Core Tenets
Prohibition of Interest (Riba): Interest is seen as an exploitative and unjust practice that allows wealth to be generated without real economic activity or risk-sharing. Instead of interest, Islamic finance uses various modes of financing that involve profit and loss sharing, asset-backed transactions, or legitimate trade.
Risk Sharing (Profit and Loss Sharing - PLS): This is also a core tenet. Unlike conventional banking where the lender seeks a fixed return regardless of the borrower's success, Islamic finance emphasizes that the financier and the customer should share the risks and rewards of a venture.
Mudarabah: One party (the capital provider, e.g., the bank) provides the capital, and the other party (the entrepreneur/manager) provides expertise and labor. Profits are shared according to a pre-agreed ratio, but losses are borne by the capital provider (unless due to the manager's negligence).
Musharakah: A joint venture where all partners contribute capital and share profits and losses based on their respective contributions and pre-agreed ratios. This promotes true partnership and shared responsibility.
Asset-Backed Financing: All financial transactions in Islamic banking must be linked to tangible assets or legitimate economic activities. Money itself cannot be traded for money. This prevents purely speculative financial dealings and ensures that financial growth is tied to real economic production and value creation. For example, instead of a loan for a car, an Islamic bank might purchase the car and then sell it to the customer at a marked-up price (Murabaha) or lease it (Ijara).
Prohibition of Speculation and Excessive Uncertainty (Gharar): Islamic finance discourages transactions that involve excessive uncertainty, ambiguity, or deception. All terms and conditions of a contract must be clear and transparent to avoid disputes and exploitation. This principle prohibits highly speculative investments, derivatives, and contracts where the outcome is largely unknown or dependent on chance.
Prohibition of Gambling (Maysir): Any form of gambling or games of chance, where wealth is acquired easily without productive effort or associated risk, is strictly forbidden. This principle reinforces the prohibition of speculation and aims to promote honest and ethical means of earning.
Ethical Investments (Halal): Islamic banks are prohibited from investing in or financing businesses that engage in activities considered haram (forbidden) under Sharia. This includes industries such as:
Alcohol and intoxicants
Pork and non-halal meat production
Gambling and casinos
Pornography and unethical entertainment
Weapons manufacturing (in some interpretations, unless for defensive purposes)
Conventional interest-based financial services
Social Responsibility and Justice: Islamic banking places a strong emphasis on social justice, equitable distribution of wealth, and promoting the well-being of society. This includes:
Zakat: A mandatory charitable contribution on wealth that is often facilitated or collected by Islamic institutions to be distributed to the needy.
Qard al-Hasan: Interest-free loans offered for social welfare or to those in need, where only the principal amount is repaid.
A general aim to contribute positively to the community and avoid harm.