Nowadays,it seems that a lot of people have been confused and unaware about Islamicfinancial. Some people thought that Islamic product is only can be used formuslims. So, people need to change their perception about Islamic product whichcan only be used by muslim. The truth is, it can be used by variety of people.When we talk about Islam, we know that Islam is not just about religion. Islamis more than people think about.
Islam is principle of life that deals withvarious aspect which are social, political and economic manner. In term offinance, the Islamic product that contributed is Islamic finance. Islamicfinance is a financial system that operates according to Islamic law that basedSyariah complaint which is Al-Quran and Hadis (source) while conventionalfinance is business activities for receiving, lending, exchanging andsafeguarding money in order to earn profit.
There are several major differencesbetween Islamic finance and conventional finance which makes it differentbetween each other. Firstly, Islamic finance andconventional finance are different in term of the function and operating modes.The system of conventional bank that we used now is fully man-made principle whileIslamic bank system is operated based on the principles of Islamic Syariah. Inaddition, the perception of Islamic product were following the Syariahprinciple, ethical and fair practice and transparent in terms.
In Islamicfinance, they strictly follow the laws and regulations because the key forimposing these laws and ethics are to promote justice which is in Islam arejustice is important. Therefore, in order to protect the social justice is akey of Islamic finance industry grows and develops well in order to competewith other products. On the other hand, conventional finance is essentiallybased on debtor and creditor relationship between depositors. By the sametoken, lenders lend to borrowers to make a profit from the interest charged onthe principle amount. These show that both, Islamic finance and conventionalare different in term of the function and operating modes. Secondly, we can see the differencebetween Islamic finance and conventional finance in term of is risk sharing.
People can make an evaluation through this step what are the differences and itteach us about risk sharing in financial market. In conventional financing, thecustomer bear all the risk of paying bank the loan from the amount of moneythey borrowed. While in Islamic finance, they are types of contract in risk sharing. Each type ofcontract specifies how risk is shared between the enterprise and the supplierof finance. One of the contract is mudarabah. In this contract, the profitsare shared in the predetermined ratio, so the financier’s return fluctuatesaccording to business profitability.
While losses, are to be borne entirely bythe financier, except those caused by the entrepreneur’s fraud or negligence.We can see here, in Islamic finance, they promote risk sharing between providerof capital and the user of fund which between investor and entrepreneur. Inconclusion, Islamic finance are contrast with conventional finance because inrisk sharing, conventional finance shows that the financier has a contractualright to receive interest (capital repayment) irrespective of the condition ofthe borrower’s business. This shows that Islamic finance andconventional have a big difference between each other. Thirdly,the different between Islamic finance and conventional is in term of interest.In conventional finance, bank charge additional money as a penalty or compoundinterest in case of defaulters.
While, in Islamic finance, the bank considerinterest they charged on loan or usury as ribaand it does not mean in Islam. In term of riba,,it has been subjected to variousforms of regulations and restrictions. Islamic finance system is very concernedand strictly prohibit of taking interest on loans. Otherwise, interest hasgiven a burden to borrower to pay back because the amount of money borrowed hasincrease so high which is including their interest. For example, in Islamicfinance, they prohibit no usury or unlawful (interest) in term of riba, no certainty or trickery in termof gharar and no compounding ofinterest and unfair fees. In Islam, it has shariah principle applied such as Akad Mudarabah (buy-sell), Musharakah Mustanaqishah (capitalsharing) and Ijarah Wa’istina(leasing with the option of ownership) instead of interest. Asa conclusion, we can see that both Islamic and conventional finance gives showsa lot of differences.
Therefore, we need to be wise in managing our finance andwealth according to Allah’s commands which promoting justice and prohibitcertain activities. It is important to acknowledge the several majordifferences between Islamic finance and conventional finance which are in termof the function and operation mode, risk sharing and interest. After all, as aconsumer of financial product we need to be wise in managing our financial welland choose the most beneficial one to use as customer. It is no use crying oversplit milk if we fail in managing our finance well.