Ten Economic Benefits of Following Islamic Principles - dummies

Ten Economic Benefits of Following Islamic Principles

By Faleel Jamaldeen

Here is an overview of crucial ways in which Islamic principles have the potential to strengthen economies. The concepts presented are largely theoretical at this point; only time will tell how the industry’s potential economic impact plays out in reality.

Reducing economic disparity

Keep in mind that Islam does not prohibit accumulating wealth. It does, however, promote awareness of — and shared responsibility for — the hardships experienced by the poor. (One of the five pillars [obligatory acts] of Islam is zakat, or giving a portion of your wealth to charity.)

Greater implementation of Islamic principles in the financial markets can result in investments that benefit people at all points on the wealth spectrum. The potential rewards of such movement — regionally, nationally, and globally — are substantial and may include less violence and greater stability.

Inviting more people into the markets

When considering how Islamic financial products can encourage greater market participation, several key issues come into play:

  • Having a captive market: The captive market for products based on Islamic principles is composed of people who want to adhere to the tenets of their religion and, therefore, abstain from putting money into conventional financial products, which are not sharia-compliant.

  • Benefiting all classes: Rich and poor alike stand to benefit from participating in products based on Islamic principles. In contrast, anyone with access to Islamic financial products has the potential opportunity to enter a partnership with one or more investors in an economic venture.

  • Keeping credit scores in perspective: A lousy credit history doesn’t automatically slam the door to participation in Islamic financial products as it does in the conventional system. An institution offering Islamic financial products considers additional criteria when determining a person’s qualification to participate in an investment or other contract.

Promoting simplicity and transparency

Islamic financial products aren’t simplistic. However, products based on Islamic principles will never become as complex and difficult to understand as some of the products that investors gamble on in the conventional markets. Here’s why:

  • They start with stricter contracts.

  • They focus on assets.

  • They rely on scholars for guidance.

  • They follow strict standards.

Connecting financial markets and economic activity

People and institutions who participate in Islamic financial products interact as buyers and sellers or as partners in a transaction rather than as lenders and borrowers. This is true even when one of the participants is a bank or a large investment firm.

This distinction is crucial because it means that individuals and institutions that invest in Islamic financial products use their money to support specific economic transactions. The contracts they sign spell out what the money is being used to buy.

Linking savings and investment

If you put money into an Islamic savings account, you’re putting it into an investment vehicle. An Islamic bank doesn’t guarantee a set rate of return on your savings.

Islamic savings vehicles illustrate the concept of connecting the financial markets more closely to real economic activity. If you save money through a product in the Islamic finance system, you don’t isolate that money from economic activity the way a conventional savings account seems to do.

Avoiding economic bubbles (and bursts)

A paper written by Jakhongir Imamnazarov and presented at the 2011 Changing Europe Summer School argues that the Islamic financial industry has an inherent “anti-crisis code” that eliminates economic bubbles.

Among his evidence, the author points to the 25-percent increase of the value of assets held within the Islamic financial industry from 2007 to 2008, when much of the world was battling the worst of the financial crisis.

An element of this “anti-crisis code” is the financial screening process Islamic investment funds employ before determining whether a company is sharia-compliant. A company that’s too greatly leveraged is shut out of the Islamic investment market altogether.

Spurring economic development

Islamic financial institutions certainly aim to make profit; if they didn’t, they wouldn’t stay in business. However, the profit motive is tightly linked with other responsibilities that affect more than just shareholders.

To be profitable, an Islamic institution must respect and develop strong partnerships with its customers. It must screen and select investments based on their compliance with sharia law as well as potential for growth and success. The bank must provide ways for money to move from the wealthy to the poor, from those seeking to fulfill the obligation of zakat to those seeking resources build a better life.

Encouraging longer-term investment

The Islamic approach to investment encourages a slower, more thoughtful decision-making process than the conventional one. After all, an Islamic investor seeks to make socially responsible choices — to avoid investment in companies that cause harm to people or the environment.

Weeding out such companies is the first step in a screening process that every Islamic fund uses. The next step — eliminating companies whose financial practices are too risky — goes a long way toward reducing risk and creating greater investment stability.

Intensive screenings, reduced risk, greater stability, socially responsible investment selections . . . this is not the stuff of quick action or (usually) quick returns. Investors following Islamic principles tend to follow a path that encourages more thoughtful selections and longer-term commitments.

Reducing the impact of harmful products and practices

Sharia law prohibits engaging in any transactions that support certain industries or activities that are considered harmful (to people or to the environment). Sharia prohibits financial transactions that involve interest, speculation, or gambling, which is why Muslims can’t use most conventional financial products and must look instead to the Islamic financial industry. The list of prohibitions also includes weapons of mass destruction, cloning, and more.

Striving for greater stability

Globally, people are longing for greater economic stability. After years of crises and economic gloom and doom in so many countries, people want positive change. They recognize that something is inherently flawed in the conventional financial system that has let them down, and they want a system that’s more just, transparent, responsible, and sturdy.

By treating money as a medium of exchange rather than an entity with value in and of itself; by viewing profit as just one of many reasons to engage in investment activity; by serving all people in a community and not just the wealthy; by putting dollars squarely behind real economic activities that create real jobs and real products . . . by these means and more, Islamic finance promotes the type of responsibility that people everywhere are craving from their financial institutions.