4 Principles of Islamic Finance

4 Principles of Islamic Finance

Islamic finance refers to a system of finance that is based on the principals of Islamic law (Sharia). As per the Sharia, the payment and the acceptance of interests for loans of money, lending money on interest (Riba), as well as investing in businesses that provide goods or services that are forbidden in Islam (Haram) , are all prohibited. The concept of Islamic finance is more accurately that money has no intrinsic value. It believes that since money has no value of its own, there should be no charge for its use. Although Islamic finance is as old as the religion itself, modern Islamic finance originated in the 1960’s.

Some of the main principles of Islamic finance are as follows.

1. Prohibition on interest: As per the laws of Islamic finance the taking or the receiving of interest at exorbitant rates is prohibited. This however does not preclude a rate of return on investments.

2. Sharing of risks: As per the Islamic finance the risks involved in any transaction must be shared at least between two parties. This is so that the business risk gets shared between the party that is providing the capital and the entrepreneur, for a share in the profit.

3. Speculative behavior not permitted: Speculative behavior (Gharar) is prohibited. This implies that gambling and other such extreme uncertainty or risks are forbidden. That is why the disclosure of information and the contractual obligations are considered to be sacred duty as per the Islamic law.

4. Violation of the rules of Sharia is forbidden: All investments in businesses related to unethical things as per the Islamic law are forbidden. These businesses would include businesses related to alcohol, pork related products, conventional financial services and entertainment. Under entertainment would fall gambling and casinos, hotels, pornography and music. These are businesses that are advised against by Sharia boards. Some Sharia boards also object to investing in businesses related to tobacco, defense or weapons.

Many experts have predicted that Islamic finance will grow further in the coming years. Thus is because of various reasons. One such reason is that Muslims worldwide are starting to choose those products that are compliant to the Sharia. These products were not available before but lately the increase in oil wealth is being channeled more into these products. Due to the growing competitiveness and the ethical focus of these products, they are drawing both Muslims and non Muslims.

Jason Holmes is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites. His expertise is woven around various aspects of the debt industry and with his e-books he tries to impart to people the different situations and simple solutions to get out of difficult situations. Some of his works include e-books like ‘Credit Score The Quintessential Therapy for a Happy Pocket’, Take Creditors and Collection Agencies to Small Claims Court’ and, My Story- From Depression To a Smile’.