#1 Principles of Islamic Finance – ACCA / CPA / SFM -By Saheb Academy

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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

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