Islamic Finance and the New Financial System: An Ethical Approach to Preventing Future Financial Crises

Chapter 7The Key Principles of Islamic Finance

The prohibition against riba is a fundamental aspect of Islamic finance, and this alone sets it apart from conventional finance. However, it's not enough to say that Islamic finance is interest-free finance. There is more to it than that. The reason behind the prohibition against interest, and riba as it is broadly defined, is to remove injustice and inequality from financial matters. To do so, Shariah has stipulated some ethical guidelines to follow.

As mentioned in Chapter 6, when it comes to trade and finance, everything is permissible unless it is explicitly prohibited by Shariah, leaving the door wide open for financial creativity and for free markets to operate. Some of the other prohibitions include industries that Muslims must avoid because they conflict with the tenets of Islam and Shariah. These industries include the following:

• Gambling: This includes all forms such as games of chance, lotteries, and, in modern times, speculation. The premise for this prohibition is based on chance: A person would pay an amount of money for a chance to win a larger amount of money if the outcome is in his/her favor. If not, the money paid is lost and no value was created in the process. In contrast to investing in, say, a start-up company, the risk of large profits or losses is there, but the investment is used for a productive purpose. If the venture works out, the return is high, and if the venture fails, the investment is lost. The ...