The role of Islamic finance in achieving economic development

Abstract

The fact that Islam prohibits paying and receiving interest does not imply that it frown on making money or encourage reverting to an all-cash or barter economy. Islam encourages all parties in a financial transaction to share the risk and profit or loss of the project. This is what leads to real economic development. That is to say, that the interest-based financing does not create real assets, therefore, the supply of money through the loans advanced by the conventional financial institutions does not match with the real goods and services produced in society, this finally will not lead to economic development in the society. At the same time, the Islamic financing based on a profit and loss sharing system in which the banks and financial institutions who provide capital to the commercial activities, out of the deposits made with them, the flow of the actual profits earned by the society may be directed towards the depositors in equitable proportions which may distribute wealth in a wider circle and may hamper concentration of wealth in the hands of the few. Allah said: “so that it will not be a perpetual distribution among the rich” (59/7). This finally will lead to economic development in the society. In this paper, we discuss the basic features of Islamic finance in achieving economic development, and we come to the end that interest-based financing does not create real assets, therefore, under this system, economic stability, and its development is impossible. While Islamic finance system has much to offer a comprehensive approach to eradicating poverty and build a healthy economy. Using inductive, and descriptive research methodologies. The author reviews several works and economic researches that have discussed the economic crisis and the obstacle of economic development in society. The work concludes by recommending Lenders, Investors, Funders, and financial institutes to take these observations into consideration when providing the capital to finance any projects.