GUEST COLUN -
By Ashar Nazim -
1) What is Islamic finance?
n Islamic finance is a system of financial services that complies with the principles of Shari’a (Islamic law). Islamic finance is free from the elements of Riba (interest), Gharar (extreme uncertainty and lack of transparency), Qimar (gambling) and some other market malpractices which are prohibited by Shari’a. Islamic finance transactions are typically asset backed as charging of returns on lending money is prohibited. Islamic finance is based on the principle of assuming risk / liability in order to obtain rewards.
2) What is Shari’a?
n Shari’a is the way of life, divine guidance and laws as prescribed by Allah. The primary sources of Shari’a are the Quran and the Hadith (sayings, actions and silent approvals of the Holy Prophet S.A). For areas where these sources are silent or not clear, Ijtihad or juristic interpretations of Islamic scholars are relied upon. Shari’a embodies all aspects of the Islamic faith, including beliefs, acts of worship, dealings and morality or ethics. Shari’a laws and guidelines encompass all facets of human life including personal, social, economic and political.
3) What is the difference between Islamic Finance and Conventional Finance?
n Islamic finance is based upon Shari’a (Islamic Law) principles, where as conventional finance is based on fully man made principles and ideas.
n Islamic finance promotes risk sharing between the provider of capital (investor) and the user of the funds (the bank) whereas conventional finance employs risk transfer, allowing pre-determined rates of interest.
n Islamic finance permits the profit motive but subject to Shari’a and legal restrictions, whereas conventional finance aims at maximising profit without any restrictions other than legal.
n Islamic finance encourages asset-based financing backed by real economic activities/transactions, whereas in conventional finance the link between financial and real economies is not a direct one.
4) Which industries are investors prohibited to invest their funds in according to Islamic Shari’a law?
Islamic Finance prohibits all illegal, immoral or unjust transactions. Specifically, Shari’a compliant investors or institutions cannot invest in the following industries:
n Arms and Ammunitions
n Interest based financial services
(To be concluded)
— The author is Partner, Global Islamic Banking Excellence Center at Ernst & Young