It is no secret that Islamic finance is gaining a lot of attention around the world. Many commercial banks in the West, Middle East, and Africa have embraced this form of financing model and the question remains what advantage does Islamic finance have over the conventional counterpart?

Advantages of Islamic finance

1. Reinforces Financial Stability

In Islamic finance, investments are approached cautiously and the decision-making process is carried out thoroughly unlike the conventional banking system. The companies that appear risky are usually kept away from financial institutions. With careful audits and analysis, Islamic finance institutions lessen the occurrence of risk and enhance financial stability. No Islamic bank was affected by the 2008 subprime crisis.

2. Promotes social justice

Islamic finance was designed at the birth of Islam to balance the wealth in society and to stop economic exploitation. Islamic finance aims to improve social justice through wealth redistribution and fair financial dealings.

3. Financial inclusion

More than 2 billion Muslims in the world, yet 3/4 of them are unbanked. Muslims refrain from banking through the conventional banking system since it is based on paying/receiving interest which is strictly prohibited by the Shariah Law. Islamic banking removes these barriers and allows Muslims to benefit from the financial system.

4. Profit and loss sharing

Financial justice is the main principle of the Islamic model. Islamic banking creates a balance for the net profit or loss between the lender and the beneficiary rather than throwing it all on the entrepreneur. If a project is financed by an Islamic bank, the output of the project will be equally distributed amongst both parties. If the financier is expecting to receive profits for a certain project, he should also agree to carry a share of the loss.

5. Linking Savings and Investment

An Islamic savings account is an investment vehicle. An Islamic bank doesn’t guarantee a return on savings. Therefore, you know when you sign the contract with the bank that it plans to actively invest your money (in Sharia-compliant ways) to earn profit that it will share with you.

Islamic investment vehicles illustrate the concept of connecting financial markets to real economic activity. If you save money in the Islamic finance system, you don’t isolate it from economic activity as a conventional savings account does. You don’t get a guaranteed return in an Islamic account, but as long as your bank does its job well, you benefit from profits derived from transactions that support economic transactions in the real world.