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Features of Islamic finance

There are four types of legal restrictions in the activities of every financial institution working on Islamic principles, as in all Islamic economic relations.

The first of these is the prohibition on usury (Riba from Arabic for “increase”). The riba in the loan agreement, which  represents the premium to the principal amount received by the lender when providing funds to the borrower. In a broad sense, riba is any percentage in the implementation of trading and financial transactions that allows one of the parties to receive income at the expense of the other, without providing it with appropriate compensation.

It can arise as a result of a contract of debt (riba an-nasia) or an unequal exchange of homogeneous and one-dimensional objects of a certain type (riba al-fadl). And the ban on it is due to the fact that according to Islam, money was created as a means of circulation, exchange and as a unit of account, and not as a store of value, used to increase profits. One of the justifications for the prohibition of the interest rate was the recognition of it as a form of social and economic exploitation, which does not correspond to the principle of justice in Islam.

The next type of legal restriction is a ban on uncertainty in the terms of the transaction (Garar from the Arabic “danger”). Uncertainty happens:

  1. inevitable (al-garar as-yasir), permissible, which does not invalidate the contract;
  2. the weakening contract (al-garar al-mutawassit), in the presence of which the contract is invalid. However, there is a possibility of its elimination;
  3. making the contract invalid (al-garar al-qasir), which cannot be eliminated without canceling the contract itself or changing its essence.

Thus, garar is an element of uncertainty in the subject of a contract or in relation to the price of a commodity, as well as simply speculative risk in financial and commodity markets. Garar is prohibited, since its presence allows one side to enrich itself at the expense of the other, which also contradicts the norms of Islam.

The following is a ban on elements of gambling in economic relations (meysir from the Arabic “gambling”). The signs of meysir include the presence of two or more parties to the participants, each of which invests certain property in order to get the opportunity to take possession of even more property, while the redistribution (gain) of property is associated with the onset of uncertain events in the future. As a result, the party that invested the property can either irrevocably lose it or receive someone else’s property in excess of the invested one.

Meysir is one of the hallmarks of modern capitalist society, which facilitates cross-border migrations of huge cash flows for the purpose of its own expanded reproduction of funds without producing real wealth, which is the main cause of financial and economic crises.

While Islam prescribes the financing of the real production sector of the economy, and according to its principles, the transaction, as a rule, must be backed by a real asset. This is the prohibition on meysir, since the receipt of income is not associated with the production and use of labor, but is a coincidence.

The last type of legal restriction is a ban on participation in prohibited activities, such as the production and distribution of alcoholic, narcotic and pornographic products, tobacco products and other products and services prohibited by Islam, including the processing and trade of pork. They also include most of the traditional financial sector, most of the modern entertainment industry, and any activity that causes serious harm to the environment. The ban is the establishment of a monopoly, gambling, lotteries and other activities that do not correspond to the morality of Islam.

Why do these principles matter?

The lack of ethics and values in our transactions has contributed to events that have jeopardized the sustainability of our societies and the environment.

Among them, we note:

  • Growing gap between rich and poor;
  • Increase in household debt;
  • Global financial crisis;
  • Acceleration of climate change;
  • Increased safety and moral decadence.

This should force us to reconsider how our actions affect our society, our people, the world around us and future generations.

The principles used by Islamic finance are aimed at promoting a sustainable society based on strong economic foundations and moral values. Adopting these principles is the first step in changing the way we do business and in creating a more sustainable world.

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