Saeed Jawed Ahmad, ArabNews, (11-May-09)
 
The Islamic finance industry is becoming popular worldwide. This popularity has not come without certain misunderstandings or misconceptions.

One major issue is the question of how Islamic finance is different from conventional finance when the “rates” (or profit margins) charged by Islamic financial institutions from borrowers are the same as those charged by conventional financial institutions. The layman does not differentiate between the Islamic finance contract and the conventional finance contract when the repayment schedule of a financing transaction looks similar.

The conceptual difference between an Islamic finance and a conventional finance transaction lies in the fact that in conventional finance, the financial institution generally lends cash for a length of time, often direct to the client or borrower, of course based on a credit rating or evaluation, on the basis that the borrower would return the borrowed amount plus an interest amount. The interest amount and the original borrowed amount is required to be repaid to the lender over the loan period or by the end of the loan period. Thus the transaction in essence is the lending of cash against the return of a higher amount of cash, and not necessarily for a specific purpose. One of the basic ideas behind the interest rate is the time value of the money lent. The excess cash returned to the lender over and above the borrowed amount is considered “riba” in Islamic finance.

Muhammad Al-Jasser, governor of Saudi Arabian Monetary Agency, addressing the 6th Annual Summit of the Islamic Financial Services  Board in Singapore. (AN photo)

SINGAPORE: Islamic finance, which puts emphasis on sharing of risks between contracting parties has an enduring appeal, especially in the aftermath of a global financial crisis, says Muhammad Al-Jasser, governor of Saudi Arabian Monetary Agency (SAMA). He said Islamic financial products could now compete with others on their own merits in the global marketplace.

He made this comment while addressing the Sixth Annual Summit of the Islamic Financial Services Board (IFSB) that began here on Thursday. It is attended by leading figures in the Islamic financial services industry who pointed out that the unique features of Islamic finance could contribute to resilience and depth in the global financial system. They also stated their firm commitment to its continued soundness and stability, taking account of the possible changes in the global financial architecture.