Prohibitions in the Islamic financial system

Sharia prohibits certain transactions and businesses because they’re harmful to society and create injustice and other problems. What are the categories of prohibitions, and how are they related to Islamic values?

By Rosie Kmeid | 3 April 2019

In general, the Islamic Sharia has constantly sought to achieve fairness, trust and transparency in all financial and business transactions while emphasizing socio-economic development and financial inclusion.

In this short piece, I will attempt to outline the main features of Islamic finance and Sharia-approved investments, as well as the categories of prohibitions and how they are related to Islamic values.

In practice, most Islamic financial institutions have established their own internal high-calibre board of religious scholars and advisors who examine carefully each financial transaction/investment to ensure its compliance with the Sharia.

The Sharia – literally meaning a clear path to be followed and observed - promotes first the principle of profit-loss sharing between financial institutions and entrepreneurs, thus emphasizing the spirit of cooperation in business which would help absorb the weight of loss when sharing it equitably.

From an Islamic perspective, the concept of asset-backing is prevalent, thus discouraging financial speculation as it is not permissible in Islam. The Sharia law also encourages ethical, sustainable and environment-friendly finance while fostering financial inclusion. Hence, in line with the main aims of Islam for emphasizing on social welfare and supporting financial stability, these explicit in-built strengths form the backbone of the Islamic financial system, gaining an even greater appreciation on the distinct nature of Islamic finance.

These and other Sharia guidelines have shaped the types of financial transactions adopted by Islamic financial institutions. Accordingly, they have developed certain contracting models based on no-interest, risk-free concept to satisfy the needs of the market while covering major schools of thought.

Practical implications

A primary purpose for imposing these laws in Islam is to promote social justice and economic development. The Islamic code of conduct thus plays a vital role in keeping and nurturing the society in a harmonious state, while striving to make the world a better place to live in. In this context, Islam views the natural resources of the world and indeed human life itself, as a trust from Allah. Accordingly, as we move more and more into rapid development, these laws encourage believers to manage resources and opportunities effectively for future generations to come.

From a Sharia viewpoint, ethics dominates economics and not the other way around. Business ethics are an integral part of the Sharia which has certain foundation and principles on which the ethical values are based. Here the basic principles of business ethics may be characterized as follows: Fairness, integrity, dignity, loyalty and justice.

Prohibitions in Islamic finance

Islam is not only a religion, but also a complete way of life. In finance, Islam requires that all transactions be based on transparency, accuracy, and trust. In view of this, the Sharia has laid down rules in connection with Fiqh Al Muamalat which refers to financial or economic transactions within a general framework. As this is a rule-based financial system, one must understand clearly what the fundamental rules are and how this system is different from others.

There are four major categories banned in Islamic financial transactions listed here below:

The first category consists of elements which are prohibited since inception; there is no debate on their legitimacy. The main practices that are considered unlawful in Islamic finance are usury (riba), ambiguity in contracts (gharar) and gambling (maysir). Riba is haram in all of its aspects. It is considered as an unjustified increment in borrowing or lending money. While gharar is banned under Islam because it is associated with uncertainty, deception and risk; maysir is forbidden on the grounds that money should be earned by way of work and effort, not involving a game of chance.   

The second category consists of elements which are prohibited if proved to be. Here remains deep skepticism over the legal interpretation of each, i.e. threat (tahdeed), mistake (ghalat), injustice (zulm), deception (khedaa), and exploitation (istighlal).

As to the third category, it consists of a single prohibited practice in Islam because it leads to inequality, and that is monopoly or Ihtikar in Arabic. Monopoly is prevented absolutely and forbidden in Sharia.

The last one is about fraudulent misconduct and blackmailing. Fraud literally means a deception practiced to secure an unjust gain. In accordance with the civil and criminal laws, fraud is morally wrong and is considered a crime same as theft. Blackmail is also wrong because the blackmail proposal is intimidating.

Conformity with the dictates of the revealed law is a communal obligation and prohibitions are extended to investing in alcohol, pork products and the adult-entertainment industry. Noting that the most important Islamic virtues are prescribed at both an individual and at a collective level.

Consequently, all Islamic financial transactions must be free from the above mentioned elements, otherwise transactions would be void. These salient features are fundamental of Islamic finance which distinguishes it from conventional finance.

In conclusion, although Sharia enforces certain prohibitions and imposes unique structural requirements on the types of approved investments, I believe that these features should be attractive to both the Islamic as well as any socially-responsible investor since the purpose of the above background is to emphasize that an economic and financial system driven by social welfare and socially-responsible mandate will lead to advancing financial inclusion, and to catalyzing and promoting real economic development.

Islam assigns heavy responsibility on the human being, with just him being held accountable for any lack of development, and only him behind the reinforcement of social and economic empowerment. 

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