Islamic banking derives from Islamic law (Shariah) which establishes three core prohibitions: (1) Riba (interest/usury) — forbidden because charging interest perpetuates inequities between lenders and borrowers, prolonging social injustice. This is the most fundamental prohibition and drives the entire structure of Islamic financial products. (2) Gharar (excessive uncertainty) — forbidden because it fosters opportunistic speculation, undermining ideals of transparency and mutual gain. Contracts must be clear and free from ambiguity. (3) Haram (forbidden activities) — involvement in prohibited businesses such as gambling, alcohol, and other harmful industries is not permitted. Together, these prohibitions support financial mechanisms ensuring that economic activity relates closely to real assets, fostering more equal wealth distribution and discouraging reckless risk-taking. Islamic financial transactions emphasize actual assets, profit-and-loss sharing, and equitable risk allocation among partners. Transactions must be free from fraud, contracts must be clear, and profits should not arise mainly from speculative gains.
Key Takeaways
- 1Riba (interest) is forbidden because it creates inequity between lenders and borrowers
- 2Gharar (uncertainty) is forbidden because it enables speculation and undermines transparency
- 3Haram industries (gambling, alcohol, etc.) are excluded from all financial activity
- 4All three prohibitions work together to ensure finance is tied to real assets and equitable outcomes
- 5Profit-and-loss sharing and equitable risk allocation are core principles, not just interest avoidance
Citation
Mohammad Kabir Hassan, Mohammad Rezoanul Hoque, Mustafa Raza Rabbani. Hassan et al. (2025) - AQU Journal of Islamic Economics, Vol. 5 No. 2 (2025).
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