Definition of Islamic finance

The main principle of Islamic finance is its adherence to interest or riba-free financial transactions, while other principles are: prohibition of fixed return, profit-and-loss sharing and hence risk sharing, participatory financing; prohibition of gharar (uncertainty), speculation and gambling; money not having any inherent value in itself; and also equity-based financing.

Within these principles, Islamic financial contracts are designed to facilitate financing according to Islamic norms. The contracts include: murabaha (mark up), mudaraba (venture capital type participatory financing), musharaka (participatory financing), ijarah (leasing), salam (forward financing transaction), istisna (financing for commissioned or pre-ordered production), and sukuk (asset based Islamic bonds). Islamic banks and financial institutions have developed other hybrid financial contracts based on these traditional modes.

Islamic finance emerged in the early 1960s with the objective of developing and providing alternative financial contracts in conformity with Sharia principles as necessitated by Islam.

Previously, various Islamic modes of financing were used in different parts of the Muslim world but the institutionalisation of Islamic finance in the form of banks and financial institutions became possible with the establishment of the first Islamic social bank, Mit Ghamr Islamic Bank in Egypt in 1963, and the first Islamic commercial bank, Dubai Islamic Bank in 1975. [1]