Islamic finance refers to how businesses and individuals raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible un✨der this for🙈m of law.

Islamic finance can be seen as a unique form of 澳洲幸运5官方开奖结果体彩网:socially responsible investment. This sub-branch of finance is a burgeoning field. In t🤪his article, we offer an overview to provide elementary information and serve as the basis fo🔯r further study.

The Big Picture of Islamic Banking

Although Islamic finance began in the seventh century, it has been formalized gradually since the late 1960s. This process was driven by the tremendous oil wealth that fueled renewed interest in and demand for 澳洲幸运5官方开奖♏结果🐭体彩网:Sharia-compliant products and practices.

The concept of risk sharing is central to 澳洲幸运5官方开奖结果体彩网:Islamic banking and finance. It is essential to understand the role of risk-sharing in raising capital. At the same time, Islamic finance demands the avoidance of riba (usury) and gharar (ambiguity or deception).

Islamic law views lending with interest payments as a relationship that favors the lender, who charges interest at the borrower's expense. Islamic law considers money as a measuring tool for value and not an asset in itself.

Therefore, it requires that one should not be able to receive income from money alone. Interest is deemed riba, and such practice is proscribed under Islamic law.🐲 It is haram, which means prohibited, as it is considered usurious and exploitative. By contrast, Islamic banking exists to further the socꦜio-economic goals of an Islamic community.

Accordingly, Sharia-compliant finance (halal, which means permitted) consists of banking𝔉 in which the financial institution shares in the profit and loss of the enterp⛎rise it underwrites. Of equal importance is the concept of gharar.

In a financial context, gharar refers to the ambiguity and deception that come from the sale of items whose exiಞstence is uncertain. Examples of gharar would be forms of insurance. That⛦ could include the purchase of premiums to insure against something that may or may not occur. Derivatives used to hedge against possible outcomes are another type of gharar.

The 澳洲幸运5官方开奖结果体彩网:equity financing of companies is permissible, as long as those companies are not engaged in restricted businesses. Prohibited activities include producing alco💎hol, gambling, and making por🙈nography.

Basic Financing Arrangements

A brief overview of permissible financing arrangements often encountered in Islamic finance is given ౠbelow.

Profit and Loss Sharing Contracts (Mudarabah)

The Islamic bank pools investors' money and assumes a share of the profits and losses. This process is agreed upon with the depositors. What does the bank invest in? A group of 澳洲幸运5官方开奖结果体彩网:mutual funds screened for Sharia compliance has arisen.

The filter parses company balance sheets to determine whether any sources of income to the corporation are prohibited. Companies holding too much debt or engaged in forbidden lines of busineꦕss are excluded.

In addition to actively managed mutual funds, passive funds exist as well. They are based on such indexes as the Dow Jones Islamic Market Index and the FTSE Global Islamic Index.

Declining Balance Shared Equity

Declining balance shared equity calls for the bank and the investor to purchase the home jointly. It is commonly used to finance a home purchase. The bank gradually transfers its equity in the house to the individual homeowner, whose payments constitute the homeowner's equity.

Lease to Own

This arrangement is similar to the declining balance described above, except the financial institution puts up most, if not all, of the money for the house and agrees to sell the house to the eventual homeowner at the end of a fixed term. A portion of every payment goes toward the lease and the balance toward the home's purchase price.

Installment Sale (Murabaha)

An installment sale starts with an intermediary buying the home with a 澳洲幸运5官方开奖结果体彩网:free and clear title to it. The intermediary investor then agrees on a sale price with th𝓰e prospective buyer; this pric♐e includes some profit.

The purchase may be made outright (lump sum) or through a 🌊series of deferred (installment) payments. This cre𓃲dit sale is an acceptable form of finance and is not to be confused with an interest-bearing loan.

Leasing (Ijarah)

Leasing, or Ijarah, involves selling the right to use an object (usufruct) for a specific time. One condition is that the lꦏessor must own the leased object for the duration of the lease.

A variation on the lease, 'ijarah wa 'iqtina, provides for a lease to be written where the lessor agrees to sell the leased object at the lease's end at a predetermined 澳洲幸运5官方开奖结果体彩网:residual value. This promise binds only the lessor. The lessee is not obligate൲d to purchase the item.

Islamic Forwards (Salam and Istisna)

These are rare forms of financing, used for certain types of business. These are an exception to gharar. The price for the item is prepa♔id, and the item is delivered at a definite point in the future. Because there is a host of conditions to be met to rendܫer such contracts valid, the help of an Islamic legal advisor is usually required.

Basic Investment Vehicles

Some permissible Isl🐓amic investments are listed below.

Equities

Sha🧸ria law allows investment in company shares (common stock) as long as those companies do not engage in forbidden activities. Investment in companies may be in shares or by direct investment (private equity).

Islamic scholars have made some concessions on permissible companies, as most use debt either to address liquidity shortages (they borrow) or to invest excess cash (interest-bearing instruments). Somಌe may choose to exclude companies that hold inte꧋rest-bearing debt, receive interest or other impure income, or trade debts for more than their face values.

Further distillation of the screens above would exclude companies whose debt/total asset ratio equals or exceeds 33%. Companies with "impure plus non-operating interest income" revenue equal to or greater than 5% would also be screened out. Finally, Islamic scholars would exclude firms whose accounts receivable/total assets equal or exceed 45%.

Fixed-Income

Retirees who want their investments to comply with the tenets of Islam face a dilemma in that fixed-income investments include riba, which is forbidden. Therefore, specific types of investment in real estate could provide steady re🔜tirement income while not running afoul of Sharia law. These investments can be direct or secur🍰itized, such as a diversified real estate fund.

In a typical ijarah sukuk (leasing🌼 bond equivalent), the issuer will sell the financial certificates to an investor group. The group will own the certificates before renting them back to the issuer in exchange for a predetermined rental return.

As with the interest rate on a conventional bond, the rental return may be a fixed or floating rate pegged to a benchmark, such as the 澳洲幸运5官方开奖结果体彩网:Secured Overnight Financing Rateꩵ (SOFR). The issuer makes a binding promise to buy back the bonds at a future date at par value. Special purpose vehicles (SPV) are often set up to act as in🍸termediaries in the transaction.

A sukuk may be a new borrowing, or it may be the Sharia-compliant replacement of a conventional bond issue. The issue may enjoy liquidity through listing on local, regional, oꦕr global exchanges.

Basic Insurance Vehicles

Traditional insurance is not permitted as a means of risk management in Islamic law. That is because it constitutes the purchase of something with an uncertain outcome (a form of gharar). Ins♚urers also use fixed income—a type of riba—as part of their portfolio management process to satisfy liabilities.

A possible Sharia-compliant alternative is cooperative (mutual) in𝔉surance. Subscribers contribute to a pool of funds, which are invested in a Sharia-compliant manner.

Funds are withdrawn from the pool to satisfy claims, and unclaimed profits are distributed among policyholders. Such a structur🍨e exists infrequently, so Muslims may avail themselves of existing insurance vehicles if needed♒.

The Bottom Line

Isl🧸amic finance is a centuries-old practice that is gaining recognition throughout the world. The ethical and economic principles of Islamic finance are even drawing interest outside the Muslim community.

Given the increasing development of Muslim nations, expect this field to undergo even more rapid evolution. Islamic finance will continue to address the challenges of reconciling 澳洲幸运5官方开奖结果体彩网:Islamic investment policy and 澳洲幸运5官方开奖结果体彩网:modern portfolio theory.