Module VI·Article I·~2 min read
Principles of Sharia
Sukuk and Islamic Finance
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Islamic Finance: Fundamental Principles
Islamic finance is a system of financial instruments and services that comply with the norms of Sharia (Islamic law). This is a rapidly growing segment of global finance with assets over $3 trillion, especially important for investors in the GCC region and Southeast Asia.
Main Prohibitions (Haram)
| Prohibition | Arabic Term | Practical Meaning |
|---|---|---|
| Prohibition of Interest | Riba | One cannot earn fixed income without participating in risk. Interest on loans and bonds is haram |
| Prohibition of Uncertainty | Gharar | A contract must be clear, conditions defined. Speculation and most derivatives are haram |
| Prohibition of Gambling | Maysir | One cannot earn income by chance. Gambling and lotteries are haram |
| Prohibited Sectors | Haram sectors | Alcohol, pork, gambling, tobacco, weapons, adult content |
Permitted Principles (Halal)
- Profit and loss sharing — both parties bear risk
- Trade in real assets — sale of goods with markup
- Leasing — renting assets for a fixed rental fee
- Partnership — joint ownership and profit sharing
- Agency relationships — asset management for a fee
Key Contract Structures
| Contract | Type | Description | Analog |
|---|---|---|---|
| Murabaha | Sale | Seller buys an asset and sells it with markup | Trade financing |
| Ijara | Lease | Leasing an asset with the possibility of buyout | Operating/Finance lease |
| Musharaka | Partnership | Joint ownership with profit/loss sharing | Joint venture |
| Mudaraba | Partnership | One provides capital, the other — labor. Profit is shared | Silent partnership |
| Wakala | Agency | Asset management for a fixed fee | Asset management |
| Istisna | Manufacturing | Contract for manufacturing goods to specifications | Construction contract |
| Salam | Forward | Advance payment for future delivery (agricultural products) | Forward contract |
Sharia Board: Compliance Oversight
Every Islamic financial product must be approved by a Sharia Board — a committee of Islamic scholars:
- Verification of structure for compliance with principles
- Audit of actual transactions
- Issuance of a fatwa (religious ruling)
- Continuous monitoring
Islamic Finance Market: Size and Geography
| Region | Share | Key Centers |
|---|---|---|
| GCC (Persian Gulf) | ~45% | Saudi Arabia, UAE, Bahrain |
| Southeast Asia | ~25% | Malaysia, Indonesia |
| Iran | ~15% | Fully Islamic system |
| The rest of the world | ~15% | UK, Turkey, Pakistan |
Importance for the Global Investor
- Access to GCC capital — many investors in the region require sharia-compliant instruments
- Diversification — an additional pool of liquidity
- ESG alignment — Islamic principles often overlap with ESG
- Regulatory arbitrage — sometimes advantageous conditions
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