TYC Finance: ALI

Islamic finance is a financial system that adheres to the principles of Islamic law (Sharia), one of whose core features is the prohibition of charging and paying interest (Riba). This regulation is not only derived from the teachings of the Quran but is also closely related to the moral and social values of Islam.

Firstly, we need to understand the meaning of "Riba" in Arabic. Riba in Arabic means "increase" or "excess," often used to refer to unequal exchange or lending fees. The Prophet Muhammad (peace be upon him) clearly stated in the Hadith collections of Sahih Bukhari and Sahih Muslim: "Every loan that benefits the lender is Riba." Furthermore, from a literal and financial perspective, Riba should also include:

- Unjust excess in exchange,

- Returns from risk-free investments,

- Compound interest and the monetization of loans,

- Or any unfair terms in exchange contracts.

Interest in traditional finance is defined as any excess amount given or received in a loan or debt. Therefore, Riba can be considered as interest in modern finance. Of course, a small number of Islamic jurists in academia limit the definition of Riba to compound interest or usury, but due to space limitations, this article will not further discuss this part.

Why is Riba prohibited?

In simple terms, because Riba contradicts the principles and concepts of fairness, justice, and mutual cooperation in the Islamic faith. From the perspective of Islamic finance, loans with interest are inherently unfair from the outset because interest is artificially predetermined, while the future is uncertain and beyond human control. On the contrary, Islam encourages transactions and profit-making, advocating post-transaction profit sharing because post-determined profits symbolize the success of entrepreneurial spirit and bring additional benefits, while pre-determined interest (Riba) is a cost, an artificial pricing of future uncertainty, and speculation.

The following further analyzes why Riba is prohibited from religious, economic, and ethical perspectives:

1. Religious Doctrine

The Quran and Hadith of Islam have clear doctrines and prohibitions against interest (Riba). Several verses in the Quran explicitly prohibit Riba, such as verses 275/276/278/279 of Surah Al-Baqarah; verse 130 of Surah Aal-e-Imran; verse 161 of Surah An-Nisaa; and verse 39 of Surah Ar-Rum. In addition, as one of the important legal bases of Islam, the Hadith also has many clear expressions against the prohibition of interest (Riba). These expressions in the Quran and Hadith further emphasize the prohibition of Riba in Islamic doctrine.

2. Economic Ethics

Interest (Riba) is considered an artificial pricing and speculation of future uncertainty. Traditionally, interest is a fee or return that borrowers must pay to lenders for using their funds, usually charged for a specific period or term, such as annual interest/monthly interest/daily interest. However, whether the borrower can obtain profits and pay interest as expected after borrowing money is, in fact, uncertain. Because the future is uncertain, it is the will of God. Islam, which means peace and submission, has at its core the Shahada, "There is no god but Allah, and Muhammad is the messenger of Allah." As creatures, humans as vicegerents on Earth cannot predict and determine the future, so they should not judge and price the uncertainty of the future and its profits. In Islamic doctrine, interest is seen as a form of speculation because it allows lenders to gain returns without bearing risks. Speculative operations related to uncertainty pricing, such as financial derivatives, lotteries, and gambling, are also prohibited. In the concept of Islamic finance, the "invisible hand" that manipulates market price fluctuations in Western classical market economics is the will of Allah. In Islamic values, people can actively participate, strive, and innovate, but whether they can profit or succeed in the future also depends on the will and arrangement of Allah, as expressed in the common Muslim phrase (Inshallah).

3. Morality

The existence of interest (Riba) in the financial system often leads to social injustice and economic instability. It tends to exploit the vulnerable groups in society, especially the poor, thereby exacerbating social wealth disparities, making the rich richer and the poor poorer. This system not only has a negative impact on individuals but also has a severe impact on businesses. If society operates in a high-interest environment for a long time, the heavy burden of high interest will become increasingly unbearable over time, making it difficult for borrowers to repay loans and leading to widespread defaults. In addition, the interest (Riba) mechanism can also lead to the instability of the national financial sector, especially for countries with poor financial and monetary policies and management, as the interest mechanism can easily induce excessive money issuance and inflation. This causes widespread damage to businesses and individuals, thereby having a negative impact on society. Moreover, the interest-based lending system, which is oriented towards short-term profits, overemphasizes short-term and immediate financial returns and neglects the importance of long-term development in social and economic activities. This can lead to uneven resource allocation, increased economic volatility, restricted innovation and entrepreneurship, damaged environmental sustainability, and insufficient long-term investment, among other social and economic issues. Islamic finance advocates for the establishment of a fair and just financial system, the development of the real economy, and advocates for more long-term sustainable development goals, which is often referred to as "responsible finance" and "ethical finance" in the Western world. Historically, we can see that the sustainable finance, ESG (environmental, social, and governance) finance, and green finance that are strongly advocated globally today are actually imitations and improvements of modern Islamic financial mechanisms and products aimed at solving the structural problems of the capitalist economy and financial system. This shows that the Islamic financial system has unique value and importance in promoting social equity and sustainable development.

