Shariah Finance & Islamic Finance
Shariah financing is based on Islamic religious law.
In relation to finance, there are differences in the way that Sharia is interpreted and applied within various groups in society. Shariah-compliant finance is a growing area in current facilities and across many financial and investment institutions. This has lead to mainstream finance houses providing Shariah-compliant investment vehicles, which will not pay interest or be seen to be taking far reaching speculation.
It is also important to mention the Shariah index, which was started in 2007 on the Tokyo Stock Exchange. It lists Sharia compliant companies.
Shariah does not permit the acceptance of an interest rate or fees for lending. Also, it is prohibited to allow investment and financings of businesses that create, sell or deal in products that are contrary to Islamic principles (e.g tobacco). It is thought that wealth should be created through legitimate trade in assets.
As all forms of interest are forbidden, the financial model of Sharia financiers works on the premise of risk sharing. Risk is shared between the customer and financial institution in relation to the asset or product financed, on the basis of prior agreed terms, and any profits is then split between them.
An example of a Shariah compliant financing, is a leasing agreement where the financier purchases a product for a client and then leases it back over a period. However, the customer risks losing their money if the financing is not successful and no fee is charged unless there is a profit.
In a Murabaha financing, an interest bearing loan is not needed, but an item is bought by the bank and then sold to a customer on a deferred basis.
Many banks now have Sharia compliant products. They will trade in Sharia compliant investments with differentiation kept between clients money and shareholders capital. The bank can also profit from assisting clients to buy a property using a specifically formulated scheme.