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Low interest rate favor the concept of Islamic finance
12 Jun 2021 (183 views)

Twenty years ago, a Muslim journalist explained to me about Islamic finance. According to the teaching of Islam, the payment of interest is forbidden. 

Their concept is that business should be financed with equity and not with loan. This is to prevent the loan being charged at a exorbitant rate. 

As the business is funded by equity, the risk is shared equally by all the providers of capital.

At that time, I held the view that loans that are levied at a "fair rate" should be acceptable. The question is - how to determine what is fair and exorbitant?

The years have passed. 

If we look at the financial market today, the interest rate on bonds are at at a very low rate. It is preferable for the investors to buy equity, rather than to get a fixed rate on bonds. 

It seems that the principle of Islamic finance is now governing the financial market in an indirect way. 

The massive printing of money by the governments of most countries have lowered interest rate to an unattractive level that most savings are now being invested in equity.

I may be over simplifying the concept and Islamic finance might have evolved over the years to be different from what was explained to me at that time.

Tan Kin Lian
 


Low interest rate favor the concept of Islamic finance
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Twenty years ago, a Muslim journalist explained to me about Islamic finance. According to the teaching of Islam, the payment of interest is forbidden. 

Their concept is that business should be financed with equity and not with loan. This is to prevent the loan being charged at a exorbitant rate. 

As the business is funded by equity, the risk is shared equally by all the providers of capital.

At that time, I held the view that loans that are levied at a "fair rate" should be acceptable. The question is - how to determine what is fair and exorbitant?

The years have passed. 

If we look at the financial market today, the interest rate on bonds are at at a very low rate. It is preferable for the investors to buy equity, rather than to get a fixed rate on bonds. 

It seems that the principle of Islamic finance is now governing the financial market in an indirect way. 

The massive printing of money by the governments of most countries have lowered interest rate to an unattractive level that most savings are now being invested in equity.

I may be over simplifying the concept and Islamic finance might have evolved over the years to be different from what was explained to me at that time.

Tan Kin Lian