What Is Finance?
Finance is a broad term that describes activities associated with banking,
leverage or debt, credit, capital markets, money, and investments. Basically,
finance represents money management and the process ofacquiring needed
funds. Finance also encompasses the oversight, creation, and study of money,
banking, credit, investments, assets, and liabilities that make up financial
Types of Finance
Since individuals, businesses, and government entities all need funding to
operate, the finance field includes three main subcategories: personal finance,
corporatefinance, and public (government) finance.
Financial planning involves analyzing the current financial position of
individuals to formulate strategies for future needs within financial constraints.
Personal finance is specific to every individual's situation and activity;
therefore, financial strategies depend largely on the person's earnings, living
requirements, goals, and desires.
Public finance includes tax, spending, budgeting, and debtissuance policies that
affect how a government pays for the services it provides to the public.
The federal government helps prevent market failure by overseeing the
allocation of resources, distribution of income, and economic stability. Regular
funding is secured mostly through taxation, borrowing from banks, insurance
companies, and other nations also help finance government spending.
Corporatefinance refers to the financial activities related to running a
corporation, usually with a division or department set up to oversee those
One example of corporatefinance: A large company may have to decide
whether to raise additional funds through a bond issue or stock offering.
Investment banks may advise the firm on such considerations and help them
market the securities.
Startups may receive capital from angel investors or venture capitalists in
exchange for a percentage of ownership. If a company thrives and decides to go
public, it will issue shares on a stock exchange through an initial public offering
(IPO) to raise cash.
In other cases, a company might be trying to budget its capital and decide which
projects to finance and which to put on hold in order to grow the company. All
of these types of decisions fall under corporatefinance.
What Is a Financial System?
A financial system is a set of institutions, such as banks, insurance companies,
and stockexchanges that permit the exchange of funds. Financial systems exist
on firm, regional, and global levels. Borrowers, lenders, and investors exchange
current funds to finance projects, either for consumption or productive
investments, and to pursue a return on their financial assets. The financial
system also includes sets of rules and practices that borrowers and lenders use
to decide which projects get financed, who finances projects, and terms of
The Islamic financial system is not much different from the products and
services in the traditional financial system but it operations are essentially based
on a certain set of moral and ethical principles that determined what is viewed
as morally ‘right’ implying actions and transactions that promote public good,
and ‘wrong’ implying actions and transactions likely to be against the public
Describing the Islamic financial system simply as "interest-free" does not
provide a correctpicture of the system as a whole and tends to create confusion.
While prohibiting the receipt and payment of interest is the nucleus of the
system, it is supported by other principles of Islamic teachings
advocating individuals' rights and duties, property rights, equitable distribution
of wealth, risk-sharing, fulfillment of obligations and the sanctity of contracts.
The Islamic financial system is not limited to banking but covers insurance,
capital formation, capital markets, and all types of financial intermediation and
suggests that moral and ethical aspects in the regulatory framework are also
necessary in addition to prudent and sound controls.