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hi everyone today in this video we are
going to discuss about this interesting
topic of financial management
islamic finance now this is a very
interesting and very non-conventional
topic
of financial management because here you
are discussing about a religion
and a different culture right so it's
very interesting to understand that yeah
how does the islamic finance
differs from the conventional finance
yeah how is it different that's the
important thing you have to understand
and to get that perfectly clear you have
to be perfectly clear with the
principles of islamic finance okay and
that's what we are going to focus in
this video
and this video is relevant for everyone
okay whether you are an acca student ca
student or cpa student
this video is for you okay don't worry
so see here islamic finance now the name
suggests itself
it's entirely based upon the religion of
islam yeah
so see here islamic finance rests on the
application of the islamic law or
rules of sharia yeah now what is sharia
sharia simply in arabic means islamic
law okay islamic law or
sharia now how does this come into
existence see
sharia has come into existence islamic
law from these two sources
okay holy quran the holy book of islam
yeah the word of god
and the sayings of prophet muhammad
peace be upon him this is also called as
hadees in arabic
okay so these two things you know has
formed the
islamic law and the islamic financial
system
entirely follows the rules of sharia
the islamic law clear you clear with
that
yeah okay then the islamic finance
concept you know it can be traced back
to about 1400 years ago when prophet
muhammad peace be upon him was born okay
since then the islamic finance concept
has come into existence
but it's recent history you can trace it
back to the 1970s
when islamic banks were launched in
saudi arabia uae
qatar bahrain all these gulf rich
countries okay all these oil rich and
gas-rich countries
fine now recently in 2020 it is now
estimated that
worldwide around u.s two trillion of
assets
are managed under the rules of islamic
finance okay
so this was the brief idea about the
islamic finance okay and
uh about islam also right now the main
thing we have to come to
Principles of Islamic finance now this
is very important for you to understand
properly
see here we have these principles mainly
these you know
six principles of islamic finance the
first one is
paying or charging interest now
according to this principle of islamic
finance
interest is completely forbidden you
can't pay or
charge interest all right islam
considers lending with interest payment
as an
exploitative practice that only favors
the lender
at the expense of the borrower so
interest is strictly prohibited it's
strictly forbidden why is it forbidden
because
islam believes in justice you know and
islam says that it is
injustice with the borrower because here
there is no economic
you know economic activity there is no
asset involved here what is happening
the lender is earning money on money
right yeah
he has lent the money to the borrower
and there is no any economic
activity that is happening nothing yeah
it's just that he has borrowed the money
and the time is passing by
and this guy only the borrower is
suffering yeah only the borrower is
suffering
yeah there's no any real economic
activity involved in this
it's just money changing the hand that's
all there is no any asset involved
that's why it's an exploitative practice
and only the borrower suffers so islam
considered it is injustice with the
borrower
and interest is strictly prohibited in
islam okay that's the main thing you
have to understand okay
in whatever transaction is there if
there is interest
it is strictly forbidden in islam clear
okay that's the first principle of
islamic finance
then the second principle is see here
investing in businesses
involved in prohibited activities now i
told you that islamic finance
completely rest upon the application on
sharia the islamic law
so whatever the islam says it goes all
right islam says this is not this is
forbidden
that's not allowed this is forbidden
that's not allowed you can't do that
right so that's what prohibited
activities now what are those prohibited
activities according to islam see here
dealing the businesses which deals in
alcohol drugs gambling
pork the other restaurant which are
involved in pork or
you know pork and then pornography all
these industries and these types of
businesses are completely forbidden in
islam
and also the music industry and many
other things are there okay or anything
else
that the sharia considers to be unlawful
or
undesirable in arabic it is called as
haram okay it is called as haram
fine so if your business is involved in
these prohibited activities
then you can't get finance from any
islamic bank and all okay the islamic
banks the financial institution
cannot be involved with any businesses
which deals in these prohibited
activities yeah
because of the sharia because of the
islamic finance the principles of
islamic finance right
then we have the third principle here
speculation
now speculation is completely forbidden
in islam okay speculation means what
you're speculating that something will
happen in future yeah
something is likely to happen and
because of that you are doing
you know business now itself yeah in
advance itself so
sharia strictly prohibits that islamic
law strictly prohibits any form of
speculation or gambling
why does it prohibit because it says
that islam says that it is equal to
gambling only because there's too much
uncertainty involved
yeah because you can't play with the
likes of people yeah you can't play with
the
what do you say yeah the lives of people
it's like gambling right it's like
gambling
too much risk is there and you already
know that gambling is what
it's a haram activity it's a prohibited
activity in islam
so it equates to gambling because of
excessive risk
and this is called 'Maisir' okay in
arabic gambling this is called
myself speculation yeah this islamic
financial institutions cannot be
involved in
any contracts where the ownership of
goods
depends on an uncertain event in future
yes
that's what speculation is right you're
speculating that something will happen
yeah
in advance itself and you're doing
business now now right
so the ownership of that thing will
depend on future
and future is very uncertain only the
god knows the future
yeah so because of this you know mainly
if you see
these two types of contracts futures
contract and the option contracts yeah
you can't deal in these two markets
according to islam so
in islamic finance these markets are
completely prohibited forbidden
fine futures and option markets clear
speculation is prohibited
and then the fourth principle is what
uncertainty and risk
