The Positive Advantages of Islamic Finance for Families, Communities and the World
In a global market that predominantly operates through the conventional financial system, Islamic finance began its journey about 40 years ago. Initially, its patronage was limited to the Middle East, where it was conceived. But over the years, Islamic finance has grown progressively and has spread to over 70 countries, and has become a $32 trillion market at the global level. Let us take a look at five advantages that are offered by Islamic finance, which have made it a preferred choice among countries that have accepted it as a financial discipline.
To Understand the Benefits of Islamic Financing We Must Look Beyond the Home
The introductory paragraph here makes the reader think bigger. This isn’t just about buying their first home (although we recognize that homeownership is a very positive achievement). It’s bigger than that. Here’s how.
Buying a home is more than just a practical financial move. For the new homeowner, it’s a means of stability that looks ahead toward future generations. It’s a way of putting down roots in a community. It is usually the biggest investment of a person’s life, into the place that becomes the setting and backdrop for every major life event to come. It’s a big deal.
Financing that home should align with the homeowner’s values.
Often, financing is seen as a kind of necessary evil, a hurdle that must be overcome. For Muslim families, for too long, it was often a source of distaste and even guilt, when the only financing they could find was based on riba (or interest), which is prohibited in Islam so that its use can be seen at best as potentially justifiable if no other option is available.
What a beautiful thing that this conflict is no longer necessary now that a groundbreaking Islamic financing option is widely available through Guidance Residential, coast to coast — and competitively priced as well.
Even better is that when looking beneath the surface, it becomes clear why this type of financing is advised. It promotes justice, helps to grow a healthy society, and protects the vulnerable. Financing a home this way is no longer distasteful but now rather a source of comfort and pride.
How beautiful when your biggest life investment reflects your values!
1. Islamic Banking Promotes Financial Justice
Financial justice is a basic requirement for the functioning of Islamic finance products. Western or conventional financing looks forward to profiting through interest payments and makes the beneficiary completely liable for any risk. Contrary to this, Islamic financing paves way for the sharing of net profit/loss and the risk involved in a proportional manner between the lender and the beneficiary. Therefore, if a financier is expecting a claim on profits of a project, it is necessary that he/she should also carry a proportional share of the loss of that project.
In a traditional mortgage, the lender claims maximum profits without assuming the risk of loss. At Guidance Residential, on the contrary, we share the responsibility of many of the risks involved in homeownership, throughout the period of financing; however, we do not claim a share of the profits in a sale or a share of the increase of the home’s value that would happen over time. This makes Islamic financing a win for the homeowner.
2. Reduces Harmful Products and Practices
Shariah principles forbid any investment that would support industries or activities that are considered harmful to the people and the society in general. This includes usury (otherwise known as interest or riba), but they also prohibit speculation and gambling. To understand the wisdom of this, we need to look no further than the 2008 housing market crash, fueled in large part by widespread speculation and other irresponsible practices, irrespective of whether these are legal or not in a given territory.
One way Islamic financial principles prevent this kind of catastrophe is by requiring transactions to be backed by assets, such as actually buying a home together as partners, which is Guidance Residential’s model of home finance. By contrast, a mortgage loan is not an asset-backed transaction – it is essentially the buying of money now for the promise of more money later, and money has no intrinsic value. Asset-backed transactions inhibit the kind of speculation that contributes to the turmoil we see in today’s economy. Practices like these foster a healthy and vibrant economy where prosperity is shared.
3. Encourages Stability in Investments
In Islamic finance, investments are approached with a slower, insightful decision-making process, when compared to conventional finance. Companies whose financial practices and operations are too risky are usually kept away by Islamic financing companies. By performing intensive audits and analyses, Islamic finance promotes the reduction of risk and creates the space for greater investment stability.
4. Accelerates Economic Development
Islamic finance companies certainly have profit creation and growth as their objectives. Outside of home finance, Islamic banks earn money through investing in businesses they think are likely to grow and succeed. In the Islamic banking industry, each bank will naturally try to out-perform its competitors through wise investments. This can result in a high rate of return, which benefits both the bank and those who deposit money with it — because as those individuals help fund the investments, they gain a share of the profits. This profit can be higher than in a conventional bank, where people who deposit money earn only a predetermined interest rate while the bank earns the rest of the profits from using their money.
For which, they choose to invest in businesses based on their potential for growth and success. Thus in the Islamic banking industry, each bank will invest in promising business ventures and attempt to out-perform its competitors, in order to attract more funds from its depositors. This will eventually result in a high return on investments both for the bank and the depositors. This is unlikely in a conventional bank, where depositors redeem returns on their deposits based on a predetermined interest rate.
Why Finance with Guidance Residential
What’s different about the Islamic banking system is the ethical and moral values it is based upon. It seeks to enable people to earn and grow money, benefiting individuals and society as a whole while restraining the richest and most powerful from taking advantage of the weak and vulnerable. Purchasing a home through Islamic financing is a beautiful way to align life’s biggest investment with the home buyer’s deepest values.
We’re always looking to expand the ways we serve you, and we hope you enjoy the tools available for you!
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Rates have dropped to historic lows! Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today!
Learn more about Islamic home financing:
● Three Reasons Why Millennial Homebuyers Should Choose Islamic Home Financing
● Do You Have to Be Muslim to Get a Riba (Interest) Free Mortgage?
● The Difference Between an Islamic Mortgage and Conventional Mortgage