Islamic finance addresses the prohibition of interest (riba) through the concept of profit-sharing and risk-sharing. In Islamic finance, earning money from money is not allowed, as it is considered exploitative. Instead, Islamic financial institutions operate on the principles of fairness, transparency, and ethical investing.
One of the key instruments used in Islamic finance to avoid interest is the concept of Mudarabah, which is a profit-sharing partnership. In a Mudarabah agreement, one party provides the capital, while the other party provides the expertise and labor. Profits are shared based on a pre-agreed ratio, while losses are borne solely by the capital provider.
Another important concept in Islamic finance is Musharakah, which is a joint venture partnership. In a Musharakah agreement, all parties contribute capital and share profits and losses based on their respective contributions. This promotes risk-sharing and encourages collaboration among stakeholders.
Overall, Islamic finance promotes ethical and socially responsible investing, while also providing financial products and services that are in line with Islamic principles. By avoiding interest and focusing on profit-sharing and risk-sharing, Islamic finance offers a unique and sustainable approach to banking and finance.
| Key Concepts | Description |
|---|---|
| Mudarabah | Profit-sharing partnership where one party provides capital and the other party provides expertise and labor. |
| Musharakah | Joint venture partnership where all parties contribute capital and share profits and losses based on their contributions. |