Islamic Finance: Principles and Practices
Islamic Finance is a system of financial intermediation and business activity that operates in strict compliance with Sharia (Islamic Law). It provides financial services—including banking, insurance, and investments—by adhering to religious principles that prioritize justice, ethical conduct, and shared risk.
Its core difference from conventional finance is the prohibition of interest-based transactions, replacing them with asset-backed contracts based on trade, partnership, and leasing.
Core Prohibitions (The Fundamental Principles)
Islamic finance is distinguished by three key prohibitions that guide all financial contracts:
Riba (Interest or Usury): The charging or payment of interest is strictly forbidden. Riba refers to any predetermined, fixed return or unjustified increase in a loan principal, as Sharia views money as a medium of exchange, not a commodity to be sold for a profit. Profit must be earned from a real economic activity linked to assets, trade, or risk-sharing.
Gharar (Excessive Uncertainty/Ambiguity): Contracts must be clear, certain, and transparent. Gharar prohibits excessive uncertainty, ambiguity, or unnecessary speculation in a transaction. This rule effectively bans most forms of conventional derivatives, options, and short-selling, as they often involve high risk or contracts over assets that may not exist.
Maisir (Gambling/Speculation): Transactions that derive monetary gain from mere chance or conjecture are prohibited. Maisir refers to all forms of gambling and excessive, non-productive speculation.
Haram Investments: Furthermore, Islamic finance prohibits investing in or financing any business involved in activities considered unlawful (Haram), such as the production or sale of alcohol, pork products, tobacco, weapons, or conventional financial services that deal in interest.