Shari'ah finance is finance governed by Islamic law and tradition. There are some fundamental differences that set it apart. Here are five.
Imagine this were a Chappies Bubblegum wrapper. “Did You Know: The Islamic community only subscribe to financial solutions that are compliant with Shari’ah guidelines?” Why no, Chappies wrapper, I did not. This is Shari’ah Finance, 101.
What Is Shari’ah Finance?
Shari’ah (or Sharia) law, also referred to as Islamic law, is the authoritative religious principles of the Islamic tradition. Shari’ah law is based on the Koran teachings as well as the traditions of the Prophet (Hadith and Sunna), and governs both secular and religious duties.The Arabic word, Shari’ah, originally meant "way" or "path".Shari’ah finance, or Islamic finance, refers to the way capital is raised by corporations in the Muslim community (and serving the Muslim market), including banks and other lending institutions. It also refers to the types of investments that are permissible under Shari’ah law.It’s fairly new in South Africa, but most major banks and financial institutions offer products that are Shari’ah compliant alongside their conventional offerings. As an example, in 2007, Absa Bank won the award for the best Islamic Offering from a Conventional Bank.Islamic law does not require that the seller of the product be Muslim, or that all the other services also be Islamic. That’s why conventional banks (and other financial institutions) can offer Shari’ah-compliant products. It does, however, require that the product or service be in compliance with Shari’ah guidelines. Here are the basics:
1. Riba Is Not Allowed
‘Riba’ is literally translated as ‘excess’ or ‘increase’. In finance terms it means interest, so any loan that derives interest is prohibited. That’s why you won’t find an overdraft facility on a Shari’ah compliant checking account, and why Shari’ah home loans operate entirely differently to regular bonds.
2. Profits And Losses Are Shared
In other words, borrowers and lenders share responsibility for profit and loss. As a shareholder, it is compliant to receive a share of a company’s profits when it does well, but also experience a loss if it does badly.
3. Islamic Values Guide Investment Choices
It is not permissible to invest in companies providing goods or services in contradiction to Islamic values which includes companies manufacturing, selling or offering pork, gambling, alcohol, pornography, weapons, prostitution, or tobacco; the entertainment industry, including casinos, nightclubs, and hotels; etc.
4. Trading In Indebtedness Is Impermissible
All transactions must be backed by tangible assets, so speculative investing and derivative trading is not allowed.