To be consistent with the principles of Islamic law (Shariah
) -- or at least an orthodox interpretation of the law -- and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities, some not illegal in secular states:
- Paying or charging interest. "All forms of interest are riba and hence prohibited". Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to prevent use of interest.
- Investing in businesses involved in activities that are forbidden (haraam). These include things such as selling alcohol or pork, or producing media such as gossip columns or pornography.
- Charging extra for late payment. This applies to murâbaḥah or other fixed payment financing transactions, although some authors believe late fees may be charged if they are donated to charity, or if the buyer has "deliberately refused" to make a payment.
- Maisir. This is usually translated as "gambling" but used to mean "speculation" in Islamic finance. Involvement in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future is maisir and forbidden in Islamic finance.
- Gharar. Gharar is usually translated as "uncertainty" or "ambiguity". Bans on both maisir and gharar tend to rule out derivatives, options and futures. Islamic finance supporters (such as Mervyn K. Lewis and Latifa M. Algaoud) believe these involve excessive risk and may foster uncertainty and fraudulent behaviour such as are found in derivative instruments used by conventional banking.
- Engaging in transactions lacking "`material finality`. All transactions must be "directly linked to a real underlying economic transaction", which excludes "options and most other derivatives".
Money on the most common type of Islamic financing — debt-based contracts — "must be made from a tangible asset that one owns and thus has the right to sell — and in financial transactions it demands that risk be shared." Money cannot be made from money.
Another statement of the Islamic banking theory of finance is: "Money has no intrinsic utility; it is only a medium of exchange."
Other restrictions include
- Islamic banks are to collect zakat (obligatory religious alms giving) from customers' accounts — at least according to some sources.
- A board of Shariah experts is to supervise and advise each Islamic bank on the propriety of transactions to "ensure that all activities are in line with Islamic principles". (Interpretations of Shariah may vary by country. According to Humayon Dar, interpretation of the Shariah is more strict in Turkey or Arab countries than in Malaysia, whose interpretation is in turn more strict than the Islamic Republic of Iran. Mohammed Ariff also found less exacting Shariah compliance in Iran where the Islamic government had decreed "that government borrowing on the basis of a fixed rate of return from the nationalized banking system would not amount to interest" and consequently would be permissible." Mahmud el-Gamal found interpretations most strict in Sudan and least in Malaysia.)
- Risk sharing. symmetrical risk and return on distribution to participants so that no one benefits disproportionately from the transaction.
In general, Islamic banking and finance has been described as having the "same purpose" as conventional banking but operating in accordance with the rules of shariah law (Institute of Islamic Banking and Insurance),
or having the same "basic objective" as other private entities, i.e. "maximization of shareholder wealth" (Mohamed Warsame).
In a similar vein, Mahmoud El-Gamal states that Islamic finance "is not constructively built from classical jurisprudence". It follows conventional banking and deviates from it "only insofar as some conventional practices are deemed forbidden under Sharia."[Note 5]
A broader description of its principles is given by the Islamic Research and Training Institute of the Islamic Development bank
"The most important feature of Islamic banking is that it promotes risk sharing between the provider of funds (investor) on the one hand and both the financial intermediary (the bank) and the user of funds (the entrepreneur) on the other hand ... In conventional banking, all this risk is borne in principle by the entrepreneur."[Note 6]
Some proponents (Nizam Yaquby) believe Islamic banking has more far reaching purposes than conventional banking, and declare that the "guiding principles" for Islamic finance include: "fairness, justice, equality, transparency, and the pursuit of social harmony",
although others describe these virtues as the natural benefits of following sharia. (Taqi Usmani describes the virtues as guiding principles in one section of his book on Islamic Banking, and benefits in another.)
Nizam Yaquby, for example declares that the "guiding principles" for Islamic finance include: "fairness, justice, equality, transparency, and the pursuit of social harmony".
Some distinguish between sharia-compliant
finance and a more holistic, pure and exacting sharia-based
" has been called necessary, or at least desirable,
for Islamic finance, as has a "gold-based currency
Taqi Usmani declares that Islamic banking would mean less lending because it paid no interest on loans, this should not be thought of as presenting a problem for borrowers finding funds, because — according to Usmani — it is in part to discourage excessive finance that Islam forbids interest.
Zubair Hasan argues that the objectives of Islamic finance as envisaged by its pioneers were "promotion of growth with equity ... the alleviation of poverty ... [and] a long run vision to improve the condition of the Muslim communities across the world."
Some (such as convert Umar Ibrahim Vadillo) believe the Islamic banking movement has so far failed to follow the principles of shariah law, or at least failed to follow them sufficiently strictly.[Note 7]
On the other hand, Usmani preached that an Islamic economy free of the "imbalances" in society — such as concentration of "wealth in the hands of the few", or monopolies which paralyze or hinder market forces — would follow
from obeying "divine injunctions" by banning interest (along with other Islamic efforts).
(Later in his book Introduction to Islamic Finance
, he argues that Islamic principles should include "the fulfillment of the needs of the society" giving "preference to the products which may help the common people to raise their standard of living", but that few Islamic banks have followed this path.)
Another source (Saleh Abdullah Kamel
described the changes anticipated for the Muslim community by following Islamic approach to economics, banking, finance, etc., as a "move towards economic development, creation of the value added factor, increased exports, less imports, job creation, rehabilitation of the incapacitated and training of capable elements".