PRINCIPLES OF ISLAMIC FINANCE
Islamic finance adheres strictly to ethical values as enshrined in Islamic law (sharia). All institutions offering sharia-compliant products must have in place a sharia supervisory board – made up of Islamic clerics and scholars who have the respect of the Muslim community – which monitors compliance.
The fundamental principles are as follows:
• “Riba” is prohibited. Riba literally means excess or increase, but is widely translated as usury, and commonly refers to the concept of interest.
• The borrower and the lender share the responsibility for profit and loss. A good example of this in conventional finance is buying shares in a company. As a shareholder, you receive a share of the company’s profits if it does well, and bear a share of its losses if it does badly.
• Investing in companies that provide goods or services considered contrary to Islamic values is prohibited. These include interestgoverned financial institutions; the entertainment industry, including hotels, casinos, and nightclubs; and companies manufacturing, selling or offering alcohol, pork, gambling, pornography, prostitution, weapons or tobacco.
• Transparency is demanded of all parties in a financial transaction. Sharia forbids deception by, for example, exaggerating a product’s worth or concealing a defect.
• Transactions must be backed by tangible assets, and trading in indebtedness is prohibited. This rules out speculative investing and trading in derivatives.