Islamic finance and insurance

Islamic finance is most easily understood in contrast to conventional finance. The global financial system is underpinned by interest-based principles that result in inflationary systems. These systems reward spending today and penalize saving for tomorrow. Islamic finance eschews riba, or interest, in favor of wealth preservation and growth through equity investments and the sharing of risk. While it is not within the scope of this paper, it is arguable that Islamic finance offers the answer to today’s social justice issues, stemming from widening financial inequality both within and across nations.

When it comes to finance, the shariah is a prohibitive code that is focused on defining what is prohibited, instead of legislating what is not prohibited. As such, anything that is not specifically prohibited is therefore allowed. The main shariah prohibitions in finance are:

  • Prohibition of Riba (interest)

  • Prohibition of Gharar (uncertainty)

  • Prohibition of Maisir/Qimar (gambling)

We’ll explain these prohibitions in more detail in the following section on Islamic insurance, or Takaful.

Islamic banking constitutes 6% of global banking today, making incredible strides from its modest beginnings in the late 1970s. And yet, room for growth is enormous. Muslims today comprise 24% of the global population and are projected to grow to 31% by 2060. Even if Islamic finance served only the “niche” Muslim audience, it should still grow to catch up with the population. Currently, Islamic finance boasts an annual growth rate of 14%, accelerating much faster than traditional finance.

Considering the advent of bitcoin, cryptocurrencies and blockchain technologies, it appears that Islamic finance is poised to grow beyond expectations. The anti-inflationary fundamentals of bitcoin and the ethos of decentralization are giving new tools upon which to build Islamic finance. Never has there been a better time to start reformulating global finance according to Islamic principles, that promise a return to social justice and happier societies.

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