Main sources of distinction of Islamic finance are discussed below: Money and other financial instruments must be free of uncertainty or risk (Gharar) Contracts cannot involve any element of speculation or a sale based on an increase in the price of the subject of the contract (Maisir) The payment system of Islamic finance is based on mutual benefit and has no provision for charging interest. Many of these principles which are discussed above including interest-free loans and profit sharing can be particularly important in UAE since it is a country with a relatively large muslim population and with a rapidly growing market in the Islamic banking and finance.
Interest-Free Loans (Qard Hasan)
Concept of Qard Hasan: Qard Hasan in Islamic finance is the term used to mean a non-interest bearing loan that is extended with goodwill. The buyer in fact avails the required amount of money from the seller known as the principal without having to pay for it in advance as interest. The borrower is only expected to make a payment of the principal sum which he had borrowed. This concept helps to free from extra costs associated with interest and it may contribute to the improving of the quality of life of people with debts.
Debt Relief: For people who are in trouble with their finance, Qard Hasan can act as a quick solution without the burden of the interest piling up. Due to this, borrowers are able to handle the debt since the interest is foregone and only need to pay back the anticipative amount of money.
Islamic Banks and Institutions: Most of the IBs and financial institutions in the UAE provide Qard Hasan within their social roles in the community. Such loans are offered by these institutions with a view of assisting those in need especially for emergent expenses or basic requirements.
Profit-Sharing (Mudarabah and Musharakah)
In a Mudarabah arrangement one party (the investor or Rabb-ul Mal) contributes capital and other party (the entrepreneur or Mudarib) contributes labour or management. The former is distributed in proportion to the agreed ratio, but the latter falls on the investor’s side only. Such an agreement can also help to reduce the pressure on the borrower’s fixed payments on debts as there is no interest rate, but instead, a share of profits.
Musharakah is a partnership that where partners contribute investments and share profit or losses in proportion to share investment. This structure can be used for different purpose, in particular to finance a business or a property. It enables the borrowers to undertake business and projects without the burden of having to service the interest and or the principal.
Mudarabah and Musharakah are one step further than the classic forms of Islamic finance, more protecting, linked to the business revenues and profitability. This risk sharing mechanisms makes both borrowers and lenders to be more committed to the success of the venture hence improving on the overall financial environment.
Asset-Backed Financing (Murabaha)
Murabahah is one of the well-known Islamic banking structures, in which the bank buys commodities and resells it at an agreed cost plus profit. This cost and markup is usually divided into instalments and it is paid by the borrower. While there is profit markup involved in Murabaha, there is no interest element involved which is contrary to the Sharia law.
Murabaha contract is mostly usual and unburdensome, and it involves specific information concerning the price as well as the markup. This transparency assists borrowers to note the full repayment costs without being afraid of any hidden costs thus making the management of debts easier.
Murabaha helps the borrowers to obtain assets with reasonable instalments repayment plan. It can prove useful when buying homes, cars or equipment and delivers a clear means of amortising the cost of acquired debt.
Conclusion
The concepts of Islamic finance as a result offer genuine options for managing debts from which interest is unlawful, including interest-free loans (Qard Hasan) and debt and profit-sharing techniques (Mudarabah and Musharakah). These methods have diverse advantages offered as elimination of interest costs, equal sharing of risks and rewards and the issue of solvency In terms of financial reports. These principles can be particularly beneficial in the UAE where Islamic finance has grown popular. These principles can provide real-world solutions of dealing with debt in accordance with the religious and ethical standards.
