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Islamic Finance Introduction

Islamic finance deals with the range of financial transactions that conform to the Shariah,

Shariah represents the moral code and religious law of Islam. Shariah spans over many topics addressed by secular law, including crime, politics, and economics, as well as personal  matters.

Shariah is considered to be the infallible law of God—in contrast with the human interpretation of the laws (fiqh).

The main principle of Islamic finance is its adherence to the four prohibitions of Shariah:

• Riba: money does not produce richness. Interest is prohibited;
• Haram: Islamic cultural prohibitions (e.g. alcohol, prostitution, tobacco etc.);
• Gharar: Gambling;
• Maysir: speculation is not admitted (conventional insurance is prohibited).

Within these principles, Islamic financial contracts are designed to facilitate financing according to Islamic norms.

The contracts include:

• murabaha (mark up);
• mudaraba (venture capital type participatory financing);
• musharaka (participatory financing);
• ijarah (leasing), salam (forward financing transaction);
• istisna (financing for commissioned or pre-ordered production);
• sukuk (asset based Islamic bonds).

Islamic banks and financial institutions have developed other hybrid financial contracts based on these traditional modes.

Islamic financial transaction are classified in Debt and Equity.

• Debt:
  • Murabaha,
  • Tawarruq (Reverse Murabaha),
  • Qard,
  • Qard Hassan,
  • Bay Muajjal,
  • Bay bithaman alajil,
  • Istijrar,
  • Bay Salam,
  • Istisnaa,
  • Istiglal,
  • Bay Inah,
  • Ijara,
  • Ijara mawsufah,
  • Ijarah wa Iqtina,
  • Aariyah,
  • Jualah,
  • Diminishing Musharakah
• Equity:
  • Mudaraba,
  • Musharaka,
  • Shirka Al Milk,
  • Profit-/Loss Sharing,
  • Silent partnership.

Business Requirements

The basic Islamic finance transactions are:

• Commodity Murabaha Deposit
• Reverse Murabaha Financing

Due to Shariah compliant business framework all financial transaction are implemented through a pre defined complex procedures.

In order to manage such procedure, a centralized, automatized and scalable tool is mandatory.

Any trade in a Shariah Compliant environment is a three step procedure:

The respect of the above mentioned three step procedure makes the transaction Shariah Compliant.