What Is Islamic Financing?

Islam being a complete religion has prohibited 'riba' or interest, in all forms and manifestations.  In the absence of any blue print or a workable model of interest free economic system, utmost care with collected gradualness will have to be exercised to bring about a smooth switch over without disrupting the process of capital formation.  

Basically the task of Islamizing the financial system revolves around, creating institutional arrangements, which, on the one hand, reconcile the freedom of the individual with the optimum use of total resources, and on the other, do not conflict with the Islamic tenants of equity and fairness.  It appears that financial system based on the principles of profit and loss sharing may meet these requirements. While this may cleanse the financial system from the evil of 'riba', its total elimination will be possible only when the savers earn their income out of 'halal' activity and the entrepreneur do not cross limits of 'halal' business and 'halal' profits.  Again, an Islamic system would be as much in need of optimum capital formation as any other economic system, be it capitalist or socialist or mixed economy.

A beginning in this direction has been made by introducing Zakat and Ushr at the personal level and eliminating interest from financial transactions at the institutional level.