BEYOND THE WORLD OF INTEREST;

INTRODUCTION

All human beings are willing to live a good standard of life. People try to make their lives colorful by earning more money and to live a good life by fulfilling their needs and wants, but they are often confused about whether the money they earn is permissible (halal) or prohibited (haram) in sharīʿah. People are engaging in lending and borrowing activities, taking loans from banks, buying new houses, paying for insurance, and investing in companies and stocks, but the main problem is whether these activities are permissible in sharīʿah or not. So, here, Islamic finance gains importance. Islamic finance is not only for Muslims, nor is it only about “banks without interest,” but it is a complete approach that deals with one simple question: Is this deal fair, honest, and useful to society?

1. WHAT IS ISLAMIC FINANCE?

Islamic finance refers to financial activities, transactions and institutions that operate in accordance with the principles and rules of sharīʿah. It covers banking, investment, trade, insurance and other economic activities. The branch of Islamic jurisprudence that deals with financial and commercial transactions is known as fiqh al-muʿāmalāt.

Islamic finance is applicable in our daily lives like the Islamic financial institutions gives people ways to buy a home, start a business, save money, protect against loss and invest, while staying away from things Islam does not allow. Today Islamic financial services are offered in many countries and the customers are both Muslim and non-Muslims.

2. WHERE DO THE RULES COME FROM?

The rules of Islamic finance come from the main sources of Islamic law: The first one is Quran, which is the primary source and the holy book of Muslims which is also the words of almighty Allah SWT. The second, Sunnah which means Sayings, actions and approvals of Prophet Muhammad (PBUH). The third, Ijma and forth, Qiyas.

The traditional trade products we can adopt from Quran and Sunnah but the modern products such as credit cards and stock markets did not exist in early Islamic history. So, today's scholars study new products using the primary sources of sharīʿah and then they make a conclusion. Many banks have a Sharīʿah board, a group of scholars who check that products follow the rules. International bodies, such as AAOIFI , IFSB , etc.

3. THE MAIN PRINCIPLES OF ISLAMIC FINANCE

3.1 The Prohibition of Ribā (Interest)

The major principle of Islamic finance is the prohibition of ribā because Islamic law is lies on the justice and the ribā is considered as unjust in the sharīʿah. ribā literally means increase or excess. In Islamic law, it refers to an unlawful increase in certain exchanges of goods or a delay in exchanging them when the sharīʿah requires immediate exchange. These rules mainly apply to goods measured by volume or weight, according to the conditions prescribed in sharīʿah.

The wisdom behind the prohibiton of ribā is its harmful effects on individuals and society. It can lead to injustice against people in need, create disputes and enmity, and cause resentment among people. It can also concentrate wealth in the hands of the rich and increase their wealth through unlawful means. So, the rich become a rich and the poor become a poor.

3.2 No Gharar (Excessive Uncertainty)

The second most essential principle of Islamic finance is prohibition of gharar, which literally means risk or danger. According to the Shafi‘i scholar al-Bujayrimi, gharar refers to something whose outcome is unknown or uncertain, or something that lies between two possibilities, with the more dangerous outcome being more likely.

The Prophet (PBUH) forbade sales involving gharar. A sale of something that does not exist yet, or that the seller cannot deliver without clear terms, is not allowed. A contract must clearly state the price, the item, the time and the conditions. For example, a person sells fish that are still in the sea without catching them. The buyer does not know whether the seller will be able to catch the fish or how many fish will be obtained. So, this a simple form of a gharar. A most prominent scholar, Ibn Rushd, counted gharar as one of the four general causes of invalidity in sales transactions.

3.3 The Forbiddance of Maysir (Gambling)

Another major principle of sharīʿah is forbiddance of Maysir that refers to gambling. It was a common practice among the Arabs during the pre-Islamic period, in which people used arrows to gamble over the meat of a camel. Maysir involved dividing the camel’s meat among participants according to the outcome of the game, with some winning a share and others losing.

