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Shariah Rules & Principles

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The Shariah Law in Islam is regarded as the religious law of life and is used in reference to both the Islamic system of law and the Islamic way of life. Islamic Finance is also based on these principles.

The two main sources of Shariah are the Koran, the holy book of Islam, and the Sunna which describes the sayings and actions of the Prophet Mohammed during his lifetime. Shariah emphasizes the importance of moral and ethical behaviour as well being considerate of each other’s requirements and circumstances. 

A concept underlying Islamic finance is that money has no intrinsic value and hence there is no charge for it.  This implies that riba (interest) is prohibited in Islam since money is considered as a medium of exchange, a store of value and a unit of measure.  

The main principles underlying Islamic Finance are:

  1. The prohibition of interest whereby it is not permitted to take or receive interest.  However, this does not prohibit earning a rate of return on the investments.
  2. Speculative behaviour is not allowed.  In Islam, this is known as Gharar and implies that gambling and activities that involve extreme risks or uncertainty are prohibited.
  3. Shariah principles do not permit the financing of certain activities such as gambling, alcohol, pornography, intoxicating drinks, non-slaughtered animals, entertainment, tobacco-related products, weapons and conventional insurance. Moreover, investments in unlawful activities and capital guarantees are avoided.

 

Main Characteristics of the Shariah Principles

All transactions that follow Shariah law are to be based on ethical behaviour where one party is prohibited from exploiting another party.  Moreover, any risk and reward is to be shared with the parties concerned.  It is also based on eliminating interest/usury (riba) and uncertainty (Gharar).

 

Should you wish for more information in regards to Shariah Rules and their impact on Islamic Finance, do not hesitate to Contact Us and we will gladly assist you with any queries you might have.

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