Principles of Islamic Finance

Abstract

Efficient financial systems are one of the pre-requisites for a developing and growing economy. Resilient and responsive financial systems enable the government to implement monetary policies effectively, which is used to control and manage several macro-economic parameters. Banking is a major component of the financial system and hence has far-reaching impact on the overall financial health and stability of an economy. Any disruption in the banking system has serious implications for the economic conditions of a country. Banking and financial system in a country connects individual economic units, thereby creating a national network of financial claims, and helps in the creation of national financial market. Essentially, banking system routes the financial transactions, plays the role of financial intermediation and helps in the creation of wealth. The intermediation process in financial market creates a series of interconnected contractual obligations and relations which alters the values of the variables in the risk equation. Intermediation helps in rationalising the decision to save and invest by surplus units and to borrow and invest by deficit units. The intermediation is generally a very long chain involving several financial entities and processes, each of which is aimed at reducing cost, improving the match between the needs and availability of funds, creation of tailor-made financial products based on the market needs, and provision of timely funds.