In Islamic finance, maysir refers to gambling or games of chance in which people gain wealth at the expense of others without a legitimate exchange or productive activity. Islamic law prohibits maysir because it can lead to unjust wealth transfer, financial loss, and disputes among people. There are several verses of Quran which clearly states that gambling is forbidden in Islam and it is the evil of Satan’s Handiwork.

3.4 Restrictions on Haram Businesses Activities

There are many new businesses in the market nowadays, but we should know whether the products and activities we deal with are permissible according to sharīʿah or not. Islamic finance does not support businesses whose main activities are prohibited in Islam, such as selling alcohol, pork products, gambling, interest-based transactions, or other prohibited activities. Many Islamic funds also screen companies to check whether they have excessive debt or earn income from interest, according to the sharīʿah screening criteria they follow. Islam places restrictions on companies that deal with prohibited products because there is wisdom behind these restrictions. Islam prohibits harmful and prohibited things, such as alcohol, whose mafasid (harms) are greater than their manafiʿ (benefits). Islam also places importance on justice, transparency, and other sharīʿah principles in business activities. This principle is supported by the Islamic legal maxim “preventing harm takes priority over obtaining benefits”. This maxim clarifies that Islam gives an importance to preventing harm to individuals and society, even when a prohibited activity may bring some economic benefits. For example, although alcohol may generate income for businesses, its harmful effects on individuals and society are among the reasons for its prohibition in Islam.

3.5 Risk Sharing

The risk sharing is essential principle of Islamic law because the profit should come with responsibility and risk. A person cannot claim profit without accepting the responsibility connected with the transaction. This principle is borrowed from the prophets’ saying al-kharāj bi al-ḍamān , which means that the right to earn a return is connected with liability. For example, in Muḍārabah and Mushārakah, profit is shared according to an agreed ratio, while financial losses are borne according to the rules of each contract.

3.6 Honesty, Fairness and Written Contracts

Honesty, fairness and transparency are important not only in Islamic finance but also in all aspects of our dealings and trade, as they are based on trust between people. Islam teaches people to be honest in their business dealings, fulfil their agreements and avoid cheating or hiding important information. The Qur’an commands believers to fulfil their contracts and prohibits taking others’ wealth unjustly, allowing trade based on mutual consent . It also encourages the documentation of debts to protect the rights of both parties and prevent future disputes . These principles help protect people’s rights, build trust and ensure fairness in financial transactions.

4. COMMON ISLAMIC FINANCE CONTRACTS

There are many contracts in the Islamic finance which was also occurred in the time of prophet Muhammad (PBUH). The major Islamic financial contracts are:

4.1 Murābaḥah (Cost-Plus Sale)

Murābaḥah is one of the most commonly used contracts in Islamic banking. It refers to a sale in which the seller informs the buyer about the original cost of an asset and adds an agreed profit margin. In Islamic banking, the bank first purchases the asset required by the customer and then sells it to the customer at a higher price. The customer can pay the amount immediately or through instalments over an agreed period.

Suppose, a customer wants to purchase a car worth ₹10 lakh but does not have enough money. The customer approaches to the Islamic bank and then bank purchases the car from the dealer and sells it to the customer for ₹11 lakh, with payment in monthly instalments. The additional ₹1 lakh is the agreed profit from the sale, not interest charged on a loan. However, the bank must genuinely acquire ownership and possession of the car before selling it to the customer. So, this is the structure of murābaḥah.

4.2 Muḍārabah (Profit-Sharing Partnership)

The second most common contract is muḍārabah which means a partnership contract between two parties in which one provides the capital and the other manages the business. The person who provides the capital is called rabb al-mal, while the person who manages the business is called mudarib. Both parties agree on a profit-sharing ratio before starting the business. If the business earns a profit, it is distributed according to the pre-agreed ratio. However, if an ordinary financial loss occurs without negligence or misconduct by the manager, the capital provider bears the financial loss, while the manager loses the effort and time invested in the business.

We can understand the muḍārabah contract through a simple example. A person has money and he don’t know how to run a business and make money so he provides ₹5 lakh to another person who has experience in running a clothing business. They agree to share the profit in the ratio of 60:40. If the business earns ₹1 lakh as profit, the capital provider receives ₹60,000 and the manager receives ₹40,000. If the business suffers an ordinary financial loss, the capital provider bears the monetary loss when the manager has not acted negligently or violated the agreement.

