In Episode 2 of the Islamic Finance podcast series, Ali Mohammed tackles some of the most common misconceptions that people hold regarding Islamic Finance.
The first misconception covered is about the issue of interest. In conventional banking, when you borrow money from a bank you pay interest. When it comes to Islamic banking, Islamic banks do not charge interest on loans. Rather, they make a profit through equity participation which requires a borrower to give the bank a share in their profits rather than paying interest. Ali Mohammed addresses the question, “Why does Islam forbid interest when money is just another commodity that comes at a price?”. He explains that in Islamic finance, money has to derive its value from something other than itself – it derives its value from the real assets, goods or services that it represents.
Another common misconception in Islamic Finance is regarding the issue of gambling. Gambling, known as Maisir in Islam, is strictly prohibited. However, a common question becomes whether buying and selling shares is permitted, since it can be seen as gambling in a way – taking bets on stocks. Ali explains that buying and selling stocks is allowed in Islamic Finance since the value of the traded stocks comes not from the stocks themselves, but from actual existing assets owned by the listed company represented by the stocks.
Finally, Ali comments about the misconception that Islamic finance may be linked with terrorism finance. He categorically states that Islam is against terrorism and all related activities, and that Islamic finance institutions are under full government regulation just like other financial institutions.
In the upcoming Episode 3, Ali will shed light on some of the challenges facing Islamic Finance in Kenya, particularly the legal and regulatory challenges. He will also explain some of the most common products offered by Islamic financial institutions.