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What you need to know about Islamic Banking and Finance - Part 1The role of interest in the financial turmoil that has enveloped the world in the last few decades cannot be overemphasised. It has continued to widen the gap between the poor and the rich and has been blamed for most socioeconomic problems most developing countries are facing. Besides, increasing inequality in the distribution of wealth and income; transfer of wealth from the poor to the rich and from developing or emerging economy to the developed ones; high rate of poverty, injustice, ecological destruction are some of the global financial menace facilitated by the use of interest. Recognising the devastating role of interest in the overall global financial crisis, the former director of bank of England, Lord Josiah Stamp, was reported to have said at a public function at the university of Texas as far back as 1927 that:
Based on the foregoing argument, it is crystal clear that one major means by which banks create money is through interest whether simple or compound. It then follows that if we do not wish to be slaves to the bankers and pay the costs of our own slavery, we should leave off patronising and investing in interest-based banks.
Therefore, Islamic finance is a non-interest financial structure that complies with the dictate of divine guidance. It is a system of banking that eschews interest, gambling and speculation in its operations. It is also an ethical banking system that promotes healthy relationship between the customers and the bank and between the bank's employees and the management. It emphasises mutual risk and profit sharing between parties; ensures fairness while ensuring that transactions are based on a particular business activity or asset.
It has contributed significantly to the world economy and it's growing at a geometric rate of about 38.5 percent annually according to the World Islamic Banking Competitiveness report (2013) by Ernst and Young with its total assets expected to reach 1.8 trillion US dollars in 2014. It is an alternative banking system to the conventional structure that is otherwise referred to as Non-Interest financial scheme or ethical system. It is not uncommon that corporate bodies and most households may have some reservations on the viability of an interest-free banking system especially in the contemporary financial structure. However, to get emancipated from the burden of financial system man has brought upon himself, the need to uphold divine guidance in financial dealing becomes inevitable. This was the opinion of a French economist, Maurice Allias, who held that regulating interest rate to zero percent and amending the tax rate to about 2 percent are two components that can remedy the world from its current financial stress.
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