The Role of Islamic Financial Systems and Banking Institutions in Global Economic Recovery

Abstract

The Islamic financial system is explored in this research. The banking system, money market, insurance (takaful), and capital markets are included. Muslims throughout the GCC countries and North Africa have used Islamic finance to lend money for business start-ups and other personal goals. According to Shariah, the core idea of Islamic finance prohibits the establishing or taking of specified interest or fees, often known as Riba or usury. Haram, which means "forbidden" in Arabic, is a Muslim principle that has been accepted by Islamic banks, financial institutions, and non-profit organizations. Sharia law is Islam's legal system, based on the Quran and the decisions of Islamic scholars. It serves as a code of behavior for modern Muslims, ensuring they follow God's will in all aspects of life, from everyday routines to personal convictions. Profiteering lending is prohibited in Islam. Therefore, they devised Islamic transaction principles to avoid problems (Fiqh al-Muamalat). Sharing profit and loss (Mudharabah), protecting (Wadiah), forming a joint enterprise (Musharakah), cost plus (Murabahah), and leasing are all options for getting around the prohibition (Ajar). As a result, Islamic finance is founded on Shariah or Islamic law. Shariah Law is based on the Prophet Muhammad's teachings and is based on the Qur'an (Islam's sacred scripture). The bonds are debt-based instruments, whereas the Sukuk is asset-based ownership. The Islamic financial system's prohibition on Riba instantly removes bonds and the debt market. Hence, the Islamic financial system simply being "interest-free" does not provide a correct picture of the system and tends to create confusion.

Keywords: Banking, Finance, Islamic Financial System, Shariah Law

JEL Classification: Z23