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KembaraXtra-Islamic Finance -Shari'ah Compliance
- Islamic finance is defined by its adherence to Shari'ah principles. This means that financial activities must not contradict Islamic law.
- Interest (Riba): A fundamental difference lies in the prohibition of riba (interest). Conventional banking relies on interest as a core mechanism for profit, which is forbidden in Islamic finance.
- Example: Fixed deposits in conventional banks involve a promise to repay the principal plus interest. This structure is unacceptable in Islamic finance.
- Debtor-Creditor Relationship: Conventional banking establishes a debtor-creditor relationship between the bank and the customer (both depositor and borrower).
- Uncertainty (Gharar): Islamic finance also prohibits gharar (excessive uncertainty or speculation) in contracts.
- Banking: Conventional banking relies on interest, which is forbidden.
- Insurance: Conventional insurance may involve gharar due to the uncertain nature of payouts (amount and timing).
- Capital Markets: Conventional bonds often involve interest payments, which are not Shari'ah-compliant.
- Goods and Services: Islamic finance avoids involvement in the production, sale, or distribution of haram (forbidden) goods and services.
- Examples of Haram:
- Non-Halal foods (pork, improperly slaughtered animals)
- Alcohol
- Gambling
- Pornography
- Related entertainment
- Examples of Haram:
- Contractual Structure: A business can be non-compliant if its contracts are based on interest (riba) or excessive uncertainty (gharar).
- Transactional Perspective: A business can be non-compliant if it deals with haram goods or services.
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