Accounting For Islamic Financial Transactions

The Islamic economic system aims to achieve social justice from a religious and ethical perspective. Essentially what this means is the prohibition of riba (interest), avoiding gharar (uncertainty) and not indulge in maisir (gambling). In contrast, the economic system of the West accepts interest as a fair reward for capital and strives to attain human welfare through the operation of the invisible hand driven by self-interest and a free market. More importantly, the economic system is primarily based on participative investment. Accordingly, Islamic banking emphasises on participatory financing. In contrast, the premise of conventional banks rests on the debtor- creditor relationship. While interest is abhorred in Islam, interest in conventional banking is the price of credit and interest represents the opportunity cost of money. To understand Islamic banking, one needs to understand Islamic economics first.

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