The guiding principles for an Islamic
financial system is a set of rules and laws, collectively referred to as Shariah,
guiding economic, social, political, and cultural aspects of Islamic societies.
Shariah originates from the rules dictated by the Quran and its practices, and
explanations rendered (more commonly known as Sunnah) by the Prophet Muhammad.
Further elaboration of the rules is provided by scholars in Islamic
jurisprudence within the framework of the Quran and Sunnah. In a sense, the
combination of law and finance in Islam is inevitable. Islamic law, by its
nature, is resilient enough to accommodate modern financing modes and
institutions with great ease. Rather, it can be, perhaps, said, that Islam is
not a rigid methodology which insists that certain specific directions be taken
to reach a destination, but a framework which provides directional guidance when
directions for certain types of activities have not been documented yet, or
those that are already documented need to be reengineered to suit changing
Islam, however, expects that the principles it enshrines are not breached while
redefining, reengineering and adopting the same in practice.
Whereas the conventional financial
system focuses primarily on the economic and financial aspects of transactions,
the Islamic system places equal emphasis on the ethical, moral, social, and
religious dimensions, to enhance equality and fairness for the good of society
as a whole.
The system can be fully appreciated only in the context of Islam's
teachings on the work ethic, wealth distribution, social and economic justice,
and the role of the state.
Undoubtedly, prohibiting the receipt and payment of interest is the nucleus of
the system, but it is supported by other principles of Islamic doctrine advocating
risk sharing, individuals' rights and duties, property rights, and the sanctity of
contracts. Similarly, the Islamic financial system is not limited to banking but
covers capital formation, capital markets, and all types of financial intermediation.
A quick summary of the well-known principles of Islamic Finance and the wisdom
inherent in them will be in order, here :
|Making Money from Money is not Permissible|
|Prohibition of Interest|
|Profit and Loss Sharing|
|Gharar (Uncertainty or Speculation) is Prohibited|
|Investments Should only Support Halal Activities|
*From a magazine article written by Colin Willis, Treasurer, Al Rajhi Banking &