Islamic finance/Alternative finance arrangements

What is Shari'a-compliant financing?

Shari'a-compliant financing arrangements, also known as Islamic financing arrangements, are designed to comply with Shari'a or Islamic law, which is a legal system based on the religion of Islam.

To comply with Shari’a law, Islamic financing arrangements must adhere to a number of principles, the key ones being:

1. •

   participation and sharing of profit and risk—by encouraging participation, equity and fair dealing, increases in wealth are encouraged to accrue from productive activities and not the mere passage of time. Return on capital is legitimised by risk-taking and determined by asset performance or project productivity. Lending relationship are viewed as partnerships and financiers should share in any risks, profits and losses

2. •

   prohibition on interest—in accordance with other principles of Shari’a law, such as participation (above), money has no intrinsic value and must not on its own create more money

3. •

   prohibition on uncertainty—to ensure that no party has an unfair advantage over another and to decrease the likelihood of contractual disputes between the parties

4. •

   prohibition on speculation—profit should be made through hard work and effort, not purely by chance

5. •

   no