Last updated on August 6th, 2023 at 08:29 am
What is Islamic banking?
Islamic banking entails banking activities that are compliant with Shariah. Also known as Islamic finance, it encompasses financial activities, particularly in the banking world, which adhere to Islamic law. This article is about the advantages of Islamic banking for business growth.
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Tenets of Islamic Banking
The religious system forbids the payment and collection of interest by investors and lenders, as well as promotes the sharing of profit and loss.
Islamic banking is operated by an underlying principle that seeks to ensure a harmonious balance between well-being and prosperity.
Not only should an organization be prosperous, but even the people should be well enough, and their rights should not be tampered with for selfish financial gains.
Not just about quantity, but also quality as well. The banking system is sponsored by ethical conduct, equality as well as risk-sharing.
Islamic banking is believed to have the capacity to act as an incentive for economic development and diversification, and also ensure the social development as well as the financial well-being of the people it serves.
It can stimulate the economic growth of micro, small and medium enterprises, as it blocks unnecessary financial burdens upon the operators.
Currently, there are over 500 financial institutions that are adhering to shariah principles in their financial and economic activities.
For instance, Maybank Singapore, with its Islamic fixed-term deposit account known as Dollar Term Deposit-i, is based on the Islamic financial principle that is known as ‘Murabaha’.
According to reports, Islamic banks’ capital is projected to be around $3.5 trillion in recent times.
Some banks operate on the principle of Islamic banking in Nigeria and they are doing well, Jaiz is the pioneer of such Islamic financial tenets in Nigeria
10 Benefits of Islamic Banking in Business Growth
One of the overall functions of the banking system is to ensure economic development via stimulating business growth.
However, we can’t avoid the fact that certain unhealthy banking practices in different places are not making matters better when it comes to business growth.
Nevertheless, the manner Islamic banking has been structured can help enhance business growth in different ways.
In countries like Singapore, there has been an increase in institutions embracing Islamic banking as an alternative to conventional financial products.
Many Muslims, in particular, are recognizing that Islamic banking can grant competitive value compared to conventional financial products.
Let’s explore ten benefits of Islamic banking to business development and ways it can help bolster growth in the Micro, Small and Medium Enterprises (MSME)
Fairness That Benefits Customers
Islamic banking embraced a crucial principle that ensures profit-sharing. Of course, the bank and its customers also get to share the risk.
Banks are usually operated by experts in the financial system, and they usually can earn reasonable profits.
Since these Islamic banks have a structure in place that ensures a more equitable distribution of income and wealth, it is a big financial booster to businesses that are connected with their operations.
This is unlike other types of banks whose profits are usually enjoyed by the big guys at the top of their operations.
Islamic banks can boast about fairness, and business owners banking there can have more resources for their businesses.
Several businesses are devoid of access to vital and cheap financial products and services that satisfy their needs.
This is the emphasis of financial inclusion, which helps to incorporate individuals and businesses into the financial system, so they too can have access to savings, credit, insurance, and so on.
It is necessary to add that these financial services and products have to be delivered responsibly and sustainably.
And while the other popular types of banking systems are usually about interest payments at a rate pre-set on the deposits of cash, Muslims are prohibited from such (payment and receiving of interest).
Due to this reason, many Shariah Law adherents avoid the conventional banking system. Islamic banking could ensure financial inclusion that brings these people into the game, helping their businesses grow in the process.
Promotes stability in investments
Unlike other types of banks, investments in Islamic banking are usually approached meticulously. Islamic financing firms don’t usually have anything to do with organizations whose financial practices are so risky.
These meticulous steps ensure the reduction of risk and also promote the platform for greater investment stability, where both banks and their customers get to make profits.
Accelerating economic development
Islamic finance firms are interested in profit and growth too. They don’t hesitate to invest in businesses that have a great and marketable plan.
Islamic banks put their money in promising business firms without the unnecessary requirements known with other types of banks.
They do all that can be done to outperform their competitors and earn more. They are enabled to attract more funds from depositors. The result is that they will be able to earn even more (higher return on investments).
And unlike other types of banks, where depositors get returns on their deposits based on a pre-determined interest rate, the average Islamic bank shares profit equally with all the depositors.
The main point here is, that their system of administration could easily help small businesses get funding for their businesses, which in turn accelerates economic development without paying extremely business-killing interest on credit facility
Let’s face it, many conventional banking firms are pretty greedy and are usually ready to do all it takes to make more money for themselves.
They can afford to not be straightforward in terms of transparency and disclosure of important details about their dealings.
On the other hand, Islamic banks are compelled by Shariah law to adhere to these things. This is necessary to ensure that one party won’t have undue advantages over the other. Hence, businesses won’t be bothered with hidden fees and other surprise payments.
Reduces the impact of harmful products and practices
Shariah principles forbid any transactions that support industries or activities which are forbidden in Islam. For example, usury, speculation, and gambling – whether these are legal or not in the place of transaction.
Clarity on the maximum amount payable
When dealing with sale-based Islamic financing products, unlike conventional products, the maximum amount to be paid by the customer will be known upfront (and this won’t change).
This means businesses can get to save more money dealing with such products offered by Islamic financial institutions than their counterparts.
Upfront profit for Islamic fixed-term deposit
Businesses can diversify their investments by getting Islamic fixed-term deposits. With this, they can get upfront profit for their investments, which can even be utilized to expand their businesses. This is one of the advantages Islamic banking has over conventional banking.
While conventional banks invest their excess resources in speculative activities without restraint (which is a misallocation of capital as it also promotes instability), shariah principles prohibit such.
Rather than Islamic finance firms doing this, they invest their capital in the real economy, which benefits businesses.
There are still debates over the position of Islam on cryptocurrency investing and whether Muslims can invest in bitcoin ethereum, litecoin, bitcoincash since all forms of cryptocurrencies are highly speculative and volatile than any investment the world has ever seen.
Non-compounding of late payment charges
It is against the principles of shariah to even embark on the compounding of late payment charges. Unlike in the conventional banking system, here, a financing product should go into arrears, what happens is that the late payment charges will simply be applied on your outstanding balance which is due and payable. As a business person, you won’t have to be bothered about paying late charges.
Ethical and moral dimensions
Beyond religion, we all need a financial banking system where people will be put first before profits. Hence, it is important to drive with ethical and moral principles.
This is easily obtained in Islamic Banking. Unlike the conventional banking system that is usually interested in milking you at any slightest opportunity, many Islamic banks will ensure they guide people to understand the risks and costs attached to their services and products. They conduct business fairly and transparently.
The banking system is pretty broad, driven by different financial structures with different philosophies. Among them is Islamic banking, which is more popular in Muslim countries.
It is a religious banking system that adheres to Islamic law (Shariah law). It is required that Muslims follow the shariah, and when it comes to financial matters, the legal framework that determines the flow of it all, is provided by its principles.
A major difference between Islamic banking and other types is that it doesn’t condone all types of economic activities that are not permitted by Shariah law.
These include Gambling and gaming, Financial services based on interest, production of non-halal products like liquor, Entertainment activities like adult entertainment, etc.
The growth of the financial muscle of many Islamic Financial institutions is attached to the soaring economies of certain Muslim countries.
These Islamic countries, who regarded themselves as custodians and promoters of the shariah and its principles, don’t hesitate to pour resources on things that are grounded in the tenets of the Islamic faith – one of which is Islamic banking.
Islamic banks operate with a strong ethical and moral method of conducting business and profits are based on Islamic tenets. They intentionally select business activities to be financed and don’t support things that are considered sinful, which the average conventional bank won’t mind avoiding just to make money.