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Concept
Islamic finance products, services and contracts
Summary
Banking or banking activity that complies with Sharia (Islamic law)—known as Islamic banking and finance, or Sharia-compliant finance—has its own products, services and contracts that differ from conventional banking. Some of these include Mudharabah (profit sharing), Wadiah (safekeeping), Musharakah (joint venture), Murabahah (cost plus finance), Ijar (leasing), Hawala (an international fund transfer system), Takaful (Islamic insurance), and Sukuk (Islamic bonds).
Sharia prohibits riba, or usury, defined as interest paid on all loans of money (although some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam ("sinful and prohibited").
By 2014 around $2 trillion in financial assets, or 1 percent of total world, was Sharia-compliant, concentrated in the Gulf Cooperation Council (GCC) countries, Iran, and Malaysia.
To be consistent with the principles of Islamic law (Shariah) and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities:
Paying or charging interest. "All forms of interest are riba and hence prohibited". Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to prevent use of interest.
Investing in businesses involved in activities that are forbidden (haraam). These include things such as selling alcohol or pork, or producing media such as gossip columns or pornography.
Charging extra for late payment. This applies to murâbaḥah or other fixed payment financing transactions, although some authors believe late fees may be charged if they are donated to charity, or if the buyer has "deliberately refused" to make a payment.
Maisir. This is usually translated as "gambling" but used to mean "speculation" in Islamic finance. Involvement in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future is maisir and forbidden in Islamic finance.
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