Key principles of Islamic finance
Key principles of Islamic finance

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Key principles of Islamic finance
  • Money—no intrinsic value
  • Equity—economic and social solidarity
  • Participation—risk, profit and loss
  • Ownership—an asset based approach
  • Prohibition on riba (interest or usury)
  • Prohibition on gharar (ambiguity or uncertainty)
  • Prohibition on unjust enrichment or unfair exploitation
  • Prohibition on maisir (speculation or gambling)
  • Prohibition on dealing in certain industries or commodities

Shari’ah compliant or Islamic finance is a form of financing based on principles of and prohibitions under Shari’ah or Islamic law. These principles and prohibitions are derived from various sources, details of which are set out in Practice Note: Sources of Shari'ah.

This Practice Note sets out the key principles and prohibitions by which Islamic finance transactions are structured. In practice, whether or not an Islamic finance transaction adheres to these principles and meets requirements so as to be considered Shari’ah compliant is a decision that will fall to the Shari’ah board of the financial institution providing or arranging the finance and, less often, the Shari’ah board of any corporate entity utilising the finance. In general, the default position is that a transaction structured as Shari’ah compliant or Islamic will be allowed unless it crosses or breaches key principles or thresholds. For further details, see Practice Note: Key participants in the Islamic finance industry.

Money—no intrinsic value

Shari’ah holds that money is merely a reflection of or a measuring tool for value and a means of exchange. It has no value in and of itself. This means that, for example, money is not a separate asset class, money cannot on its own generate a return and money has no associated time-value.

Equity—economic and social solidarity

Shari’ah calls for a fair and equitable economic system and fairness and equity

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