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Basics in Islamic Finance

May 2016

May 23, 2016 | 17:00 | Dubai

Contributed by Dr. Ghada G. Mohamed

Founder ECO-ENA, Inc.® & owner of the forum, www.islamicfinanceforum.ca

We actually use the term ‘Islamic Finance’ metaphorically to refer to the Islamic ethical regulations of the financial transactions. In simple words Islamic Finance is all about the application of the ethical values of Islam on the financial transactions.

The main sources of those regulations are;

  • the Quran (Muslims’ holy book),
  • the Sunnah; the Prophet PBUH of Islam’s legacy, and
  • the Ejtihad (the Islamic scholars’ intellectual diligence).

In a very simple exposition, we can bound financial transactions within two deterministic bands; halal (permissible) and haram (impermissible) according to Islam as a religion. Between those two bands many transactions fall without obvious categories and they are considered ambiguous transactions in terms of their permissibility according to Islam. In other simple words; any financial transaction is considered “halal” (permissible) if it satisfies the following Islamic ethical regulations:

  1. The transaction must be transparent and cannot include any type of inequity
  2. The transaction must be applied only on permissible goods and services considered halal in Islam
  3. The transaction must be done according to the spot financial market but if it’s related to forward markets; the contract must be written and signed by both parties, hedged and secured against exposure to financial risk and all types of fluctuations to avoid potential damage of interests.
  4. The transactions must be applied on existing goods and services and not as a reservation for potential processing.
  5. The transactions must not be with an intention of monopolizing goods and services.
  6. The transaction must be done by a neutral medium of exchange; i.e., money.
  7. The price must be fair.

Otherwise; the transaction cannot be considered fully halal to Muslims.

On the other hand; there are ethical regulations in Islam regarding financial investments. Hence; the financial investment is considered halal in Islam if it satisfies the following Islamic ethical regulations:

  1. the permissible investment could not generate interest but it can generate profits.
  2. the permissible investment cannot be related to haram goods and haram services and activities according to Islam.
  3. All parties related to the permissible investment must share the profits and the losses according to the percentage of shares unless the investment is secured against the loss by the financial intermediary or by the state.

Otherwise; the investment cannot be considered fully halal to Muslims.

The question that lingers is, do we need really to substitute the conventional financial system by a pure Islamic financial system? The answer to this question is very simple, because it is not about a system it’s all about ethical financial regulations according to Islam as a religion so it can be applied within the existing conventional financial system. The Islamic bonds and all Islamic financial products can be just provided as alternative instruments even in conventional banks as it already happens in many western banks that deal with all types of Islamic financial transactions. It is all about demand and supply. If there is a demand for such type of financial instruments the bank provides them to the demanders if the transaction is profitable to the bank. Islamic financial products, thus, are very flexible to be traded within any type of conventional financial systems because they are well wrapped for distinction and they can be picked up from any financial vendor.


Keen to know more around the field of Islamic Finance including earning a recognized certification in this field.  Visit, www.tradingcampus.ae to know more

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