The concept of the modern Islamic Finance services industry is rooted in the principles of Islamic legal jurisprudence that deals with financial transactions, which is a branch of Fiqh Al Muamalaat. Fiqh Al Muamalaat is a framework under Sharia or Islamic Law that charts the conduct of Muslims under the civil arena. The principles of the Islamic rulings for financial transactions are derived from primarily the Quran (Unaltered revelation from God Almighty according to Muslim belief), and the Sunnah (Narrations and approvals from Prophet Muhammad, The Final Prophet according to Muslim belief). Islamic Finance products and rulings are based on some specific injunctions from the Quran that prohibits certain features when it comes to financial transactions and economic activities.
Quran forbids dealing with interest or usury, therefore in Islamic Financial transactions, lending in interest is strictly forbidden. The underlying reasoning as per the scholars in Islamic Finance is that Islam considers lending as a charitable act to help another member of the society in his/her time of need, and profiting from someone's hardship is strictly forbidden under Sharia. In the conventional banking system, when interest is charged on a loan, the risk of that transaction is transferred to the borrower while the lender enjoys profit from the interest based transaction without making any effort or considering any hardship endured by the borrower in case he/she has undergone any loss from the transaction. This is an unfair and unethical form of transaction which creates inequity in society and creates a debt based financial market where financiers profit from activities without producing any actual goods and services in the economy. When an entire system is based on such system, debt increases and economy begins to shrink while rich get richer and poor get poorer.
Sharia prohibits unethical financial practices, and promotes social justice, and wealth distribution to reduce poverty and inequity. This is manifested in the prohibitions of activities such as excessive speculation, gambling and investing in products that are harmful for society (alcohol, pornography, pork etc.). Islamic financial instruments are designed in ways to avoid dealing with these prohibited activities. These avoidance and structure of Islamic financial products and services, specially its prohibition in speculative transactions helped the industry escape the adverse effects of the financial crisis of 2008. The governance model of Islamic Financial institutions have been praised as an ethical alternative even by institutions such as IMF and the World Bank. Economic experts have suggested that Islamic Financial principles can be leveraged to promote financial inclusion to uplift the quality of life in developing nations, and Islamic finance principles can contribute in financial stability and economic development around the world.
The Author works with Guidance Residential, an Islamic Finance Company Providing Home Financing Solutions and Islamic Mortgage for Muslims in USA.