Sharia Finance Rules

Sharia finance, also known as Islamic finance, operates under a distinct set of principles derived from Islamic law (Sharia). These rules aim to ensure that financial transactions are ethical, equitable, and socially responsible, reflecting core Islamic values.

Key Principles

1. Prohibition of Riba (Interest):

   The most fundamental principle is the prohibition of riba, generally translated as interest or usury. Sharia considers predetermined interest as an unjust and exploitative gain. Instead, financial institutions must utilize profit-sharing arrangements, leasing, or other mechanisms that align risk and reward between parties.

2. Prohibition of Gharar (Uncertainty):

   Gharar refers to excessive uncertainty, speculation, or ambiguity in contracts. Sharia requires contracts to be clear, transparent, and free from elements of chance that could lead to unfair outcomes. This principle discourages gambling-like activities and complex derivatives with unclear risks.

3. Prohibition of Maisir (Gambling):

   Maisir refers to games of chance or gambling. Sharia prohibits activities where one party wins at the expense of another through pure luck or speculation. This includes traditional forms of gambling and any transaction where the outcome is uncertain and depends solely on chance.

4. Sharing of Profit and Loss:

   Islamic finance promotes the sharing of profit and loss between the financier and the entrepreneur. This fosters a sense of partnership and encourages responsible investment. This can be achieved through models like Mudarabah (profit-sharing) and Musharakah (joint venture).

5. Asset-Backed Financing:

   Sharia finance requires financial transactions to be linked to tangible assets or legitimate economic activities. This principle aims to ensure that financing is directed towards productive sectors and prevents the creation of “money out of money.” This contrasts with conventional finance, where transactions can be purely speculative without a real underlying asset.

6. Ethical Investments:

   Investments must adhere to ethical guidelines. Sharia prohibits investments in businesses involved in activities considered harmful or unethical, such as alcohol production, gambling, pornography, and the production or sale of weapons that can be used unlawfully.

7. Zakat Compliance:

   Sharia finance encourages or sometimes mandates the payment of Zakat, a form of obligatory charity, on wealth and assets. This helps to redistribute wealth and promote social justice.

Examples of Sharia-Compliant Products

Common Sharia-compliant financial products include:

• Murabaha (Cost-plus financing)
• Ijara (Leasing)
• Mudarabah (Profit-sharing partnership)
• Musharakah (Joint venture)
• Sukuk (Islamic bonds)

Sharia finance provides an alternative approach to financial transactions rooted in ethical and religious principles. It is gaining increasing global recognition as a viable and responsible alternative to conventional finance.