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What is Islamic Finance?
Islamic finance and banking is a system of finance and financial tools that are compliant with the principles of Islamic law (Shari’ah).

In terms of finance, Shari’ah explains in detail the ethical concepts of money and capital, the relationship between risk and profit and the social responsibilities of financial institutions.

What is Interest (Riba)?
The most well-known aspect of an Islamic financial system is the prohibition of paying or receiving interest on capital.

Essentially, any positive, fixed, predetermined rate tied to the maturity and the amount of principal, which is guaranteed irrespective of the performance of the investment, is considered riba and is so prohibited.

This prohibition is not to be confused with a rate of return or profit on capital, as the earnings and sharing of profit is very much encouraged within Islam.

Moreover, profit, determined ex post, symbolizes the creation of additional wealth through successful entrepreneurship, whereas interest, determined ex ante, is a cost that is accrued irrespective of the outcome of business operations, and may create wealth, even if there are business losses.

What is Risk and Uncertainty (Gharar)?
Contractual risk is also forbidden. In general, this prohibits the selling of goods or services that the seller is not in a position to deliver or the making of a contract which is conditional on an unknown event.

You cannot sell something you do not own. Also, the price and nature of the goods being transacted are defined in detail and agreed upon by both parties, thereby avoiding a sale that may represent a gamble ( for example, conventional short sales or sales on margin are prohibited).


Although the prohibition of interest can indeed be viewed as the nucleus of Islamic
doctrine relating to finance, there are a number of other supporting principles which provide guidance for an Islamic financial systems :
  • advocating risk sharing
  • preservation of property rights
  • promotion of entrepreneurship
  • discouraging speculative behavior

• Bai’ Al-inah
sale and buy-back agreement
• Bai’ Bithaman Ajil deferred payment sales
• Bai’ Muajal credit sales
• Musharakah project financing with
agreed shares of profit
• Mudharabah project financing capital vs labour
• Murabahah trading with disclosure
of margin
• Musawamah trading agreement
• Bai Salam trading with advance
• Hibah gift for a service
• Ijarah lease
• Sukuk Islamic bonds
• Takaful Islamic insurance
• Wadiah safekeeping
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