1.3
Islamic Alternatives to
Conventional Finance
Pervez Said, Islamic Banking Department, State Bank
of Pakistan
Introduction
Islamic finance has been growing at a rapid pace over the last few years.
This has been accompanied with an extension of product ranges that caters
to the diverse needs of investors on both the liabilities and assets side of
Islamic banks. Financial solutions range from profit-and-loss sharing
mechanisms, consumer finance (including for durables, credit/debit cards
and housing finance), trade finance, working capital finance and project
finance. Moreover, this list is evolving quickly and is providing a large
number of viable alternative Shari’a-compliant solutions to conventional
finance.
The emergence of Islamic financial products, particularly in capital
markets,hasalsopromotedgreaterglobalfinancialintegration.Thebringing
together of financial institutions and market players across continents to
participate in this expansion of inter-regional investment flows has fostered
financial links amongst the major regions. This will not only provide greater
synergies and opportunities, but will also contributetowards facilitating
international financial stability.
Islamic finance instruments
The main principles of Islamic finance include the following:
- Strict prohibition on paying or receiving interest;
- Risks in any transaction must be shared between the parties, so that the
provider of capital and the entrepreneur share the business risk in return
for a share in the profits;
- Speculative behaviour is prohibited. This means that extreme orexcessive
uncertainty (gharar)orriskisprohibited,andthuscontractualobligations
and disclosure of information are necessary;
- Money is seen as potential capital and can only take the form of actual