now this principle in arabic is also
called as 'Gharar'
g-h-a-r-a-r okay so see here
uncertainty and risk it is always
similar to that only speculation only
but it's a bit different see here the
rules of islamic finance
ban participation in contracts where the
terms
and subject matter is uncertain and it
has
excessive risk yes see here in islam you
know
as i said there is a principle of
justice yeah in the beginning itself you
have to be very clear
what you are going to do what type of
business you are going to do yeah it
cannot be uncertain and unambiguous yeah you can't have that
yeah if there is a contract any business
contract any financial contract
then what you have to do what
obligations you have to perform
it should be perfectly written down and
clear
right so the subject matter and the term
should be very clear it should not be
uncertain and it should not have too
much risk excessive risk
yeah now normally this can be seen in
the derivative contracts
and also in short selling yeah so those
types of contracts and these type of
you know activities are completely
prohibited okay because this includes a
prohibition on selling something
one does not own yeah you doesn't own
that thing and you're selling it in
advance
yeah that's what happens in derivative
and short selling contracts isn't it
yes so it's completely prohibited okay
uncertainty and risk
and then the fifth principle we have
here is
risk should be shared yeah that's the
main thing and very
good thing about the islamic finance
that the risks should be shared
among the partners in the business okay
in the you know any financial
transaction in that matter
in islamic finance the partners will
share their profit and loss according to
the part they played in the business
now let's understand this properly see
here now there are two people A and B
now in islam no you know loan is allowed
okay
the a can lend the money to the b five
thousand dollars yeah A has lend five
thousand dollars to the B
and then what will happen interest is
not allowed so after some period of time
b will repay the five thousand dollars
back
that is allowed but here we are not
talking about simple loan
simple A is giving loan to B or Bank is
giving loan to
B something like that no here we are
talking about wealth creation yeah
finance
how wealth can be created how profit and
loss can happen that's what we are
talking about
if you are just talking about loan A
giving money to B and then B giving it
back
that's what that's a simple loan yeah
there is no wealth creation over there
here what we are talking about is
you know there is islamic bank yeah
there is islamic bank
right there is an islamic bank and you
are approaching to the bank and you are
saying
uh see i want to do business and i need
five thousand dollars right
so now the bank will lend you money you
will get the money but then what will
happen
you will be in partnership with the bank
because bank is the lender
you are the borrower and you have opened
a business with that money now what will
happen
the profit and the loss yeah the
benefits as well the risk
will be shared among the bank and you
yeah that's what the
risk sharing in islamic finance is the
lender and the borrower
will be treated as partners this is the
main principle there will be risk
sharing
among these two people yeah you can't
say that
you know only borrower will suffer or
only lender will suffer no it doesn't
happen like that
both parties both parties will have to
share equal risk
all right and you can't have guaranteed
on rate of returns okay that
you will get five percent no matter what
happens with your business that's like
interest only yeah it's similar to
interest so that's why it's completely
prohibited you can't have
guarantee on rate of returns okay you
can't say uh okay Bank you are giving me
five thousand dollars i'm opening the
business and i will pay you ten percent
every year
you can't say that okay that can that
can't happen in islamic financial system
all right the risk and everything the
benefits as well as the
laws will be shared among the parties
equally
simple as that yeah very easy then what
we have is
wealth must be generated from legitimate
trade and
asset based investment see here it's
very simple to understand
now i don't have any you know piece of
paper for that because
see paying or charging interest here
what i what did i say
here i said that you can't use money to
make money right
you can't lend money to someone and then
say pay me the principal
money back and also the interest yeah
you can't do that in in islamic finance
right
so you can't do that there must be a
real economic activity
yeah real legitimate trade should be
there something you have to sell
something should be involved
yeah asset based investment you can't
have just money on money you can't do
that
yeah and risk also should be shared so
this is what wealth must be
generated from legitimate trade and
asset based investment
only in those activities the islamic
banks can get involved with
yeah clear those six are the
principles of islamic finance yeah
paying or charging interest you can't
have
you know you can't pay or charge the
interest from the people and then
some prohibited activities we saw such
as gambling, drugs,
alcohol, pork, pornography, music industry
these kind of activities
yeah if any business is involved in then
you can't get
finance from the islamic banks it's not
allowed and then speculation is 'maisir'
speculation is prohibited yeah
futures contracts and option contracts
are prohibited and then uncertainty and
risk such as derivative contracts and
short selling are prohibited
because it has too much uncertainty the
terms are not clear the subject matter
is not clear
and too much risk is there so this is
also it equates to
gambling right so it's completely
prohibited and then
risk should be shared the lender and the
borrower are like partners
yeah and wealth must be generated from
legitimate trade and asset based
investment right so these were the
principles of islamic finance
now in the coming video we are going to
see different types of
you know islamic finances okay different
sources of islamic finance
that's also very interesting to
understand yeah okay then see in the
next video okay you have
got the idea now what islamic finance is
isn't it how is it different from
conventional finance in conventional
finance what everything is allowed here
everything is allowed right
yeah it's entirely opposite yeah you can
pay the interest you can charge the
interest speculation
is allowed uncertainty and risk it
doesn't matter you can do anything you
like so
this is islamic finance because here
entirely it is based upon the sharia
islamic law
whatever the islam says whatever the
rules of islam says that goes
yeah easy right okay then see you in the
next video right
bye
