London School of International Business (LSIB)

How does Sharia law influence the practices of Islamic finance

How Does Sharia Law Influence the Practices of Islamic Finance

Sharia law, also known as Islamic law, plays a significant role in shaping the practices of Islamic finance. Islamic finance is guided by the principles of Sharia law, which prohibits certain activities such as charging interest (riba) and investing in businesses that are considered haram (forbidden).

One of the key principles of Sharia law that influences Islamic finance is the prohibition of riba, or interest. In Islamic finance, charging or paying interest is considered unethical and is strictly forbidden. Instead, Islamic financial institutions operate on the principle of profit-sharing, where profits and losses are shared between the lender and the borrower. This ensures that both parties have a stake in the success of the investment, promoting a more equitable and ethical financial system.

Another important aspect of Sharia law that influences Islamic finance is the concept of risk-sharing. In Islamic finance, risk is shared between the lender and the borrower, with both parties bearing the financial consequences of the investment. This promotes transparency and accountability in financial transactions, as both parties are incentivized to make informed decisions and carefully assess the risks involved.

Sharia law also prohibits investing in businesses that are considered haram, such as those involved in alcohol, gambling, or pork products. Islamic financial institutions are required to ensure that their investments comply with Sharia law, and they often employ Sharia scholars to provide guidance on the permissibility of certain investments. This ensures that Islamic finance operates in accordance with Islamic principles and values, promoting ethical and socially responsible investing.

Overall, Sharia law has a profound influence on the practices of Islamic finance, shaping the way in which financial transactions are conducted and investments are made. By adhering to the principles of Sharia law, Islamic finance promotes ethical and responsible financial practices that are in line with Islamic values and beliefs.

Sharia Law Principles	Influence on Islamic Finance
Prohibition of Riba	Promotes profit-sharing and ethical lending practices
Risk-sharing	Encourages transparency and accountability in financial transactions
Prohibition of Haram Investments	Ensures investments are in line with Islamic values and beliefs