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Islamic finance

Fundamentals of Islamic finance

Islamic finance

Islamic finance is the system of commercial banks and investment funds operating in compliance with Islamic Law (Sharia). The main difference with the traditional Western finance is the prohibition for banks to earn interest (riba) and make speculation (gharar). In fact, Quran considers interest as usury and it doesn't allow that money standing still, can generate more money. For example, instead of granting a loan to a person who wants to buy a property, the Islamic bank buys the property directly and then rent it to the client who agrees to pay the sum correspondent in installments. Once he has paid all the installments, he becomes the owner of the property.

Islamic finance also differs from the Western one for the emphasis on socially responsible investment. So investments are forbidden in weapons, drugs, pornography, liquors, meat pork, tabloids and all other sectors where Islamic Law's prohibitions apply. In fact, the Islamic finance has the purpose to promote and safeguard the values of Islam.

According to recent estimates, the funds managed by Islamic banks around the world, range between 1,200 and 1,500 billions dollars. Islamic finance is widespread not only in Islamic countries, but also in U.S., Germany, England and France, where the presence of Muslims wishing to invest or borrow in compliance with their religion, is stronger. The estimates will grow, because not only Muslims, but also Western citizens and economic operators start to make use of the Islamic finance.

By Mr. Luca Santaniello
Lawyer at Santaniello & Partners

Published on 29 February 2012

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