Islamic Finance Essay Example | Topics and Well Written Essays - 1250 words

Islamic Finance - Essay Example Investments have an element of gambling because of the reality of risks. How can modern financial products be acceptable to Muslims? How can notions like â€Å"interest†, â€Å"speculation†, and â€Å"gambling† be excluded in financial products not only in form but in substance? In particular, how can it be possible for conventional financial products to be acceptable to Muslims? In the opinion of this writer, an important key towards designing financial instruments that are compatible with Islam is an understanding what financial transactions are prohibited and permissible under Islam. According to El-Gamal (2000, p. 2-6, 24), Islam prohibits Riba, Gharar, and financial insurance. Transactions that involve prohibited acts under Islam are invalid (batil) and forbidden (haram) under Islam (El-Gamal 2000, p. 1). On the other hand, El-Gamal (2000, p. 10-17) asserted that Islam permits cost-plus sales (murabaha), credit sales (bay’ bi-thaman ‘ajil), forw ard contracts (salam), and cooperative insurance. More importantly, Islam permits trade even if Riba is a forbidden (El-Gamal 2000, p. 9). According to El-Gamal (2000, p. 9), a trade that is valid from the perspective of Islam takes place â€Å"if the seller and buyer exchange an offer and acceptance which specify the object of sale and the price, and they both agree†. ... 4): Bilal visted the Messenger of Allah (pbuh) with some high quality dates, and the Prophet (pbuh) inquired about their source. Bilal explained that he traded two volumes of lower quality dates for one volume of higher quality. The Messenger of Allah (pbuh) said: â€Å"this is precisely the forbidden Riba. Do not do this. Instead, sell the first type of dates, and use the proceeds to buy the other.† While usury involves exorbitant interest rates, a Riba takes place when an interest rate is charged regardless of its amount (El-Gamal 2000, p. 9). Thus, the charging of interest rate is prohibited under Islamic laws regardless of whether the interest rate is small or large. The preceding discussion pointed out that while inferior dates is prohibited to be exchanged with fine dates, the transaction can proceed nevertheless by selling the inferior dates and then buying the fine dates from the proceeds. Thus, it can be concluded that while Islam can prohibit certain transactions, th e same transactions can essentially proceed by taking certain routes such that the essential of the intended transaction can ultimately take place despite the prohibition under Islam. In short, alternative transactions routes can be executed such that the essentials of the target transaction are eventually realized. According to El-Gamal (2000, p. 6), a good translation of Gharar is â€Å"risk† or â€Å"uncertainty†. Gharar is â€Å"the sale of probable items whose existence or characteristics are not certain, due to risky nature which makes the trade similar to gambling. Selling non-existent objects is categorized as Gharar and is forbidden (El-Gamal 2000, p. 17). At this