Definition:
Financial activities undertaken according to Shariah rules sourced from the Quran and traditions (hadith) of the Prophet s.a.w.
Objectives:
- Equitable creation of wealth
- Fair and Transparent transactions
- Principles of Islamic Finance:
- Finance is tied to actual economic activity
- Returns from financing activities must be based on actual performance of economic activity
- Money is an intermediary and not a commodity
- Lending is a benevolent act without the profit motive
- Equitable sharing of responsibilities, risk and rewards
Scope of Islamic Financial activities:
Economic transactions are generally accepted unless they are prohibited by Shariah
Prohibited transactions: Activities involving/related to;
1. Riba/usury based transactions (conventional, compounded bank interest)
2. Any form gambling or game of chance (casino, number forecasting, sports/horse/dog betting, bingo, lucky draws and the like)
3. Uncertainty, ambiguous contract terms (conventional insurance, derivatives and the like)
4. Alcohol production and distribution
5. Entertainment that does not adhere to the Islamic code (karaoke, cinema/theatre, bars, discotheques and the like)
6. Pork and swine related industries
7. Selling something the seller does not own (short selling)
8. Selling in pursue of a loan denotes intetion to circumvent rules prohibiting riba (hilah)
Islamic Finance is not a zero sum game where there has to be one party worse off for the other to be better off. Islamic Finance is a positive sum game where gains and losses are borne equitably together.
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