Islamic finance is a financial management system that uses the principles and fundamentals of Islamic law as a guide. The principles and foundations of Islamic law are not only applied to the system, but also to financial management institutions, including the products they offer.
As a financial management system, its goal is to transfer customer funds stored in financial institutions to users of the funds. In principle, this does not differ significantly from conventional financial management. Of course, Sharia-based finance differs from conventional finance in some ways.
Sharia-based financial management must adhere to the following principles:
- Expect pleasure from Allah SWT.
- The goal to be achieved must be by the instructions of Allah SWT and the Hadith of Prophet Muhammad SAW.
- Free from interest/usury.
- Application of the principle of profit sharing (sharing) between banks and customers.
- The funded sector is not a sector prohibited under Islamic Sharia.
- Investments made must be guaranteed to be halal.
Then what is forbidden in his administration?
- Riba, is the determination of interest or the exaggeration of the loan amount on return based on a certain percentage of the principal loan amount, which is charged to the borrower.
- Maisir easily gets something without working or playing hard.
- Gharar is anything unclear or uncertain. Gharar can also be interpreted as gambling. This includes all shops where the goods are still unclear or not available. For example, buying and selling fish that have been raised while still in the water and have not yet seen any results.
- Waste, which is the state of spending more than one’s ability, necessity, or carrying capacity.
Islamic financial products
Now its products are more diverse and evolving according to the needs of the community. Here are some products that might suit you.
1. Sharia Insurance
Sharia insurance can be an option if you are not compatible with traditional insurance management. This insurance is free from gharar, maisir, and usury and uses a written contract or agreement, namely the Tabarru contract and/or the Tijarah.
Sharia assurance is also a mission of aqeedah, worship (ta’awun), business (iqtishad), and mission to empower people (social). This distinguishes them from conventional insurance companies, which only have a social mandate.
2. Sharia Securities
You can also choose the product of State Sharia Securities (SBSN) or better known as Sukuk. Sukuk are securities representing ownership of assets in the form of debt issuance based on Sharia principles.
For Sukuk products, the return is given in the form of an annuity (ujrah) or profit sharing at a certain percentage without usury/interest.
3. Sharia Shares
The Islamic stock index is issued by the Islamic capital market. Therefore, the transaction mechanism, both sales, and purchases should not be executed directly to avoid price manipulation.
This stock also does not include bank stocks or goods that contain haram elements, such as cigarettes and alcoholic beverages.
4. Sharia Deposits
Sharia deposits are fixed-term deposit products managed under Islamic Sharia. They may receive a margin from profit sharing (nisbah) under the Mudharabah contract.
5. Sharia Funding
Sharia financing (leasing) has a different principle than conventional financing. In this financing, the transaction occurs by providing credit to the seller. With conventional financing, the position is that of the creditors.
That is, as a seller, the company must have the goods to be sold to consumers. Financial institutions must purchase goods from suppliers, either cash or non-cash.
Then, according to the agreement, the company sells the goods to consumers at a higher price. However, the transaction must include the purchase price plus acquisition costs and profits taken by the company.
The difference between Islamic finance and conventional finance
1. Management System
In terms of fund management, there is a marked difference between Sharia and conventional. Fund management in Islamic finance must adhere to Islamic principles. There is a concept in the teachings of Islam that requires wealth to be properly preserved and beneficial to many people.
By referring to this principle, the concept of interest in Sharia-based financial management is unaware. Because interest or usury is among the things that are forbidden according to Islamic teachings. Therefore, the benefits of managing funds are known as profit-sharing, both in funding and savings.
2. Activity Management
In terms of activity management, three principles must be adhered to when conducting Sharia-based finance, namely fundraising, investment, and use of funds. Here’s the explanation.
- Raising funds, the method of raising funds must comply with Islamic Sharia. Funds that Islamic financial institutions receive from customers must use Mudharabah, Murabahah, Musyarakah, Salam, Istishna, Ijarah contracts, and others.
- Investments, the principles of Islamic teachings must also be applied. In Islam, money is a medium of exchange. Money is not a commodity. This principle must be observed when investing. Fund investments must also be made through financial institutions that also apply Islamic principles.
- The use of funds, use of funds in Sharia-based financial management must have a clear purpose, it must not be used for anything that deviates from Islamic law. Therefore, funds in this administrative system are usually allocated for infaq, waqf, and alms.
Another difference is related to transactions. Transactions in Sharia-based finance use Tabarru contracts. The Tabarru Contract is a business aiming to help each other within the framework of doing good (non-profit). In Tabarru’s contract, the bank, as a benevolent party, does not demand any profit from this transaction.
However, the bank may charge customer management fees, but may not make any profit from them