Understanding Islamic Finance - Doha Academy of Tertiary Studies

3The Main Prohibitions and Business Ethics inIslamic Economics and Finance3.1 INTRODUCTIONIn the previous chapter we discussed the main features of Islamic economics and the Islamiceconomic system, with the objective of distinguishing them from conventional economics.Now we proceed to discuss the fundamentals of Islamic business and finance, includingthe basic prohibitions, encouragements, norms and ethics governing economic and businessactivities in the framework of the Sharī´ah.Islam has constrained the freedom to engage in business and financial transactions onthe basis of a number of prohibitions, ethics and norms. Besides some major prohibitions,Islamic law has prescribed a number of other norms and boundaries in order to avoidinequitable gains and injustice. As Sharī´ah compliance is the raison d’etre of the Islamicfinancial system, concern for the Sharī´ah tenets should dominate all other concerns ofIslamic financial institutions. It is only through the compliance of Islamic banking operationswith the norms and the principles of the Sharī´ah that the system can develop on a sustainablebasis and can ensure fairness for investors, the business community and institutions.This chapter is organized to include discussion of the major prohibitions and norms thatdetermine the overall limitations, working beyond which would create Sharī´ah complianceproblems for Islamic financial institutions and observance of which is necessary for theintegrity and credibility of the Islamic finance movement. The prohibitions that we shalldiscuss here include that of Riba, commonly known as “interest” in conventional commercialterminology, Maisir and Qimār (gambling) and Gharar or excessive uncertainty about thesubject matter and/or the price in exchanges and the norms and ethics of business andfinance in the Islamic framework. These norms and ethics require that all economic agentsin a society must avoid injustice and unfair dealing with others and that harm should notbe inflicted upon anyone. Invalid contracts on account of any contractual deficiencies arenot the subject of this chapter but will be discussed in Chapter 5. Similarly, principles andfeatures of Islamic banking and the financial system will be discussed separately in the nextchapter.3.2 THE BASIC PROHIBITIONSAs a rule, Islamic law does not recognize transactions that have a proven illegitimate factorand/or object. For that purpose, Sharī´ah has identified some elements which are to beavoided in commerce or business transactions. In this regard, the prohibition of Riba, Ghararand gambling is the most strategic factor that defines invalid and voidable contracts anddemarcates the overall limits which should not be crossed. We will elaborate upon these oneby one.