Islamic finance is gaining immense popularity among Muslims and Non-Muslims, of course for good reasons. Also known as Sharia finance, this term is widely used reference to how businesses and individuals raise capital in line with Sharia, or Islamic law. It can also be used in reference to the types of investments that are allowed under this form of law.
It is worth mentioning that Islamic beliefs tend to limit the types of investments allowed due to the nature of the underlying company or the features of the financial investment. Having said that, it is essential that you understand what Islamic finance is all about.
For starters, Islamic finance aims to allow for inclusion within the financial services industry. Many Islamic beliefs impose restrictions, boundaries, or limitations on financial matters. These practices tend to conflict with non-Islamic financial instruments. No wonder you should take it upon yourself to understand what they entail.
Before leveraging Islamic Finance, it always pays off to determine how you can use it to your advantage. It narrows to examining the different permissible Islamic investments you can settle for. Well, you can always choose to go with equities if you have no idea on where to start.
According to Sharia law, there is nothing wrong with investing in company shares as long as those companies don’t engage in forbidden activities. Investment in such companies may be in the form of shares or by direct investment. Islamic scholars, however, have made some concessions on companies allowed.
After all, most of these companies tend to use debt either to address liquidity shortages or to invest excess cash. Not to mention some choose to exclude companies that hold interest-bearing debt, receive interest or other impure income, or trade debts for more than their face values.
In Islamic finance, each transaction must be related to a real underlying economic transaction. Moreover, parties entering into the contracts in Islamic finance share profit/loss and risks associated with the transaction. No one can benefit from the transaction more than the other party, allowing for equality among everyone involved.