Islamic financial models are unique in that ethics are intertwined with their operations. Islamic governance takes into account the social implications of a business transaction and thereby serves the greater community interests. One of the main tenets upon which Islamic banking law rests is the prohibition on interest or “riba”. The concept is meant to outlaw all forms of wrongdoing and give the financier an interest in the venture. Not only does the doctrine of “riba” prevent the exploitation of someone in a weak bargaining position, but it also forbids “all forms of gain or profit which were unearned in the sense that they resulted from speculative or risky transactions and could not be ...view middle of the document...
In response to this investment criterion, a Dow Jones Islamic Index was created in 1999 to screen out stocks that did not comply with these beliefs.
The index tracks securities that are approved by the Shari’a Supervisory Board of the Dow Jones. The screen eliminates businesses that make 5% or more of their revenue from activities deemed “sinful” and prohibited under Shari’a. When a company makes less than the 5% level of revenue from a sinful activity, a compliant investor can invest in the company, but must donate to charity the same proportion of his dividends as the company’s revenue from a “sinful” activity. Risk mitigation is essential to producing structures that comply with Islamic finance. Therefore, since the stock market is inherently risky, stock market transactions are only permitted when the ethical elements of Islamic law are adhered to. Although based on Islamic principles, such a screening process, which excludes firms that are particularly risky, may be attractive to any conservative investor, not only to Muslims who are interested in accountability and the social responsibility of the company. The Dow Jones Islamic Fund integrates the ethical principles of Shari’a law into modern equity investing.
Islamic banking refers to a system of banking, which is consistent with Islamic Shari’ah (Law), and guided by Islamic economics. Islamic law prohibits the payment and collection of riba (interest or usury).The main argument against interest is that money is not used as a commodity with which to make a profit but that it should be earned on goods and services only, not on control of money itself. Features of Islamic Banking are based on ethical principles. Islamic Shari’ah allows all economic activities in the framework of protecting public interest and safeguarding it. Man may make profit from doing business. However, when this runs against Islamic ethics and morality, it is outlawed. In addition, for an investment to be legitimate, one of the most important requirements is that its outcome must fulfill the reality of investment transactions and that it enables the Islamic Financial Institution (IFI) to state what it expects to make in profits. However, this cannot be determined as a certainty or can one commit one’s self to it, or bear any loss sustained.
Main conditions governing Islamic investment include: Money does not generate or beget money in itself, but it becomes productive if it is involving an activity or work; Investment is subject to the rule of profit and loss sharing; Investment in business activities is lawful, but prohibitions should be avoided. ;Contracts must be free of gharar (uncertainty, ignorance and the conditions which lead to disputes).
RIBA (USUARY / INTEREST)
The Islamic Economic System revolves upon the prohibition of Riba (interest).
The two main types of usury to be avoided are as follows:
Riba al Nasiyah defined as: “any excess compensation over and above the...