4. International Practice

Modern Islamic finance, based on the principle of prohibiting interest, has been widely recognized and promoted globally. Since the early 1970s, a series of regional and international Islamic financial institutions and standardization bodies have been established, such as the Islamic Development Bank (IsDB), the Islamic Financial Services Board (IFSB), and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which provide standardized guidance and standards for Islamic finance and have gradually introduced a variety of Islamic financial products. Currently, more than 70 countries worldwide, including non-Islamic countries, have established Islamic finance counters, windows, and branches in their banks, and various financial innovation enterprises and products have emerged, providing a range of financial products and practices, including Islamic bonds (Sukuk), Islamic insurance (Takaful), Islamic finance stock compliance screening (Halal Stocks Screening), trade financing (Islamic Trade Finance), and more, continuously expanding the Muslim customer market and meeting the needs of the Muslim community for Islamic financial products. TYC Finance in Hong Kong provides stock Islamic finance compliance screening, which is a reference to AAOIFI standards for the compliance of stocks in the Greater China region. In addition, Islamic financial assets and institutions operate in accordance with Islamic law (Sharia) principles, implement interest bans (Riba) and speculation bans (Gharar), and encourage investment in actual production and business activities, rather than purely monetary and financial transactions. This model also promotes trade and financial exchanges between Muslims and non-Muslim countries, helping to promote the development of the real economy, advocate value creation, rather than just wealth transfer through financial instruments. In recent years, the continuous development and improvement of the modern Islamic financial system have significantly improved the domestic economic conditions of some countries. Statistics show that, as of the end of 2023, the market value of Islamic financial assets in countries worldwide has exceeded 4 trillion US dollars (including Iran), demonstrating the importance and growth potential of Islamic finance in the global financial market. The development of the Islamic financial system and market not only provides financial services in line with religious doctrines for Muslims, expanding the service population and sources of funds but also promotes the synchronous development of local finance and economy due to its efficient operation and risk-sharing characteristics.

Summary and Outlook

The practice of prohibiting interest in Islamic finance reflects its pursuit of economic equity, social justice, and moral responsibility, aiming to create a more just and stable economic environment and promote harmonious social development. For example, one of the five pillars of Islam, Zakat, requires Muslims to donate a portion of their wealth to those in need, which helps reduce poverty and promote a more equitable distribution of social wealth. In addition, Islamic finance also encourages funds to flow into the real economy, investing through cooperation and sharing profits and risks, such as partnership investments and profit-sharing. This approach helps promote economic growth while ensuring that all participants can fairly share profits and bear risks, thus fostering a more cooperative and fair financial system. In recent years, Islamic finance has experienced steady growth and has provided a new perspective for the global financial system through the development and implementation of alternative financial models.

At the same time, we should also recognize that completely avoiding interest in the modern financial system and real life is a severe challenge, especially in non-Muslim countries and regions without Islamic financial services and products (facing realistic situations and difficulties, historically, many Islamic jurists have also proposed exemptions and jurisprudential interpretations for the interest ban in non-Muslim regions). Islamic finance, as an improvement and innovation of capitalism and the interest mechanism and system, is still developing and improving, and it is not perfect, still has flaws and problems, and faces a series of challenges, including the lack of a sound regulatory and legal framework, the lack of product standardization and consistency, the need for education and training of professional talents, competition and cooperation with traditional finance, and the adoption of new financial technologies. These challenges require Islamic financial institutions and markets to overcome through innovation, cooperation, and education to achieve broader global acceptance and robust development.

Overall, the current development direction of Islamic finance is positive and reformative, and the market also has a good growth trend. Its contribution to financial inclusiveness, financial innovation, global cooperation, and environmental and social responsibility makes it worthy of promotion worldwide. Looking forward, Islamic finance is expected to play a more important role in the global financial market. With the development of future financial technologies such as artificial intelligence and digital currencies, as well as the global emphasis on sustainable development goals, the principles and practices of Islamic finance will provide new momentum for the diversification and sustainable development of the global financial system. In addition, the contribution of Islamic finance to the national "Belt and Road" initiative and the construction of a community with a shared future for mankind will further promote the sustainable development of the global economy and the diversification of the international financial system. At the same time, we also look forward to the wisdom contained in the Quran, which has been passed down for thousands of years, and the Islamic finance industry can play a greater role in the future, making a positive contribution to the stability and prosperity of the global financial market.