5 Common Myths About Islamic - Based Finance
Some of the top banks, brokerage firms, mortgage companies, accountants, insurance companies, and financial consultants offer Islamic-based services and products. During the many years that Islamic-Based finance has been around, several myths have crept into the media and popular culture. Most of them are based on a misunderstanding of the core principles of Islam and that faith’s view of earned interest. As Islamic products and services become more widely available in the modern world, it’s important to dispel some of the most common myths and misconceptions. Consider the following points to gain a clearer understanding of how Islamic-based finance operates.
In Practice, It’s the Same as Conventional Finance
The truth is, while there are surface similarities, the core principles are worlds apart. Because most of the financial objectives and prices appear the same, Islamic-based finance comes with major philosophical and practical differences. One of the main differences is the way in which Islamic-based accounts reach their financial goals. At the heart of those differences is the concept of interest. It is not a part of Islamic-based finance contracts, agreements, or other offerings.
The idea of interest-bearing instruments is never a part of the arrangement in the faith-based system. An alternative is a group of smaller contracts that spell out specific roles for both parties to an agreement. The method’s result is a partnership in which shared risk stands in for interest-oriented financial contracts. Another aspect that’s unique to Islamic-based business is ethics. Hedge funds and brokers who follow the principles don’t invest capital in companies that deal with tobacco products, weapons, or adult-oriented media of any kind. It’s worth noting that there are also Christian, Judaic, Buddhist, Hindu, and other faith-based finance concepts that operate in much the same way, but of course, with different restrictions.
Islam’s Rules Forbid Stock Trading
The reality is there is not a faith-based prohibition on trading equities. Anyone who uses an islamic account for online trading knows that there are a few differences in the way balances are calculated. Additionally, anyone who trades on margin or encounters situations that involve the payment or receipt of interest will notice differences in the way faith-based brokerage accounts deal with those issues. But the bottom line is pretty much the same, both in terms of amounts earned and spent.
On the surface, financial results appear almost identical to non-Islamic accounts. The main differences are in how assets are handled and how profits are figured. Online trading for all types of accounts, faith-based or not, generally operates in the same fashion. Not only are there no prohibitions against equity trading within the Islamic faith, but anyone can get an account set up as quickly as a non-Islamic one.
Only Muslims Use Such Accounts
The correct version is many Christians, Buddhists, and others use them for trading securities, buying homes, saving money, buying cars, etc. Anyone who wishes to use Islamic-based financial agreements can do so. There are no legal barriers in any way, and in fact, large numbers of non-Muslims take advantage of the features that are built into such agreements, particularly the unique way in which the contracts deal with shared risk. For investors and consumers in a variety of industries, the ethical concepts behind the contracts are the most important. Not only are these specialized financial products totally transparent, but they were created with ethical business practices as a core component of their makeup.
Products and Services are Expensive
At one time, this myth was a fact, but nowadays, products are competitively priced. Two decades ago, when faith-based finance and related products were a rarity, prices were higher. That was true for mortgages, non-mortgage loans, and investing services. However, when more people became interested in this as an ethical alternative to conventional ways of doing business, the idea gained traction and built a huge following. Now that the ideas of Islamic-based contracts and practices have entered the mainstream, overall pricing has come down to the point that it’s not only competitive but also within reach of the average consumer, investor, and borrower.
The Services & Offerings are Complicated
They’re no more complex than conventional versions. At first glance, Islamic-oriented finance can appear overly complex, but in reality, it is no more complicated than conventional methods and practices. While many of the terms, ideas, goals, and methods are unique to Islam, the underlying philosophy is not more difficult to comprehend than any other kind of finance. For consumers who want to learn more about Islamic-based finance, it’s essential to work with an experienced professional to get solid support during any transaction.
Please note that this post was written by a third-party and does not necessarily reflect the views of Arab America or its employees. These posts help allow Arab America to produce our wonderful original content, thanks for your understanding.
Don’t forget to check out Arab America’s blog!