Sharia Law and Islamic Financing

Sharia Law:

Sharia law is the branch of statute that formalises the previously discussed principles of Islamic economics into law. For example, under Sharia Islamic law:

·        Making money from money – e.g. charging interest – is usury and therefore not permitted.

·        Wealth should only be generated through legitimate investment in assets and legitimate trade.

·        Investment in companies involved with gambling, tobacco

and alcohol is prohibited.

·        Short selling and non-asset backed derivatives are not permitted.

There are now a range of products freely available on the global financial markets that comply with Sharia Islamic law. These include bank current accounts, mortgages and even personal loans.

Islamic Financing:

The Islamic financial model works on the basis of sharing risk. The bank and customer agree terms on how to share risk of an investment then divide profits between them. Whilst customers risk losing their money if the investment is unsuccessful, the bank will not charge a handling fee unless it secures the customer a profit.

Whilst the range of available financial product types continues to grow, some of

the key categories of Islamic finance are:

·        Mudaraba: This is where a financial expert offers specialist investment in which the customer and bank share profits.

·        Musharaka: This is an investment partnership with profit sharing terms agreed in advance and losses limited to the initial capital invested.

·        Murabaha: This is a form of credit that enables customers following Islamic principles to make a purchase without the need to take out an interest bearing loan. The substance of the transaction is that the bank buys an item then sells it to the customer on a deferred basis.

·        Ijara: This is a leasing agreement whereby the bank buys an item for a customer then leases it back to them over an agreed time period. The bank makes a fair profit by charging rent on the property.

·        Ijara-wa-Iqtina: Similar to Ijara but the customer is able to buy the item at the end of the contract.