Conventional Finance Vs Islamic Finance
Islamic finance is different from conventional finance. The reason is that Islamic finance follows the guidelines of the Prophet Mohamed, while conventional finance does not follow such rules. This creates some striking differences between these two systems and the critical difference lies in interest charges. Conventional finance assumes that time is equal to money and hence loans are eligible for interest payments.
This brings us to another striking difference between the two financial models. There is little debt financing in Islamic finance. instead, there exist hybrid types of finance that use the principle of profit/loss sharing. The idea is that in the case of a loan, the bank will get some ownership of the asset and will share the profits and losses of the finance, as this is a more approachable way according to the Quran.
Since the Islamic financer takes a more direct approach to the business, the conditions to get a finance in Islamic finance can sometimes be more stringent compared to conventional finance. The reason is that since the bank will be part of the business ownership, it needs to assure that it invests in a credible business that is strong and reliable. There are no finance defaults in Islamic finance, instead, the management of the defaulting business is transferred to the bank. The bank then seeks to make a comeback in the hopes of getting the money back.
Conventional finance values assets by factoring in their current value and the future expected value. Therefore, there can be financial instruments with no current practical value to society, but due to expected future value, these assets or instruments can be assigned a value. In Islamic finance, there are no speculations about the future, and everything should be valued under its present value. Therefore, Islamic financial instruments are usually backed by a tangible asset, while conventional financial instruments can be issued with being fully backed, as the future value can serve as a backup. Based on this requirement, it is prohibited to trade the futures contract. The idea is that gold and any other commodity musts be settled on hand, and hence it is not allowed to speculate on the prices of such assets by merely holding papers.
Another difference between Islamic finance and conventional finance is the advertisement of financial instruments. Islamic finance requires that all parties are fair to each other, and it is prohibited to start a financial deal with the intent to lie, scam, or make abnormal claims You can rest assured as when you engage with Islamic finance, you will get to work with fair people, value-driven and respect the Quran laws.