University of Kotli Azad Jammu and

Kashmir
 Self introduction

Name : Afaq Bin Niaz

Roll No. : 04
Class : M.com ( 4th )
Subject : Principles of Islamic finance
Presentation Topic

Sharia’a Principles
Meanings of Sharia’a

Sharia means “the correct path” in Arabic. In

Islam, it refers to the divine counsel that
Muslims follow to live moral lives and grow
close to Allah.
Definition of Sharia’a

The code of law derived from the Quran and from

the teachings and examples of Hazrat Mohammed
(PBUH).
Sharia’a Principles

 Sharia’a Islamic investment principles

 Conditions for investment in shares
 Sanctity of contract
 Definition of Asymmetric information
 Adverse selection
 Moral Hazard
 Sharia’a Islamic investment principles

A good illustration of the application of the Sharia’a is to look at

Islamic investment prohibitions. It is forbidden for any Islamic
institution or investment fund to deal in the following goods:
 Alcoholic drinks and related activities;
 Pork, ham, bacon and related by-products;
 Dead animals (or those not slaughtered according to the rules of
the Sharia’a);
Sharia’a Islamic investment principles

 Productsassociated with gambling such as gambling

machines;
 Tobacco and other drugs;
 Activities associated with pornography;
 Gold and silver except for spot cash;
 Armaments and destructive weapons.
Conditions for investment in shares

If the issuer company declares that its business activities as

well as its business management are conducted predicated
on the shariah principles and it is not involved in any of the
following businesses:
 Gambling
 Trading with non-deliverance of goods or accommodation
 Conventional banks
 Conventional leasing companies
 Doing transactions that contain bribe substance
Sanctity of contract

Before executing any Islamic banking transaction, the

counter parties have to satisfy whether the transaction is
halal (valid) in the eyes of Islamic Shariah. This means that
Islamic bank’s transaction must not be invalid or voidable.
To save all parties from any type of injustice, Islam requires
contracts. Contracts can be written or oral, but mostly, it
supports written contracts. The Quran directs people to
keep their promises after they make them
 Definition of Asymmetric information

Asymmetric information” is a term that refers to when

one party in a transaction is in possession of more
information than the other. In certain transactions,
sellers can take advantage of buyers because
asymmetric information exists whereby the seller has
more knowledge of the good being sold than the
buyer.
Types of asymmetric information

There are two types of asymmetric information :

 Adverse selection
 Moral Hazard
• Adverse selection

Adverse selection occurs when either the buyer or seller

has more information about the product or service than
the other. In other words, the buyer or seller knows that
the products value is lower than its worth.
Example of adverse selection

For example, a car salesman knows that he has a faulty

car, which is worth $1,000. However, the customer has
no idea about these faults. As far as they’re concerned,
it’s in working condition, so are willing to pay $2,000.
The transaction takes place, but the customer is then
left with a faulty car worth half what they actually paid
for it – resulting in adverse selection.
• Moral Hazard

In economics, a moral hazard is a situation where an

economic actor has an incentive to increase its
exposure to risk because it does not bear the full
costs of that risk.
Example of moral hazard

For example, when a corporation is insured, it may

take on higher risk knowing that its insurance will
pay the associated costs. A moral hazard may occur
where the actions of the risk-taking party change to
the detriment of the cost-bearing party after a
financial transaction has taken place.
FI AMANILLAH