NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, July 25, 2005

Islamic financial services (IFS) can be viewed as an element of the broad process of financial innovation and diversification of the financial landscape. IFS are continuing to evolve in response to market demand and regulatory developments.

Basic Principles of Islamic Finance

Islamic finance is broader than interest rate prohibition. The general perception of Islamic finance is that it prohibits the practice of paying and receiving interest. Actually the prohibition is that of engaging in transactions that have elements of “riba” and “gharar”.[2] The former relates to a transaction based on the exchange of a commodity of the same nature but with an augmentation or decrease in amount. Money exchanged for more money or dates for more dates are given often as examples. The second is engaging in a transaction whose outcome is highly uncertain, as for instance gambling would be. These two prohibitions stem from concerns of justice and fairness. In fact it amounts to prohibiting extracting a surplus value in an unfair way. Read the full article here.