Business Crowdfunding Syariah Islamic Economics Islamic Finance

Does Islamic Financing Have to Be Cheap?

Devin Halim Wijaya17 January 2025

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Following Shariah rules to the letter, Islamic finance is a substitute for traditional financial systems. Understanding that Shariah compliance puts adherence to Islamic laws ahead of cost considerations is crucial to answering the frequently asked question: Should Islamic financing be less expensive than conventional methods?

Shariah’s core principle is compliance over cost

Shariah places a strong emphasis on conducting financial transactions free from maisir (gambling) gharar (excessive uncertainty) and riba (usury). Allah ﷻ says in the Quran :

وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا

Allah has allowed trade and prohibited usury (Al-Baqarah: 275).

Islamic financial arrangements like murabaha are made to be transparent and equitable in accordance with Islamic moral principles. Instead of just looking for cheaper prices, the goal is to complete transactions that are blessed with barakah and comply with sharia rulings.

The following is what the Prophet Muhammad (peace be upon him) said:

إِنَّكَ لَنْ تَدَعَ شَيْئاً لِلَّهِ عَزَّ وَجَلَّ إِلاَّ بَدَّلَكَ اللَّهُ بِهِ مَا هُوَ خَيْرٌ لَكَ مِنْهُ

If someone gives up something for Allah’s sake, Allah will replace it with something better. (Hadeeth from Ahmad’s narration). This emphasizes how selecting financing that complies with Shariah despite its seeming higher cost results in divine favors and rewards.

Also read:Project Based vs Equity Based Financing

Factors Influencing the Cost of Islamic Financing

The cost of Islamic financing is affected by various factors. The idea that Islamic financing could be more costly is influenced by a number of factors:

1.Operational and Structural Costs: In order to maintain Shariah compliance Islamic financial products frequently incorporate additional structures such as sharia board (SPVs) to oversee sharia aspects of it’s transactions. Operating costs may rise as a result of these extra layers.

2.Scale and Market Penetration: Islamic finance has a comparatively small market share in Singapore. The cost of Islamic financial products may increase as a result of this small scale.

3.The Cost of Fund Difference: Unlike conventional banks that depend on cheap interest-bearing deposits, Islamic banks use Shariah-compliant instruments which may have different cost structures. The total cost of financial products may be impacted by these variations.

Compliance with Shariah is the main objective

Ensuring that all financial transactions adhere to Islamic law is the main reason of Islamic financing. For example under murabaha contracts the bank buys an asset and sells it to the client at a predetermined profit margin guaranteeing openness and compliance with Sharia laws. In contrast Shariah seeks to avoid the uncertainty and potential for exploitation that come with conventional loans where interest rates are subject to fluctuations.

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Barakah’s importance in transactions

There are spiritual advantages to Shariah-compliant financing that go beyond financial gains. Allah ﷻ’s says:

وَمَا آتَيْتُمْ مِنْ رِبًا لِيَرْبُوَ فِي أَمْوَالِ النَّاسِ فَلَا يَرْبُو عِنْدَ اللَّهِ ۖ وَمَا آتَيْتُمْ مِنْ زَكَاةٍ تُرِيدُونَ وَجْهَ اللَّهِ فَأُولَٰئِكَ هُمُ الْمُضْعِفُونَ

And whatever you give for interest to increase within the wealth of people will not increase with Allah. But what you give in zakah, desiring the countenance of Allah – those are the multipliers. (Ar-Rum: 39).

Selecting Islamic financing promotes a sense of contentment and serenity that transcends monetary savings and is consistent with moral and religious commitments.

In conclusion

The fundamental component of Islamic financing is its adherence to Shariah principles even though its structural and operational requirements can occasionally make it seem more expensive. Rather than just looking for cost savings the emphasis is on carrying out transactions that are morally righteous and in accordance with Sharia law. Making Shariah compliance a top priority in financial transactions as Muslims guarantees that we carry out our religious obligations and receive spiritual benefits capturing the essence of Islamic finance.

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