How on the principles of Islamic Syariah. In

How Is Islamic Finance
Different From Conventional Finance

 

Nowadays,
it seems that a lot of people have been confused and unaware about Islamic
financial. Some people thought that Islamic product is only can be used for
muslims. So, people need to change their perception about Islamic product which
can only be used by muslim. The truth is, it can be used by variety of people.
When we talk about Islam, we know that Islam is not just about religion. Islam
is more than people think about. Islam is principle of life that deals with
various aspect which are social, political and economic manner. In term of
finance, the Islamic product that contributed is Islamic finance. Islamic
finance is a financial system that operates according to Islamic law that based
Syariah complaint which is Al-Quran and Hadis (source) while conventional
finance is that we used now. There are several major differences between
Islamic finance and conventional finance which are the function and operating
modes, risk sharing and interest.

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            Firstly, the difference between Islamic finance and
conventional finance is the function and operating modes. The system of
conventional bank that we used now that operated based on the principle while
Islamic bank system that operated based on the principles of Islamic Syariah. In
addition, the perception of Islamic product were following the Syariah
principle, ethical and fair practice and transparent in terms. In Islamic
finance, they strictly follow the laws and regulations because the key for
imposing these laws and ethics are to promote justice which is in Islam are
justice is important. Therefore, in order to protect the social justice is a
key of Islamic finance industry grows and develops well in order  to compete with other procducts. On the other
hand, conventional finance is essentially based on debtor and creditor
relationship between depositors. By the same token, lenders lend to borrowers
to make a profit from the interest charged on the principle amount.

            Secondly, the different between Islamic finance and
conventional is risk sharing. People can make an evaluation through this step
what are the differences and it teach us about risk sharing in financial
market. In conventional financing, the customer bear all the risk of paying
bank the loan from the amount of money they borrowed while in Islamic financing
promotes risk sharing between provider of capital and the user of fund which
between investor and intrepreneur. For example, if the customer used
conventional in finance had loss or bankcruptcy so they need to bear all the
risk of paying back the loan or their name will be blacklisted. On the other
hand, there are two main forms of 
Islamic finance which are bank finance and issuing Islamic securities
called “sukuk”. While in conventional, they consider of these as debt of bank
loans and board issues respectively, but that is inaccurate. However, Islamic
finance operates on the principle of profit and loss sharing because Islam hand
encourage risk sharing in financing transaction. For example, when a risk
shared among two or more parties, the burden faced by each party is reduced
based on made of finance used “Mudarabah” and “Musharakah”.

Thirdly,
the different between Islamic finance and conventional is interest. In conventional
finance, bank charge additional money as a penalty or compound interest in case
of defaulters. While, in Islamic finance, the bank consider interest they
charged on loan or usury as “riba” and it does not mean in Islam. In term of
“riba” has been subjected to various forms of regulations and restrictions.
Islamic finance system is very concerned and strictly prohibit of taking
interest on loans. Otherwise, interest has given a burden to borrower to pay
back because the amount of money borrowed has increase so high which is
including their interest. For example, in Islamic finance, they prohibit no
usury or unlawful (interest) in term of “riba”, no certainty or trickery in
term of “gharar” and no compounding of interest and unfair fees. In Islam, it
has syariah principkle applied such as Akad Mudarabah (buy-sell), Musharakah
Mustanaqishah (capital sharing) and Ijarah Wa’iqtina (leasing with the option
of ownership) instead of interest.

 

As
a conclusion, in order to be good person an responsibility as a Muslim person
we know that Islam is prohibited against transaction that involve gambling,
fraud and oppression toward people. Therefore, we need to be wise in managing
our finance and wealth according to Allah’s commands which promoting justice
and prohibit certain activities. It is important to acknowledge the several
major differences between Islamic finance and conventional finance which are the
function and operation mode, risk sharing and interest. After all, as a
consumer of financial product we need to be wise in managing our financial well
and the most beneficial. It is no use crying over split milk if we have loss in
managing our finance.