Fundamental Principle of Islamic Finance

The most interesting aspect is that almost all major religions in the world are against charging interest. Christianity and Judaism explicitly prohibit charging interest. Hinduism text is full of references of how evil it is. Till 12th century all across Europe charging interest was banned. Medici family of Italy exploited a loophole in the Bible to create one of the first modern banks (that charged interest) and soon afterward the entire world forgot how evil interests are. The Islamic banking seems to be the people in the world who still haven’t forgotten their religion.

In Islam all assets (money, land, property etc.) are considered a gift of god and so is the time. So interest (riba) is viewed as making profit solely due to passage of time by exploiting the plight of those in need by those in excess. A man should not be able to make money from the mere fact that he/she has and others don’t. This is against the fundamental principle of social, economic and political fairness and hence is against Islam.

To confirm with the Islamic principles of finance, one has to abide by Sharia. However it is an abstract form of law capable of adaptation, development and interpretation. The most acceptable form of Sharia used by the financial world today has evolved from the interpretation of the text of Quran, Sunna, ijma and ijtihad/qiyas by the 4 independent schools Hanafi, Maliki, Shafi and Hanbali. However because of the minor differences in opinions and thoughts most Islamic banks consult from time to time a religious committee of religious scholars which supervise their investment activities and make amends.

Following 3 principles are common between the 4 main schools:
1. Riba/Interest: Under Islam interest is banned. Instead it is replaced by a profit and loss sharing agreement. So in essence there is no guaranteed rate of return and the banker has to share the risk. So in essence a lender of capital should not make money which is calculated on the basis of how long the money was borrowed but on the basis of how useful the money was for the borrower.

2. Gharrar/Gambling: One should not bet on chance, uncertainty or speculation.

3. One should not invest in ventures that can destroy the humanity eg: alcohol.

Note: I am neither a Muslim nor an expert in the ways of Islam. Hence please correct me if you believe my interpretation had overlooked some important aspects.

5 replies on “Fundamental Principle of Islamic Finance”

The thing shuttles between absolute chance (gambling) and absolute surety(interest, irrespective of the loanees profit/loss)
The middle ground is allowed.

Interest, as I have posted in the link above gives you a sort of entitlement (caused by the ownership of money) to more money
You can hold the concept of money responsible for the origin of inflation

The difference between Islamic and conventional finance & banking is of Halal – Permitted by Allah (SWT) & His Messenger Muhammad (PBUH) and Haram – Prohibited by Allah (SWT) & His Messenger Muhammad (PBUH). It is not a matter of interest, gambling or social investing, if this has been the case then Muslims would have done the same thing as Medici did. But beware of Haram in the guise of Halal – Islamic Finance as practiced by so called Islamic Banks.

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