Islamic finance, as discussed in the Ofqual Level 5 Certificate in The Concepts of Islamic Finance and Banking (fast-track), adheres to the principles of Sharia law, which prohibits the charging or paying of interest (riba) in financial transactions. Instead, Islamic finance utilizes alternative methods to facilitate transactions while ensuring compliance with Islamic law.
One of the key principles in Islamic finance is the concept of profit and loss sharing, where both parties share in the risks and rewards of the investment. This is in contrast to conventional banking, where interest is charged regardless of the outcome of the investment.
Another common method used in Islamic finance is the concept of Murabaha, where the financial institution purchases an asset on behalf of the customer and then sells it to them at a markup price. This allows for the customer to acquire the asset without paying interest.
Additionally, Islamic finance also utilizes the concept of Ijara, where the financial institution purchases an asset and leases it to the customer for a predetermined period. At the end of the lease term, the customer has the option to purchase the asset at an agreed-upon price.
Overall, Islamic finance offers a unique and ethical approach to financial transactions by prohibiting interest and promoting risk-sharing and asset-backed transactions. By adhering to the principles of Sharia law, Islamic finance provides a viable alternative for individuals and businesses seeking financial services that align with their religious beliefs.