Fundamentals and contracts
The three prohibitions behind Islamic finance, then the contracts that let you save, finance and insure without them.
The fundamentals
What is prohibited, and why.
- الرباRiba: usury and interest in IslamWhat is riba? The verses, the hadiths, the two kinds of riba, the six goods, bank interest according to the International Islamic Fiqh Academy and al-Azhar, and what is not riba.
- الغررGharar: excessive uncertainty in contractsGharar (excessive uncertainty): the hadith that forbids it, minor versus major gharar, the forbidden sales, and its modern applications (insurance, options, cryptocurrencies).
- الميسرMaysir: gambling, betting and lotteriesMaysir (gambling) in the Qur’an, how it differs from business risk, and its modern forms: lotteries, sports betting, prize bonds, paid competitions and speculative products.
- الكسب الحلالHalal earnings: the principles of Islamic financeThe principles governing money in Islam: transactions are lawful by default, gain goes with risk, the prohibitions (riba, gharar, maysir), necessity and need, mostly halal income, purification.
The contracts
How each contract works, its conditions and how it is used today.
- المرابحةMurabaha: the sale with a known mark-upMurabaha explained: how the bank buys and then resells with a mark-up, the conditions set by the International Islamic Fiqh Academy, the promise to buy, late payment, criticisms and a worked example.
- الإجارةIjarah: leasing, and leasing ending in ownershipIjarah (leasing) and ijarah ending in ownership: how they work, the forms permitted and prohibited by the International Islamic Fiqh Academy, insurance, maintenance and leasing.
- المشاركةMusharakah and diminishing musharakahMusharakah and the diminishing musharakah used for home finance: how it works, profit and loss sharing, the International Islamic Fiqh Academy’s conditions (resolution 136), an example.
- المضاربةMudarabah: capital entrusted to a managerMudarabah: a capital provider and a manager share the profit by an agreed percentage; any loss falls on the capital unless the manager is at fault. Rules, investment accounts, example.
- الصكوكSukuk: certificates backed by real assetsWhat are sukuk? How they differ from bonds, types (ijarah, mudarabah, musharakah), the International Islamic Fiqh Academy’s rules (resolutions 30, 137, 178), criticisms, Turkish kira sertifikası.
- التكافلTakaful: cooperative insuranceTakaful (Islamic insurance): a mutual-help fund run by a company, the difference from commercial insurance, International Islamic Fiqh Academy rules (resolutions 9 and 200), wakalah and mudarabah.
- السَّلَمSalam: pay now, take delivery laterSalam: the price is paid in advance and the described goods are delivered later. The hadith behind it, its conditions, parallel salam and International Islamic Fiqh Academy resolution 85.
- الاستصناعIstisna’: ordering an asset to be manufacturedIstisna’: ordering an asset to be manufactured or built, paid in stages, a penalty clause may bind the maker. Used for off-plan homes (International Islamic Fiqh Academy, resolution 65).
- التورقTawarruq: raising cash through a deferred saleTawarruq: buying on credit to resell for cash. Why classic tawarruq is widely accepted but bank-organised tawarruq is prohibited by the International Islamic Fiqh Academy (resolution 179, 2009).
- القرض الحسنQard hasan: the benevolent loanQard hasan (interest-free loan): its merit and its rules (repaid in the same amount, actual costs only, extra time for a debtor in difficulty), current accounts and mutual-aid funds.
- الوكالة بالاستثمارWakalah: entrusting your money to an agentWakalah (wakalah bi-l-istithmar): an agent invests on the client’s behalf for a fixed fee; how it differs from mudarabah, and its uses in savings, funds and takaful.