Islamic Finance
Islamic finance refers to the means by which individuals and corporations, including banks and other lending institutions, raise capital in accordance with Shariah. This centuries-old practice is gaining recognition throughout the world and is seen as a unique form of socially responsible investment. Islamic Finance covers a wide range of financial products and services that are deemed permissible under the Islamic law, and whose ethical nature is even drawing the interest of non-Muslims.
Central to Islamic finance is an understanding of the importance of risk sharing as part of raising capital and the avoidance of usury and uncertainty. In fact, money is seen as a measuring tool for value and not an asset in itself. Therefore, the most common principles that govern Islamic Finance are:
The approach to risk in Islamic Finance is quite different to the conventional system. So while an Islamic Finance product may have the similar objective to a conventional finance product, it is likely to have a very different risk/reward profile. At times, this unconventional risk/reward profile is attractive to potential investors, even when they are not motivated by religious reasons.
While the basic principles of Islamic Finance are well-understood and generally accepted, there can be some variation in viewpoint between Islamic scholars on how these principles apply in certain situations. So it is possible that certain deals may be regarded as acceptable in some places (jurisdictions/ Shariah boards), but not acceptable in others.
Central to Islamic finance is an understanding of the importance of risk sharing as part of raising capital and the avoidance of usury and uncertainty. In fact, money is seen as a measuring tool for value and not an asset in itself. Therefore, the most common principles that govern Islamic Finance are:
- Investment must not be in businesses related to alcohol, pork products, gambling, pornography, and weapons
- Investment cannot involve the payment of interest
- Investment cannot include speculation, or deals with extreme uncertainty
- Risk must be shared between at least two parties
The approach to risk in Islamic Finance is quite different to the conventional system. So while an Islamic Finance product may have the similar objective to a conventional finance product, it is likely to have a very different risk/reward profile. At times, this unconventional risk/reward profile is attractive to potential investors, even when they are not motivated by religious reasons.
While the basic principles of Islamic Finance are well-understood and generally accepted, there can be some variation in viewpoint between Islamic scholars on how these principles apply in certain situations. So it is possible that certain deals may be regarded as acceptable in some places (jurisdictions/ Shariah boards), but not acceptable in others.
