Sharia-compliant finance, also known as Islamic finance, adheres to the principles of Islamic law (Sharia). It prohibits interest (riba), speculation (gharar), and investment in activities considered unethical or harmful according to Islamic teachings, such as alcohol, gambling, and pork production. Instead, it emphasizes risk-sharing, ethical investing, and social responsibility. One key principle is the prohibition of riba. Traditional lending with predetermined interest rates is forbidden. Instead, Islamic finance offers alternative methods of financing based on profit-sharing, leasing, and partnership. * **Mudarabah:** A profit-sharing agreement where one party provides the capital and the other manages the business. Profits are shared according to a pre-agreed ratio, while losses are borne solely by the capital provider (except in cases of negligence). * **Musharakah:** A joint venture where all partners contribute capital and management expertise. Profits and losses are shared according to a pre-agreed ratio. * **Murabahah:** A cost-plus financing arrangement where a financial institution purchases an asset on behalf of a customer and sells it to them at a higher price, which includes a predetermined profit margin. The customer then repays the institution in installments. * **Ijara:** A leasing agreement where a financial institution leases an asset to a customer for a specific period in exchange for rental payments. At the end of the lease, the customer may have the option to purchase the asset. * **Sukuk:** Islamic bonds that represent ownership in underlying assets, rather than debt obligations. Sukuk holders receive a share of the profits generated by the assets. Sharia boards, composed of Islamic scholars, oversee Sharia-compliant financial institutions and products to ensure they adhere to Islamic principles. These boards provide guidance and issue rulings (fatwas) on the permissibility of various financial activities. The interpretation of Sharia principles can vary across different Sharia boards, leading to some variations in the application of Islamic finance. Islamic finance promotes ethical investing by prohibiting investments in sectors deemed harmful or unethical. This includes industries involved in alcohol, gambling, pornography, weapons manufacturing, and pork production. Instead, it encourages investments in businesses that contribute to the well-being of society, such as healthcare, education, and sustainable development. The growing popularity of Islamic finance stems from its ethical and socially responsible approach to investing. It provides an alternative to conventional finance that aligns with the values of many Muslims and those seeking ethical investment options. While Islamic finance faces challenges such as standardization, regulatory hurdles, and a need for greater awareness, it continues to grow and evolve, playing an increasingly important role in the global financial landscape. Its emphasis on ethical considerations and risk-sharing mechanisms can contribute to a more stable and equitable financial system.
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