Islamic Modes of Financing

PRINCIPLES OF ISLAMIC
FINANCE
 Islamic Finance – Principles
Principles of Islamic Finance – Prohibitions & Permissions
1. Prohibition of Riba:
Riba means excess– Predetermined/fixed/time related
Excess of weight or measure in one of the two homogenous
articles in a contract of exchange
– An increment on loan received by the lender (benefit of
delay) - Riba al Nasi’ah (Riba al Jahiliyyah, Quranic Riba)
– Discrepancy appropriated through exchange of goods
(excess arising from weight or measure subject to
conditions) -Riba al Fadl
 Islamic Finance – Principles
Principles of Islamic Finance
1. Prohibition of Riba: Prohibition in Shariah:
A. Qur’an
1. Surah al-Room – [Undesirability of Riba was revealed where
Allah (SWT) conveyed His displeasure on such transactions]
2. Surah al-Nissa – [In response to provocations of Jews and
recounting their sins, including charging of Riba, Allah
(SWT) tells them about the punishment and also rewards for
the clear minded]
3. Surah Aale-Imran – [Riba was expressly prohibited for
Muslims]
 Islamic Finance – Principles
Principles of Islamic Finance
1. Prohibition of Riba: Prohibition in Shariah:
A. Qur’an
4. Surah al-Baqarah – [In response to adversaries of Islam’s
question of paralleling profit and Riba, Allah (SWT)
permitted sale and prohibited Riba, and that the matter of
already charged Riba was with Allah]
5. Surah al-Baqarah- [Declaration of war from Allah (SWT)
and His Prophet (PBUH) against those who disobey the
prohibition, and all previous Ribavi transactions were
entitled to receive principal only, and that to give the debtor
grace period until he can manage to clear the dues against
him]
 Islamic Finance – Principles
Principles of Islamic Finance
1. Prohibition of Riba: Prohibition in Shariah:
B. Ahadith
Ahadith relate to the following subjects:
1. Prohibition of Riba [various parties to Ribavi
transactions]
2. Consequences of indulging in Riba […Night of
ascendance to Heavens…, violators subject to the
curse]
3. Forms of Riba in loans and other transactions […
Varily/Indeed Riba was in lending, …, Riba al Fadl]
 Islamic Finance – Principles
Principles of Islamic Finance
1. Prohibition of Riba: Prohibition in Shariah:
B. Ahadith
Ahadith relate to the following subjects:
4. Creditor and debtir relationship […not to accept any
gift or ride from borrower…, …restrict even minute
benefit transferring from debtor to creditor…]

5. Outstanding debt, the necessity of repaying the debt

[…all sins would be forgiven except o/s debt…, …
dishonour and punishment for willful defaulter…, …
allowance of repayment time for genuine defaulter…]
 Islamic Finance – Principles
Principles of Islamic Finance
2. Profit belongs to one who bears responsibility:
These two interrelated characteristics are expressed in the
Prophet (PBUH)'s saying "al kharaj bi al daman “ –
entitlement of gain is linked to the responsibility for loss”.
3. Variable return:
Profit Sharing Principle (PSP) or the Profit and Loss
Sharing Principle (PLSP).
– Mudarabah – Profit sharing principle
– Musharakah – Profit and loss sharing principle
4. Asset backed financing:
Transactions based on or create assets – real sector activity
 Islamic Finance – Principles
Principles of Islamic Finance
5. Prohibition of speculative transactions: uncertainty (Gharar)
and gambling (Maysir)
Sale of probable items whose existence or characteristics are
uncertain.
 Bay al Mukhadarah – eg. Selling fruit before they ripen
 Bay al Samak fi’l Ma – eg. Selling fish in the water
 Bay Safqatan fi Saqfah – eg. Two prices in one sale, etc.
6. Prohibition of fraud (Khilabah) and deception (Ghishish):
7. Prohibition of executing two mutually inconsistent contracts
OR conditional contracts
8. Permissibility as a general rule:
 Islamic Finance – Principles
Rules of Sale:
1. Subject must exist at the time of sale
2. Subject must be in ownership of seller
3. Subject in possession – Physical or constructive
4. Sale must be instant and absolute
5. Subject must be property of value
6. Subject should be halal
7. Subject must be known and identified
8. Sale must be unconditional
9. Delivery of sold item must be certain
10. Price of subject must be certain
 Islamic Finance – Principles

REFERENCE SLIDES