How Islamic Finance is different from conventional finance

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Pangea Trust in partnership with SIDA Labs has been looking for ways to enable more Africans to gain access to Islamic Finance and Banking. Islamic finance is optionally a new and more productive way of financing start-ups and idea-stage ventures in Africa. 

We have been organizing various roundtables – a co-creation process – and we would love it if people from the African diaspora reached out to either join and/or participate during the event. Your insights would prove highly valuable.

So let’s talk about Islamic Finance.

First, Did you know that more than 56% of Africans are Muslim?

Well, Islamic finance is a way of providing financial services in compliance with Shariah law. Islamic finance is considered a more ethical way of financing, in comparison to the more conventional ways. It also provides more inclusion for Muslims across the globe. Unfortunately, a majority of them do not have access to financial services due to the lack of systems in compliance with Shariah law.

How is Islamic Finance different from conventional finance?

First, is the prohibition of interest rates on loans. In Islam, lending with interest rates is considered to be beneficial to the lender at the expense of the borrower. Therefore, charging of interest is not allowed in Islamic finance.

The second is gharar, which is prohibited. Gharar means uncertainty or risk. Shariah law strictly forbids dealing with business ventures that are too risky. In consideration would be short-selling and derivative contracts just to name a few.

Third, Islamic finance does not support ventures that are considered haram, which is prohibited by Islamic law. For example, starting a pork processing firm.

Fourth, is the prohibition of maisir- speculation or gambling. In Islam, maisir is forbidden since it involves gaining wealth by chance instead of through productive activity.

Why choose Islamic Finance?

The value of Islamic Finance stood at $2.88 trillion in 2019 and has the potential to grow up to $3.69 trillion by 2024. With a growing Muslim population, expected to reach 3billion by 2060, Islamic finance has tremendous potential for growth in Africa.

In Africa, there is a deficit of proper financial infrastructure. This deficit provides a gap for Islamic finance to fill. Many Muslims do not use conventional banking methods since they do not comply with Sharia law. Thus, they provide a large market for Islamic finance in Africa.

In addition to the Muslim community, there is the African diaspora community that should take part in Islamic finance. Many Africans in the diaspora wish to invest back home in Africa, but they do not know where to start. There have been several roundtables with the diaspora to enable the community to know where to invest and Islamic finance is a great place to start. Islamic finance could further close the gap between MSMEs in Africa and the funding they need to achieve their full potential.

Now that you know a little more about Islamic Finance, what next?

Stay tuned to our social media and pages for more updates.

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