property tax known as “zakat.” Every eligible Muslim with accumulated wealth must pay zakat, which is then distributed to those in need. This system promotes the socially responsible distribution of wealth by taxing the assets of wealth accumulators and redistributing it to benefit the less fortunate.
4. Prohibiting Riba (Interest):
Islamic finance strictly prohibits interest-based transactions. Hoarding money to earn interest is not permissible. Instead, individuals and businesses are encouraged to keep money in circulation to support productive economic activities, such as investments, trade, and job creation. The returns generated from these activities are shared among the involved parties, promoting wealth sharing and fair economic practices.
5. Encouraging Shared Risk:
Islamic finance promotes risk-sharing in economic transactions. When multiple parties share the risks associated with an economic activity, the burden on each party is reduced. This cooperative approach fosters a sense of shared responsibility and mutual benefit in financial dealings.
Conclusion:
Islamic finance is guided by a set of principles that prioritize societal welfare, justice, and ethical conduct. It emphasizes the importance of maintaining a balance between material pursuits and spiritual needs, and it encourages responsible resource use, wealth distribution, and shared risk. By adhering to these principles, Islamic finance not only offers a unique financial system but also contributes to a more equitable and just society.
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