Shariah-compliant finance, also known as Islamic finance, refers to financial activities and products that adhere to the principles of Shariah (Islamic law). Unlike conventional finance, which primarily focuses on maximizing profit, Shariah-compliant finance incorporates ethical and moral considerations derived from Islamic teachings. These principles aim to promote social justice, equitable wealth distribution, and responsible economic activity.
A core principle of Shariah-compliant finance is the prohibition of riba, which translates to interest or usury. This prohibition stems from the belief that money should not generate more money on its own without real economic activity. Instead of interest-based lending, Islamic financial institutions utilize alternative financing methods such as:
- Murabaha (Cost-Plus Financing): In this structure, the bank purchases an asset on behalf of the customer and then sells it to the customer at a predetermined mark-up. The customer repays the cost plus the agreed profit in installments.
- Ijara (Leasing): The bank purchases an asset and leases it to the customer for a specific period. The customer makes rental payments to the bank.
- Musharaka (Profit and Loss Sharing): This is a partnership where the bank and the customer contribute capital to a project and share profits and losses according to a pre-agreed ratio.
- Mudaraba (Trust Financing): One party (the bank or investor) provides capital to another party (the entrepreneur) who manages the business. Profits are shared according to a pre-agreed ratio, while losses are borne by the capital provider.
- Sukuk (Islamic Bonds): These are certificates of ownership representing a proportionate share in an asset or a pool of assets. Sukuk holders receive a share of the income generated by the asset, rather than interest payments.
Another key principle is the prohibition of gharar, which refers to excessive uncertainty or speculation. Shariah-compliant finance emphasizes transparency and clarity in financial transactions. Contracts must be clearly defined, and all parties must have a clear understanding of the risks and rewards involved. This principle aims to prevent exploitation and ensure fairness.
Furthermore, Shariah-compliant finance prohibits investment in businesses involved in activities deemed unethical or harmful according to Islamic values. This typically includes businesses involved in the production or sale of alcohol, gambling, pork products, and weapons, among others. This ethical screening ensures that investments are aligned with Islamic moral principles.
To ensure compliance with Shariah principles, Islamic financial institutions typically have Shariah Supervisory Boards (SSBs) composed of qualified Islamic scholars. These boards provide guidance and oversee the development and implementation of Shariah-compliant products and services. They issue fatwas (religious rulings) on the permissibility of various financial transactions.
In conclusion, Shariah-compliant finance offers an alternative to conventional finance by integrating ethical and moral considerations into financial practices. It promotes fairness, transparency, and social responsibility while adhering to the principles of Islamic law. By prohibiting interest, excessive speculation, and unethical investments, Shariah-compliant finance seeks to create a more just and sustainable financial system.
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