Islamic Finance Within Compliance Of Sharia Law

2261 WordsMar 5, 201510 Pages
Introduction Islamic finance within compliance of Sharia law form the core of Islamic banking and have become one of the fastest growing segments of the financial industry, operating in over 75 countries (Cihak,Hesse2008). Islamic finance initially was concentrated in the Middle East and South East Asia, but is now found globally. The roots of Islamic finance stemmed from the efforts of Islamic scholars to identify alternatives to the interest based system that is prohibited and condemned by Allah within the Quran. Islamic finance also prohibits the practice of lending money for investments in tobacco, alcohol, gambling and weapons per Sharia law. In the wake of the global financial crisis however, there has been a renewed interest on the…show more content…
The first states that paying interest is prohibited, thus Islamic banks have to use contracts that create exposure to the real sector and must ensure efficient risk management (citation needed). The second principle revolves around the profit and loss sharing concept, where any financial transaction must share both risk and reward so excessive losses and profits are minimized. The third principle prohibits uncertainty and/or speculation. Uncertainty in contractual terms and conditions is forbidden, however, risk taking is allowed only when all terms and conditions are clearly outlined to all participating parties. The last principle requires the use of asset-backing, where each financial transaction must relate to tangible and/or identifiable underlying assets that ensure Islamic banks remain connected to the real economy. A better understanding of Islamic finance is called for in all respects. Islamic Finance – Historical and Religious beginnings Islamic finance took its roots at the beginning of the 7th century when the Prophet Muhammad claimed to have received revelations directly from God (Allah). At the time of these revelations the current standards/rules of financial operations were derived from the Quran and the Sunna, however, since then there has been a continuing process of coordinated adjustment
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