System of Islamic Finance: Fiction or Reality?

System of Islamic Finance: Fiction or Reality?

The rapid expansion of the Islamic banking system and the introduction of Islamic financial tools in Pakistan have recently caused a lot of controversy. Despite its popularity, Pakistan's banking system does not include the Islamic financial system, and many people continue to question its legitimacy. However, the question of whether or not it is the only solution to Pakistan's poor financial management has never been investigated.

The Islamic financial system cannot be described in a straightforward way as "interest-free," which is inaccurate and frequently leads to confusion. While the principle of the system is to prevent interest from being received and paid, it is supported by other Islamic doctrines that emphasize individual rights and responsibilities, property rights, fair wealth distribution, risk-sharing, obligation fulfillment, and contract purity. The Islamic financial system includes insurance, capital production, capital markets, and all forms of financial intermediation in addition to prudent and sound regulations. This implies that moral and ethical considerations must be incorporated into the regulatory framework.

Over the past ten years, the Islamic finance industry has grown at a rate of 10 to 12 percent annually. Financial assets that comply with Sharia include insurance, capital markets, money markets, and bank and non-bank financial institutions (collectively referred to as "Takaful")

Islamic finance's sustainable growth promotes shared wealth, poverty reduction, and economic expansion.

An Islamic financial system's conceptual foundation goes beyond the interaction between economic behavior and production variables. The Islamic financial system can only be fully comprehended within the framework of Islam's teachings on business ethics, wealth distribution, and social and economic justice, which are at the heart of a moral economy. The Islamic financial system places equal emphasis on the ethical, moral, social, and public interest dimensions in order to promote equality and fairness as well as the role of the state. In contrast, the conventional financial system focuses primarily on the economic and financial aspects of transactions and their material outcomes.

According to Zamir Iqbal's article on the Islamic Financial System, which is published by the World Bank, the ethical economy forms the basis of this system. The following goals can be used to comprehend this system:

. to adhere to the equity and justice principles of Shariah;

 must be based on the genuine consent of all parties and be free of unfair enrichment. must be an essential component of a genuine commercial or economic transaction, such as a sale, lease, manufacturing, or partnership.

A properly implemented Islamic financial system has numerous advantages. Islamic finance's sustainable growth promotes shared wealth, poverty reduction, and economic expansion. Islamic finance has the potential to significantly contribute to economic expansion due to its direct connection to real-world assets and the economy. Profit-and-loss sharing arrangements encourage the provision of financial support to productive businesses that are able to increase output and create jobs. By ensuring that only transactions with a significant purpose are supported by the industry, the emphasis on tangible assets discourages financial speculation. Islamic money advances the development of the monetary area and increments monetary incorporation. Islamic finance has the potential to increase financial inclusion and improve financial access by expanding the range and availability of financial products. Islamic finance places an emphasis on financing in the form of partnerships, which has the potential to improve the poor's and small businesses' access to capital.

These would be extremely beneficial to Pakistan, but given the true prerequisites for creating a favorable environment for the Islamic Financial Management System, it may be unlikely that Pakistan will reap these benefits. Politicians, bankers, and economists all know the truth about Pakistan's economy. We use a system that has not been documented much; Unjust enrichment is ingrained in our business practices, and our compliance with Shari'ah is in serious doubt. Unfortunately, implementing Islamic Financial Management in a way that is both active and efficient is a long way off. The realization of the goal of an interest-free economy has been significantly hampered by the absence of a suitable environment. Sadly, the government and public figures have done little to create an ideal or nearly ideal Islamic environment.

An essential component of a perfect environment is an economy devoid of inflation. A person who lends money and receives the same amount back a year later actually has lost money because inflation reduces the real value of money. Inflation is primarily brought on by inadequate financing. In point of fact, it is unfair to the public that public currency is devalued as a result of notes being printed to cover a budget deficit. The government's performance is also poor in this regard. The government's domestic and international debts, as well as high-interest borrowing, have reached unsustainable levels. Additionally, no effort has been made to conform the tax structure to Shariah.

despite the fact that major financial institutions' publications, such as those from the World Bank and the Asian Development Bank, strongly support the Islamic Financial Model in order to reap the benefits of this rapidly expanding industry. In essence, the Islamic Financial Model cannot be effectively implemented without establishing an ethical economics-based social and economic structure.