4.3 Musharakah (Partnership Financing)

Musharakah is a partnership contract in which two or more parties contribute their capital to establish or operate a business. All partners participate in the ownership of the business, and they share the profits according to a ratio agreed upon between them. However, financial losses are distributed according to their respective capital contributions. This contract encourages cooperation and allows people to establish businesses by combining their financial resources.

A simple illustration of the mushārakah is here; Two individuals decide to establish a restaurant. The first person invests ₹6 lakh, while the second invests ₹4 lakh. Their total investment is ₹10 lakh. They agree to distribute the profit in the ratio of 50:50. However, if the business suffers a financial loss of ₹1 lakh, the first person bears ₹60,000 and the second person bears ₹40,000, according to their capital contributions.

4.4 Ijarah (Leasing)

Ijarah is an Islamic contract of leasing in which one party provides an asset to another party for an agreed period in exchange for rental payments. In this contract, the ownership of the asset remains with the lessor, while the lessee receives the right to use and benefit from it. The lessor is responsible for the major ownership-related responsibilities, whereas the lessee pays the agreed rent for using the asset.

4.5 Salam (Advance Payment Sale)

Salam is a sale contract in which the buyer pays the full price in advance, while the seller agrees to deliver specified goods at a future date. The quantity, quality, price and delivery date must be clearly mentioned in the agreement. This contract is particularly useful for farmers and agricultural producers because it allows them to receive money before harvesting their crops.

6. History and Development of Islamic Finance

The basic principles of Islamic finance have existed since the time of Prophet Muhammad (PBUH). Muslims were involved in trade, partnerships, lending and other financial activities, but these transactions were guided by sharīʿah principles such as the prohibition of Riba, honesty, mutual consent and justice. During the early Islamic period, institutions such as Bayt al-Mal also played an important role in managing public funds and supporting social welfare. In later centuries, Muslim traders continued to use financial practices such as business partnerships, deposits and Hawala (money transfer). However, these practices were not the same as the modern banking system.

Modern Islamic banking began to develop during the twentieth century. One of the earliest important experiments was the Mit Ghamr Savings Bank which was established in Egypt in 1963 under the leadership of economist Ahmad al-Najjar. It provided savings and financing services based on Islamic principles. Around the same period, Malaysia developed Lembaga Tabung Haji to help Muslims save money for performing Hajj.

The 1970s marked an important stage in the growth of Islamic finance. Dubai Islamic Bank was established in 1975 as a pioneer of modern Islamic commercial banking. In the same year, the Islamic Development Bank was established in Jeddah to support economic and social development in its member countries. Other institutions, including Faisal Islamic Bank of Egypt and Kuwait Finance House, were established in 1977. During the 1980s and 1990s, Islamic finance expanded into countries such as Malaysia, Bahrain, Pakistan, Sudan and Iran. Its services also developed beyond banking to include Takaful, investment funds and Islamic capital market products.

As the industry grew, there was a need for common standards and proper supervision. Therefore, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established in 1991 to develop standards for Islamic financial institutions. Later, the Islamic Financial Services Board (IFSB) was established in 2002 to support the regulation and supervision of the industry. Today, Islamic finance includes banking, Takaful, Sukuk, investment funds, microfinance and financial technology. It continues to expand internationally while facing new challenges in areas such as digital banking, cryptocurrency and sustainable finance.

CONCLUSION

Islamic finance is a system of financial activity guided by the principles of sharīʿah. Its scope extends beyond the avoidance of interest: it includes rules concerning uncertainty, gambling, prohibited business activities, contractual responsibility, transparency and justice. Its contracts such as murābaḥah, muḍārabah and others provide different ways to conduct trade, investment and financing. By understanding these principles requires attention to the sources of Islamic law and to the specific conditions of each contract. As financial products continue to develop, the central task is to assess them carefully against sharīʿah principles while maintaining fairness, clarity and social responsibility.

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