How Islamic Finance Actually Works #Finance

alikum and welcome back to my channel my name is Ali cholan today we are talking about how Islamic Finance Works Islamic bold; color: #1a73e8; text-decoration: none;">Finance is the engine of a real economy it lives where the real things that benefit Society are produced it aim is to be the engine that supports holistic and wholesome lifestyle it Profits comes from creating benefit that helps

everybody that creates a value for everybody just like Prophet sallallahu alaihi wasallam said the best of you are those who benefit others the most so let me tell you a little bit how most basic transaction in economy works and then we can compare Islamic

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance with a conventional and look at some of the modes of Islamic Finance which is today $4 trillion industry so when

it comes to the more simple transaction ction and you have two people who are trying to exchange something in a contract of let’s say sale you have somebody usually with money and somebody with some kind of an asset so this person wants to buy a house now what would normally happen is after

offer and acceptance this person would sell the House pass ownership for some money now first thing to notice here is that house is linked with the real economy and in this transaction when you have sale of house for the money what you are doing is you are linking your Profit with

the real economic activity and in real economy the Profit is generated by creating wealth whether it’s through manufacturing agriculture industry or building something service or a product that helps people live their life in a better way and so this normal way of doing

business where Profit comes by being linked to the real economic activities is pretty much the essence of what Islam wants to see when it comes commercial transactions and Profiting now let’s see how things work in a conventional space so as we said from

before when you look at a normal everyday transaction you would have two parties exchanging two things money for some kind of an asset in this case we have monetary asset being exchanged for for a house which is non- monetary asset and as we said before this asset is linked with your real economy

where things are produced where they live and so on now what would happen if we change one thing in this equation and we took this asset and replac it with something else so we simply have a different transaction where we have money being exchanged for more money and this is how most of our uh

economic system work in terms of the financing industry when you have a Loan they will give you money for some more money later on now what happens with the links with the real world when money starts circulating well what happens with this situation is that when money goes around

it creates more money all right so we have situation where money grows we have situation where the economy became more financialized as economy gets more financialized and there is no asset that is being directly traded what’s happened is that we start cutting the links with this economy and

with links being cut with real economic activities we came come in situation where money starts giving birth as money starts giving birth this creates new economy money growing exponentially Debt is growing exponentially what starts now happening is that this gives birth to entire

different economy that economy looks something like this that economy is now symbolizing red color symbolizing growth of Debt speculative leveraged Finance compounded

interest Debt whether it’s government corporate and households and that keeps growing and growing and growing now you might think about how big is this Debt how big is this financialized economy and when we compare it to our previously here a green or real

economy well you would be surprised that when you look at it the size of the real economy is only a tiny fraction of this entire Financial economy so I don’t know about you but when I was kid whenever we would buy something we would get this little bubble rep and these balloons remind me of

this financial economy because the situation that you have is exactly this okay this is the situation this is the economy that we have it’s a whole host of different kind of bubbles that are growing with a growth that is not anymore linked with anything so how does Islamic

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance work how do we de leverage how do we go opposite reverse that financialization of the economy well we need to go back to what economy is really about so as we said before you cannot just

make money from money that just grows Financial economy so in Islam for money to be useful to make your money you can’t just sell it for more money you need to cut that transaction where money becomes something that is asset that is not money that is useful in itself and then that investment

or asset through sale or some productive use is what creates the money so let me show you how that might work on institutional level between the people how to summarize the basic modes of financing that you see from Islamic Banks to Islamic institutions and Personnel at dealing so if you think

about it we could also have kind of Debt and Equity types of transaction they a little bit different than in your conventional Finance but let’s say we

have two people they want to exchange some asset so two people want to exchange some asset let’s say it’s it’s the house so here the transaction would be like this and person can buy this house on the spot in cash immediately pay or Islam allows also that they pay in deferred

payment basis now often you would see that if these people go to the bank if the bank was one of the partners and they are buying this they could for example purchase the house and sell it or lease it to the customer now this would be one of the modes of financing that in Islamic

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance we might refer as either murabaha orara these are are the sale or lease based transactions or there might be if it involves some other Commodities forward contract like sellum for

instance where we are paying now to get things later on but it doesn’t have to be a bank there could be any type of partnership where people engage into some kind of a real Assets in order to derive Profit for their Venture so for example let’s say you

might have a bank that answers enters into the transaction with a customer to Finance some of the real economic activities in that case when they are entering into

Equity partnership which could be based on Capital contribution that they both put in or some party could put their time and effort another person might put some of the Capital in that case that partnership joint venture into real business

activities could result in Profit and loss and basically depending on how that goes they would share in the fruits now these transactions are often referred as musharaka or mudaraba and if you have really bigger projects let’s say infrastructure project the company or

interested party could raise Finance through other instruments like sukuk and so on sometimes people refer to these as Islamic equivalent of bond but these are more like investment

certificates into the projects so what we are doing in all of these different ways is that we are breaking the link between money and money by converting money in either project or asset that then earns the Income and that’s how we derive The Profit other

than the core transaction being linked to the real economic activities Islamic Finance as Islam itself drives certain behaviors and embeds them as it grows this wholesome lifestyle and so

Islam would prohibit any unethical speculative harmful speculative activities interest or RBA gambling and immoral activities on the other hand because it is engaging in real transaction it is encouraging entrepreneurial activities Mutual cooperation and spirit of generosity so what is Islamic

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance TR Islamic Finance is trying to link money resources people ideas in a real

economy economy where we derived all of our products and services where we actually sold the needs that we have in society in a way that is ethical and just and I hope you subscribe to our Channel we’ll see you in the next CashNews.co inshallah Salam alikum thank you for spending time to

watch this CashNews.co if you would like to learn more about Finance and economy from Islamic perspective head to our new platform Muslim Money Matters where we go in much

greater details regarding the content until next time my name is Aly chanam