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Top1. Introduction
Financial activities mobilise funds for investments, which make it very important for the growth and development of an economy. The activities like giving out loans, deposits, exchange of currency and validation of coins, were typically offered in order to pay the flat fee, or when it is investments in order to get profit (Financial services review, 2009). It also serves as an intermediary activities between surplus (depositors) and deficit (borrowers) sides of the economy, with both ends benefiting in order to have an even distribution of wealth for the gain, growth and development of the whole economy. Thus, the kind of benefits or return depositors and the economy gained from borrowers is largely from interest which serves as price of the loans, it is clear rent of money and according to Islamic laws and regulations (Shari’ah) paying or receiving interest is vividly prohibited (Hasnuddeen, 2009).
The prohibition of Interest was categorically stated in several verses of the holy Quran which include Al Baqrah (2:275-280), Al-i-'Imran (3:130), An-Nisaa (4: 160, 161), Ar-Rum (30:39). This means Muslims are not allowed in any circumstances to participate in modern financial practices. Financial activities in the modern time are necessity, as it is needed for the growth and development of an economy. Therefore, Muslims need to find an alternative, this inspires them to transform Islamic economic ideas into practice and introduced profit and loss sharing financial system tagged “Islamic finance” as an alternative for interest based conventional modern financing. With the introduction of Islamic finance in Muslims world, the expectation is that it will spur and influence the growth of the economy (Chapra, 2000). Generally, there is a need for the study of Islamic finance in the present time, because it is a new addition in the context of finance with the different perception, principles and modes. It became a new phenomenon in the field of finance which needs to be digested so that it is advantages and disadvantages can be known. Islamic finance also lacks general recognition and acceptance especially to the non-Muslim world, with quite number of studies it can be easily understood, and be accepted. Lastly it is contribution to the growth and development of nations economy need to be well spells out through studies.
Islamic finance refers to the means (which includes banks and other lending institutions), by which individuals and corporations in the Muslim and non-Muslim world sources capital and engaging into financial transactions, in accordance with Islamic Shari’ah principles or Islamic law. Even though prohibiting the receipt and payment of interest is the nucleus of the system. It is being reinforced and sustained by other principles of Islamic teachings advocating peoples' rights and duties, property rights, equitable distribution of wealth, risk-sharing, fulfilment of obligations and the sanctity of contracts. Similarly, the Islamic financial system is not limited to banking only but also includes insurance, capital formation, capital markets, and all types of financial intermediation. It suggests that moral and ethical aspects in the regulatory framework are also necessary for addition to prudent and sound controls. It is also an exclusive system of socially responsible investment (Ross, 2018).