Islamic finance prohibits interest and gambling, and requires profit/loss sharing based on Sharia principles. It uses alternatives like musharakah (partnership), murabahah (cost-plus financing), and sukuk (asset-backed bonds). The objectives are to maximize wealth ethically and help society. Regulations differ between Islamic and non-Islamic financial systems in areas like permitted returns, risk sharing, and penalties.

1. Chapter 28
Islamic
Finance

2. Holy Quran Sunna
Shariah - “Sacred Law”
Islamic Finance

3. Riba - Usury
Interest-based lending
where borrower repays
more than amount
borrowed to reflect
time delay in repayment

4. Gharar
Excessive uncertainty
and ambiguity about an
outcome
Gambling and Insurance

5. Haram
Forbidden practices
No interest
No selling what you do
not own
No selling of debts

6. Interest Prohibited
Profit and Loss Sharing
Permitted

7. Haram - Prohibited
Interest
Halal - Permitted
Profit and Loss Sharing

8. Avoid Riba
No interest elements
Null and void

9. Different cultures have
different definitions of
fairness and justice and
what is unfair and
unjust

10. Islamic definition of
fairness and justice
Money
Profit
Risk
Interest

11. Argument
1. Can only charge rent on something that is a commodity
2.Therefore, it is unfair to charge rent on something that is
not a commodity
3. Money is not a commodity.
4.Therefore money cannot be rented
5. Rent on money is called interest
6.Therefore cannot charge interest

12. Avoid Gharar
Gambling - Zero Sum
Game
Seller should own what
they intend to sell

13. Objectives
Maximize profit and
wealth
Spread prosperity

14. Islamic Finance
Money does not have
intrinsic value
Just a measure of value or
medium of exchange

15. Islamic Finance
Must have an asset
involved in the exchange
No money for money

16. Participatory-type finance
Share profit and loss
Share risk
Equity position
Debt position

17. Zakat - Religious Tax
2.5 Percent on profits
Poor, orphans, charity
Finance projects

18. Operations
Islamic
Shariah - Interpreted
Non-Islamic
Secular - Elected

19. Interest Charging
Islamic
Not allowed
Profit and loss sharing
Non-Islamic
Allowed
Fixed and variable

20. Interest on Deposits
Islamic
Not allowed
May share in profits
Non-Islamic
Allowed
Interest plus principal

21. Risk Sharing
Islamic
Must share risk
Non-Islamic
May share risk

22. Penalty on Default
Islamic
Not allowed to charge
Non-Islamic
May charge

23. Gharar
Islamic
Forbidden
Non-Islamic
Allowed

24. Customer Relationship
Islamic
Partner and Investor
Non-Islamic
Creditor and Debtor

25. Shariah Supervision
Islamic
Requires Board
Non-Islamic
No Board

26. Islamic Banks
Maximize shareholder
wealth
Develop society

27. Source of Funds
Shareholders
Depositors

28. Deposits
Current
Savings
Investment

29. Hiba
A non-predetermined
return paid
Gift

30. Current Deposit Accounts
Receive funds on demand
Issue checks
No guarantee of return
Bank may give Hiba

31. Savings Deposit Accounts
Wadiah
Must get permission to
use for loans
Bank may give Hiba

32. Investment Deposit
Accounts
Mudarabah
Specific time period
Profit and loss sharing based
on predetermined ratio
Could lose deposit

33. Islamic
Profit and loss sharing system
Non Islamic
interest-based system

34. Equity Financing
Musharakah
Mudarabah

35. Musharakah
Partnership
All contribute capital
Profit shared on prior agreement
Only lose invested capital
Charge a fee if manage
Project pays profit share to bank
Entrepreneur pays bank capital

36. Mudarabah
Partnership
Bank contributes capital
Entrepreneur contributes work
Profit shared on prior agreement
Bank bears all capital losses

37. Asset Financing
Must own before reselling
Murabahah
Salem
Ijarah Leasing

38. Murabahah
Bank buys the asset
Resells to customer
Price includes cost plus markup
profit
Full disclosure transparency
Customer pays installments or lump
sum at the end

39. Salem
Bank buys the asset today for
delivery in the future
Agriculture
Buyer responsible for delivery

40. Ijarah Leasing
Usufruct: temporary use and enjoyment
of a property
Bank (Lessor) buys the asset and
rents to client (lessee)
Client may return or receive asset
at the end of the term

41. Sukuk - Islamic Bonds
Regular bonds not permitted
Interest and reselling debt prohibited
Investor owns a proportionate
undivided share of the asset
Ownership equity position
not a debt position
No guarantee or fixed return

42. Takaful - Islamic Insurance
Distribute losses among participants
Participants pool funds
No insurer-insured relationship
Operator manages account fund
Participants pay premiums to create fund
Operator pays damages out of funds
Operator can charge an administrative fee

43. Future
Different views and interpretations
Evolving
No uniform consensus
Four schools of thought
Shafi’i, Maliki, Hanafi, and Hanbali