Financial inclusion through Islamic financial instruments: A catalyst for small and medium enterprises (SMEs)
Faculty of Business Administration, Department of Economics, Muslim University of Morogoro, Tanzania.
Review
Open Access Research Journal of Multidisciplinary Studies, 2024, 07(01), 134–141.
Article DOI: 10.53022/oarjms.2024.7.1.0008
Publication history:
Received on 20 December 2023; revised on 06 March 2024; accepted on 09 March 2024
Abstract:
The term Islamic finance is used to refer to financial activities conforming to Islamic Law (Sharia). One of the main principles of the Islamic finance system is the prohibition of the payment and the receipt of riba (interest) in a financial transaction. The term riba covers all forms of interest and is not limited to usury or excessive interest only. The most critical and significant implication of banning interest is the indirect prohibition of a “pure” debt security. The key point to bear in mind is that Islamic law does not recognize money and money instruments as a commodity but merely as a medium of exchange. Hence any return must be tied to an asset, or participation and risk-taking in a joint enterprise (such as partnerships). A pure debt security is replaced with an “asset-linked” security, direct financing of a real asset, and different forms of partnerships of which equity financing is the most desirable. In addition to prohibition of riba, there are several other important provisions which may affect financial transactions. These include the prohibition of ‘gharar’ (uncertainty or asymmetrical information), ‘maysir’ (gambling, speculation), hoarding, as well as trading in prohibited commodities (for example, pork and alcohol).
Keywords:
Interest (riba); Gharar’ (uncertainty or asymmetrical information); Maysir’ (gambling); Shariah-compliant business contracts
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Copyright © 2024 Author(s) retain the copyright of this article. This article is published under the terms of the Creative Commons Attribution Liscense 4.0