Islamic Finance and Interest

SUKUKBAY.COM

Islamic Finance creating wealth through trading in real assets, investments and partnership

The Islamic financial model works on the basis of risk sharing, partnership and asset backed financing. The investors and the entrepreneur share the risk of any investment on agreed terms, and divide any profits amongst them.

Sukuk is a financial Islamic term referring to investment which relate to bonds, however, as conventional bonds are interest based, sukuks are asset (ownership) based, the underlying asset is sold and leased back to derive return income on investment.

Islamic finance is based on element of income or profit, avoiding the prohibitions defined above and based on Islamic financial contracts defined in Shariah as fair and socially responsible.

Text Box: The prohibitions area: Haram (anything that is prohibited, e.g. alcohol, pork) Riba (i.e. usury or interest, where there is like for like exchange with excess return i.e. receive more of the same for less) Gharar (uncertainty, ambiguity non-existent forms i.e. short selling, no agreed price etc) Qimar (extreme form of uncertainty i.e.gambling)

Until now it has been untapped industry, with the growth of liquidity running into trillion of dollars in the middle-east countries and demands from the Muslim population for acceptable investment products. Now this is one of the fastest growing markets. Islamic banking and investment promotes ethical and social responsible investing. The principles build on creating fairer market economy as incidental exposure to uncertain risk is avoided.

Conventional banking and finance - standard deposits and borrowing from the banks involves interest, banks and investors all need to make profits so business practices are evolving around the principles of Islamic contracts to facilitate a mutual partnership.

Equities - investment in equity markets is acceptable but requires screening of stocks on ethical basis and level of profits that are attributed to interest. The interest gearing ratio must in of acceptable proportion and proportion of profits attributed to interest need to be cleaned by giving away to charities.

Derivatives - in their current form they are prohibited as they are a form or excess risk and the fact that it is effective selling nothing for something, this is form of gharar and thus prohibited.

Bonds and Income Securities - again all these involve payment of fixed or variable interest which is prohibited. Based on Islamic contracts capital is raised in partnership with share in profits or sale and lease back of schemes which provide the capital for the organisations and income and security for the investors.

Islamic Finance - Prohibitions

Prohibitions

Need for Alternative Investment

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