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Islamic Finance: Simplified

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Mr. Salim Desai, 
Finance / Investment Advisor

Today, Globally Islamic/Sharia Finance or Investments are in limelight. Many people find it difficult to understand the fundamentals of Islamic finance/investment as there is a clear dominance of conventional financial systems, not only in secular countries but also in Islamic countries. In coming articles, I will be trying to simplify basic Islamic finance concepts which would be helpful to readers to understand Islamic investment concepts.


The significance of Islamic law

By definition, an Islamic finance follows Islamic principles based on Sharia  and sunnah. Those principles are originated in Holy Qur’an,  and can  be found in the judgments given by the Prophet himself, reflecting the application of rules, principles and injunctions already pronounced in the Holy Qur’an. Over the period of time these principles are now developed a complete system of law to regulate lives of human being in private & public as well as prescriptions for the practice of religion.


As Islamic principles regulates and influences all other spheres of life, it also provides code of conduct to govern business & commerce.


There are four root commercial transactions in Islamic economy as follows:


(1) Ssales (bay), transfer of the ownership or corpus of property for a consideration;

(2) Hire (ijâra), transfer of the usufruct (right to use) of property for a consideration;

(3) Gift (hiba), gratuitous transfer of the corpus of property; and

(4) Loan (ariyah),gratuitous transfer of the usufruct of property.


The above basic principles are then applied to pledge, deposit, guarantee, agency, assignment, land tenancy, waqf foundations (religious or charitable bodies) and partnerships, which play an important role in Islamic financing and form the backbone of Islamic banking practices.


While doing above commercial transactions there are certain principles, which are to be observed strictly;


a.     Prohibition of riba (interest):

This is the fundamental difference between Islamic & western system having far reaching effect on the both school of economics. In Islamic principle money has no intrinsic value; it is only measure of value, medium of transaction, so there should not be any charge for its use. Payment of riba and the taking of interest as occurs in a conventional banking system is explicitly prohibited by the Holy Qur’ran. Since trading, business or tijarat is allowed, investor is compensated in other forms.(will be explained later)


b.    All business & investments must be done in halal(legal, permitted) activities:


Though, business & investment are allowed to earn profit, a strict code of ‘ethical investments’ operates for Islamic financial activities. Businesses are not allowed in forbidden (haram) activities such as trade of alcoholic beverages, casinos, pork meat and many others


c.        Prohibition of maysir (gambling)

Gambling in all forms is forbidden in Islamic jurisprudence. Holy Quar’an(S5: 90–91)  explicitly prohibits game of chances. The word mysir implies that the gambler strives to earn money without effort and the term applied to all gambling activities. Along with explicit forms of gambling, any business activities which contain any element of gambling are also prohibited.


d.       Prohibition of excessive speculation (gharar)

transactions should be free from gharar (speculation or unreasonable uncertainty):

While riba and maysir are condemned in the HolyQur’an, condemnation of gharar can be traced in  ahadith. In business terms, gharar means to undertake a venture blindly without sufficient knowledge or to undertake an excessively risky transaction, although minor uncertainties can be permitted when there is some necessity.


e.     Zakat

Zakat is the most important instrument for the redistribution of wealth. The main purpose here is to moderate social variances in Islamic society, and to enable the poor to lead a normal, spiritual  and material life in dignity and contentment. This almsgiving is a compulsory levy, and  constitutes one of the five basic tenets of Islam. The generally accepted amount of the zakat is a  one-fortieth (2.5 per cent) assessment on assets held for a full year (after a small initial exclusion, nisab), the purpose of which is to transfer income from the wealthy to the needy.

Mr. Salim Desai is the Vice-President (CFO) of Al Razzi Holding Group in Kuwait. He earned his Bachelors in Commerce from Mumbai University. He has passed many professional certifications examinations from US & India which includes CPA, CMA, CFM & ICWA. He is board member of Bayan Medical Co. K.S.C.

He believes Economic Development is an integral process of Community Development. So Financial Counseling, being his prime interest, transformed him in Investment Advisory. Being an NRI, he is well versed with NRI's problems & offers practical solutions. He can be reached on his email by This e-mail address is being protected from spambots. You need JavaScript enabled to view it or telephone +965 99727710.

EDITORIAL DISCLAIMER: As part of our mission to provide our users with valuable information about matters of job, health, investments etc., iKokani actively seeks a diversity of viewpoints in its columns, consultancy, commentaries and other opinion-based content. Opinions expressed in these articles are not intended to represent iKokani editorial policy and do not necessarily reflect the views of iKokani's staff, members or supporters. 


Comments (1)
Islamic Finance
1Thursday, 03 November 2011 11:15
Gaus Abdulla Tisekar
Dear Salim Bhai,

This article is undoubtedly good but it gives only a brief introduction. I would suggest you to continue writing on the subject with some of the islamic financial structures. Since we all kokanis live mostly in India without any Islamic Finance Products but we can develop our own ideas to invest in products which are sharia compliant. Such as real estate, gold, equity products and the way to cleanse part of non sharia compaliant income mixed with halal investment products. Like, rental income earned through real estate properties. We need to offer community a viable solution substituting interest based products.

Request you to dedicate one good informative article on this.


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