Financial institutions play a key role in acting as intermediaries in an economy which basically means that they take money from entities with surplus funds (through deposits) and then place the funds with entities with a deficit in funds (through loans/finance).
Islamic financial institutions have restrictions on the types of entities that they can finance as there are certain economic activities which their Shariah board would not allow them to finance as these economic activities conflict with Shariah principles.
This means that Islamic financial institutions would not be able to use depositors funds to finance companies operating in certain sectors such as in the following examples:
- Companies involved in the production of Alcohol
- Companies involved in the production of Pornographic material
- Companies involved in the Gambling Industry
- Companies involved in the production of Pork
- Companies involved in the Tobacco or Narcotics industry
Conventional financial institutions on the other hand are not necessarily restricted with regards to the types of entities that they can provide finance to, therefore they would usually have no restrcitions on financing a company involved in any of the examples we gave above. Hence you may find a global bank financing a casino or alcohol brewery.
This means that when you open an account with an Islamic financial institution, you know that the institution is not using your funds to finance a company which operates in sectors which are contrary to Shariah such as those listed above. Therefore, if you have an option between opening an account with an Islamic financial institution and opening one with a conventional institution, the choice in my opinion, should be clear.
To read the previous post (#6) of this series, please click the link below: