Key principles of Islamic Finance

​

The main principles of Islamic finance are derived from Shariah (Islamic law) and aim to promote ethical, equitable and risk-sharing financial practices. Here are the core principles:

 

1. Prohibition of Riba (Interest)

• Charging or receiving interest on loans is strictly forbidden.

• Profit should be earned through legitimate trade and investment, not guaranteed interest.

 

2. Risk Sharing

• Both the lender and borrower share the risks and rewards of investment.

• This is done through partnership contracts like:

  • Mudarabah (profit-sharing)

  • Musharakah (joint venture)

 

3. Prohibition of Gharar (Excessive Uncertainty)

• Contracts involving excessive uncertainty, ambiguity, or speculation are not allowed.

• All terms and conditions must be clear to all parties.

 

4. Prohibition of Haram (Unlawful) Activities

• Investments must be made only in halal (permissible) activities.

• Forbidden sectors include alcohol, gambling, pork, adult entertainment, and interest-based financial institutions.

 

5. Asset-Backed Financing

• Transactions must be backed by tangible assets or services.

• Money cannot be used to generate more money (i.e., interest on loans).

 

6. Ethical and Social Responsibility

• Islamic finance promotes justice, fairness, and transparency.

• Financial dealings should not exploit any party.

 

7. Sanctity of Contracts

• All contracts must be honored and enforced in good faith.

• Islamic finance gives strong emphasis on contractual obligations.

 

8. Profit and Loss Sharing

• Encourages business ventures where profit and loss are shared.

• Discourages guaranteed returns regardless of outcome.

​

​