Introduction & Basics

Basic educational resources, from sources of Islamic finance to Capital, Entrepreneurship and Islam.

Lessons

Investment Modalities

Islamic banks cannot charge interest on lending, therefore, they have to find other ways of financing entrepreneurs who are not ‘borrowers’ as the case with traditional banks but basically stand as partners to the bank.

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Multiple Use of Modalities

A number of the mentioned modalities can be used concurrently to finance one single operation. Thus an oil mill’s seasonal needs can be financed on a Musharaka basis.

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Basic Characteristics of Islamic Investment Modalities

In the process of applying Islamic investment modalities, some basic characteristics have emerged. The alternative risk sharing modalities offered by Islamic banks in lieu of interest are characterised by flexibility.

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Islamic Financial Instruments

It was designed to replace the old debenture used in the financing of industrial investments.

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Belief in Divine Guidance

The foremost belief around which all the Islamic concepts revolve is that the whole universe is created and controlled by One, the only One God. He has created man and appointed him as His vicegerent on the earth to fulfil certain objectives through obeying His commands.

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A Brief Introduction to Islam

The book of genesis, like the Quran, narrates the story of Abraham’s servant Hagar, who gave birth to his first child Ishmael. Abraham’s first wife Sarah gave birth to Isaac and then asked her husband to send Hagar and her child away.

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Sources of Islamic Finance

"For Muslims the Koran stands as the Text of reference, the source and the essence of the message transmitted to humanity by the creator. It is the last of a lengthy series of revelations addressed to humans down through history."

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Islamic Contract Law

The Arabic word for a contract is Aqd'. Before we look at some of the intricacies of a contract, we will delve into two preliminaries: how Islamic law deals with unilateral promises (the Wa'd) and bilateral promise (the Muwada).

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Asset-backed Financing

One of the most important characteristics of Islamic financing is that it is an asset-backed financing. The conventional / capitalist concept of financing is that the banks and financial institutions deal in money and monetary papers only.

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Capital, Entrepreneur and Islam

According to the capitalist theory, capital and entrepreneur are two separate factors of production. The former gets interest while the latter is entitled to profit. Interest is a fixed return for providing capital, while profit can be earned only when there is a surplus after distributing the fixed return to land, labour and capital (in the form of rent, wages and interest).

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Capitalist vs. Islamic Economy

Islam does not deny the market forces and market economy. Even the profit motive is acceptable to a reasonable extent. Private ownership is not totally negated. Yet, the basic difference between capitalist and Islamic economy is that in secular capitalism, the profit motive or private ownership are given unbridled power to make economic decisions.

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Gharar

Gharar has meanings that encompass: uncertainty, risk, hazard and deceit. The Arabic root for gharar means deception - but in practice the term is used quite widely.

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Islamic banks – Current Practices

It is sometimes argued against the Islamic financial system that the Islamic banks and financial institutions, working since last three decades, did not bring any visible change in the economic set-up, not even in the field of financing.

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Riba (Interest)

In the conventional literature, interest is seen as the time value of money, as described by the common expression: "time is money". However, Islamic scholars contend that time is not money, but "time is life".

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Five Main Contracts in Islamic Finance

Furthermore, for Islamic Banks to a make profit and to satisfy the borrowers’ needs of cash, they have to conduct transactions that do not violate Islamic rules by looking for allowed contracts that can achieve the required goal. Mostly, they are based on sale and purchase transactions, accompanied by a degree of risk. There are five main contracts: Mudarabah, Musharakah, Murabahah, Ijarah and Salam.

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