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Islamic Financial Products: Malawi’s Valid Food For Thought

The growth of Islamic Finance and Banking in the global financial system is valid food for thought to expect that this growth will continue elsewhere in the world and Malawi might not be spared compelling its conventional banks to expand by providing Islamic financial products. Why the need and Malawi in particular?

Even though there are differences between Islamic Finance and the Conventional banking system there are some fundamental principles that apply equally to both. For example, the necessity of strong corporate governance, rigorous risk management, and sound capital adequacy.

Mostly, a commonly known aspect of Islamic finance and banking is the prohibition of interest. This is understood by the conventional banking system as a restriction to economic activities. Nonetheless, Islam does not restrict economic activities, but instead directs it towards responsible activities and honors our Lord Almighty.

The argument may rise leading to wonder, how Islamic finance directs its transactions towards a responsible activity that benefits other people. In the context of Malawi, we add the phrase, benefiting the ordinary people. Instead of believing in money’s unbridled right to a return irrespective of the level of profit or loss generated in any business or project, Islam suggests that loans must be paid with no excess.

Significantly, Islam allows for a free-market economy where supply and demand are decided in the market. But at the same time, Islam directs the function of the mechanism by imposing specific laws and ethics. A key purpose for imposing these laws and ethics is to promote social justice. Islam and social justice are inseparable, making it a key concept of the Islamic finance industry.

Similarly, just as conventional financial systems, Islamic finance features banks, capital markets, fund managers, investment firms, and insurance companies. However, these entities are governed both by Islamic principles and by the finance industry rules and regulations that apply to their conventional counterparts.

The underlying paradigm of today’s life is the fulfillment of social justice. Likewise, Islam put measures to achieve social justice in the economy. For that matter, Islam prohibits interest-based transactions. It encourages risk-sharing in economic transactions. When a risk is shared among two or more parties, the burden of the risk faced by each party is reduced.