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Principles Of Islamic Finance In A Nutshell

Date : 11/11/2020

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Maria

Uploaded by : Maria
Uploaded on : 11/11/2020
Subject : Law


Islamic Finance (IF) refers to engaging in financial activities according to the prescri ptions of Shariah Law (SL) (Divine Law). SL provides instruction to Muslims in all areas of their life personal and social including their carrying out of financial transactions. The basis of SL is found in the Quran and the Sunna and it is brought to Muslims by Fiqh (Islamic jurisprudence). The area of Islamic jurisprudence overseeing financial transactions is known as fiqh-ul-muamulaat.[1]

SL is arguably strongly focused on community wellbeing as it views it as paramount to the wellbeing of the individual. The aim of SL is to help those who suffer and are put at a disadvantage furthermore, the possibility of creating benefit for someone is considered secondary to the principle of alleviation of hardship. Still, in the assessment of harm and benefit, SL approaches the matter by electing (or balancing between, favouring) the lesser loss and the greater benefit.[2] In practical terms, the application of these principles leads to a very strong bias towards what is good for the larger community rather than for the individual financial actor. Notably, in the context of a financial transaction, the larger community s interests are deemed strongly aligned with those of the financial institution facilitating the transaction. This approach reflects one of the main goals of SL, that is: to promote macro and micro financial stability (the stability of the financial system as a whole and that of the financial institution forming a part of it).

The communitarian spirit of IF is clearly reflected in its second principle (relieving hardship). Under this notion, Shariah compliant financiers are called upon to consider favorably transactions that will alleviate one s financial debts and poverty rather than transactions the only purpose of which is to make the actor richer.

Understanding the above fundamental notions, helps to put in context and appreciate the number of prohibitions imposed by Shariah law, namely the ban on interest,[3] excessive risk taking,[4] speculation and gambling,[5] unearned income[6] and trading in forbidden products and industries.[7] Despite their apparent strictness and even rigidness, these prohibitions have arguably been the reason why the Shariah compliant banking framework remained relatively unscathed during the last financial crisis. As a last point, it should be noted that although IF anchors itself in a centuries long religious tradition, IF exists from relatively recently, most notably from the 60s of the 20th century.[8] It is clear nevertheless, that this (young) form of financing has a huge potential, particularly considering the authority of SL within Muslim countries and within the Muslim population living in the West. Being so young, however, could be both an advantage (as it leaves IF open to fresh ideas and structures) and a disadvantage (as it makes it less sophisticated, varied or flexible than conventional finance). Given the competition between the two systems, the suggestion of this author is that FinTech could provide an opportunity to close the gap between conventional and Shariah compliant finance in terms of broadening what the latter could offer to Muslims around the world. While it is true that FinTech can be used to facilitate transactions that would be proscribed by Shariah (which is what happens in conventional finance), it could also be applied in order to meet some of the lofty ideals contained in the holy teachings. The purpose of the following section is to convince the reader of this argument.


[1]Islamic Finance Advisory Board: Permission Prohibition under Islamic Law (2016). http://islamicfinanceboard.com/permission-prohibition-islamic-law/ (accessed 30th September 2018).

[2] Institute of Islamic Banking and Insurance: Shari ah Rulings and Finance (N.d.). http://www.islamic-banking.com/shariah-rulings-finance.aspx (accessed 30th September 2018).

[3] Hans Visser, Islamic Finance: Principles and Practice, (2nd edn. Edward Elgar, Cheltenham Glos 2013).

[4] Ibid.

[5] Islamic Finance Advisory Board: Permission Prohibition under Islamic Law (2016), http://islamicfinanceboard.com/permission-prohibition-islamic-law/ (accessed 30 September 2018).

[6] Ibid.

[7] F Jamaldeen, Seven Prohibited Industries in Islamic Financial Investments (2017), http://www.dummies.com/personal-finance/islamic-finance/seven-prohibited-industries-in-islamic-financial-investments/ (accessed 30 September 2018). For a detailed perspective on the key concepts of Shariah Finance, see Maria Todorof, Islamic Finance Key Concepts for Shariah Law Students (2019) https://www.udemy.com/islamic-finance-law-course/learn/v4/overview.

[8] Islamic Banker: An Early Experiment: Islamic Banking (2018). https://islamicbanker.com/education/early-experiment-islamic-banking (accessed 30 September 2018).

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