| Financial Arrangements and Contracts – The giving and taking of interest (riba) are prohibited (haram, i.e., forbidden by Islamic law). Transactions between consumers and lenders are partnership-based (Nouman & Ullah 2014). |
| riba |
Islamic finance is an interest-free system. Interest (riba) is considered usury and is haram. In transactions involving personal loan arrangements, the consumer cannot make a profit by lending their money at unreasonably high rates of interest (riba) at the expense of the borrower (e.g., bank). They cannot pay interest on loans or mortgages nor earn interest on chequing or saving accounts. |
| akad |
This is the Arabic word for contract. The akad “is important and foremost for business actors, business activities (tijaraj) and social (tabarru’) activities” (Setiawati et al. 2018, p. 5). |
| wakalah |
To avoid interest (riba), the bank acts as the person’s agent (wakalah). Anyone providing funds to a consumer purchasing goods or services acts as an investor rather than a creditor. |
| qard (loan) |
The consumer deposits their money in a bank (chequing or saving account), and the bank (wakalah) treats it as an interest-free loan (a qard) for them to use; the bank has ready access to this money, which it invests in only Shariah-compliant investment vehicles (what Shariah says is not harmful). Islam believes there is a moral duty to give borrowers money free of charge if a case can be made that they need it. In that spirit, a qard hasan is a benevolent loan for social welfare or short-term bridging finance. |
| musharakah |
This is a joint venture, profit/loss sharing, equity financing partnership between a consumer and the bank so that property can be jointly purchased and profits shared (no interest payments). The bank gradually transfers its portion of equity to the investor in exchange for the latter’s payments using an installment plan. Losses are shared in proportion to the amount invested. |
| murabahah |
Through murabahah (partnership/contract, cost-plus financing), the bank buys property or trades in commodities then sells to the consumer at a profit for the bank. The consumer lives in (uses) the jointly owned property and pays the bank back over time (no interest), but the bank concurrently charges the consumer a fee to cover its costs. This product is often used for consumer finance, real estate, the purchase of machinery, and financing short-term trade. |
| mudararba |
In a mudararba contract (profit/risk-sharing investment arrangement), the person providing capital (financier) transfers the capital but not the ownership of it to a mudarib (entrepreneur or investment manager) who puts the money into a project (business) or portfolio. Any profits earned by a business or portfolio managed by a mudarib are shared with the capital owner at an agreed-to profit-sharing ratio. Loses are born by the financier/investor (rab ul mal). The rab ul mal cannot interfere in the running of the business but has the right to know how the business is being run and can specify conditions for better management of his or her money (i.e., like a silent partner). This contract is often used for investment funds. |
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| Consumer Financial Instruments |
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| bai al inah personal financing |
This Arabic word translates to personal financing (instead of personal loan, which implies debt and interest payments). It is a two-party transaction. Lenders charge consumers a profit rate for providing access to a personal financing facility. The lender buys an asset (e.g., cash, equipment, or a service) that the consumer wants, sells it to the consumer, and immediately repurchases it. The consumer pays it off using installments (deferred payment plan) (bai muajjal) but pays more than the original price (i.e., a profit markup instead of interest). |
| credit cards |
Islamic credit cards do not charge interest (simple or compound) because gharar (overcharging) and riba (interest) are haram. Instead, lenders charge consumers for their services (profit rate instead of interest rate). Shariah-compliant credit cards have a takaful (insurance) coverage option and a zakat (wealth tax) payment option. Unlike conventional credit cards, there is a halal transaction filtering system on these cards, wherein if consumers try to buy alcohol or gamble, the card issuer will deny the purchase. Failure to make minimum payments (5% of the bill) on these cards leads to an increase in the profit rate and a late payment penalty (1%). |
| tawarruq credit card |
This is a sales contract for a three-party transaction. The underlying Islamic principle is that a tangible asset must underlie each transaction. “If a customer wants a credit limit of $10,000, the bank will purchase an asset (usually a commodity; however, shares and mutual fund units have also been used) worth $10,000 and sell the same to the customer on a deferred payment basis with a credit period of 01 year at the applicable profit rate of say 10%, hence the selling price will be $11,000. Subsequently, the customer appoints the Bank as an agent to sell the same goods in the market for cash for $10,000” (Muhammad 2021, para. 2). “If a customer utilizes $10,000 of the limit every month during the validity of the card and pays it within the due date every month, he [sic] will be relieved from paying the $1000 profit on the deferred sale contract. However, if in any month any funds are outstanding beyond the due date, he will have to pay the profit based on the amount and the days it remains outstanding, and the rest of the profit will be waived” (Muhammad 2021, para. 13). |
| urjah |
This Arabic term loosely translates to fee. The credit card holder (consumer) is charged a service fee in exchange for services, benefits, and privileges tendered by the credit card company. Cash advances are available under the urjah concept. Urjah can also refer to wages, allowances, commissions, and other financial charges for using services (in lieu of interest, riba). |
| Investments – Any underlying asset must be Shariah compliant. All investments must be ethical. “Shariah prohibits activities connected with alcohol, pork-related products, tobacco, conventional financial services, gambling, sale of arms, and conventional insurance” (Addleshaw Goddard 2017, p. 2). |
| gharar |
Uncertainty, excessive risk, and deception are haram and not allowed in Islamic finance (e.g., short selling stocks, derivative contracts, or stock speculation). Uncertainty arises from ignorance (lack of information) of an essential element of the exchange. |
| maysir |
Gambling, games of chance, conventional insurance, and speculation (maysir) are haram by Shariah law. Ownership of goods that are dependent on uncertain future events is not permitted. |
| rishwah |
Corruption and bribery (rishwah) are haram because those taking the money (the bribe or payback) have already been paid to provide service to others. The money earned from the bribe is called suht, and owning it is unlawful. |
| Insurance – “Insurance in Islam [takaful] should be based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity” (IIBI, ca. 2004, para. 6). |
| takaful |
Conventional insurance is haram (forbidden). Islamic insurance (takaful) separates the funds from the shareholders by passing ownership of the insurance fund (takaful) to the policyholders. Like business partnerships, consumers (policyholders) are joint investors with the insurance vendor (mudarib) who manages the fund. Consumers share in the pool of profits and losses. To avoid gharar, the insurer charges consumers a premium in proportion to the scientifically and statistically calculated risks. Islamic insurance (takaful) emphasizes the ethical, moral, and social dimensions of life to enhance equality and fairness for the good of society. Thus, each consumer’s contribution (premium) to the insurance fund is viewed as a donation to help those needing assistance. |
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| Rental and Leasing |
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| ijarah |
Leasing (ijarah) is an Islamic financial arrangement whereby a financing party (lessor) purchases property, equipment, or some other asset desired by its client (i.e., the consumer, the lessee) and then leases it to the client for a rental fee (i.e., a stream of rental or purchase payments that can end with the transfer of ownership to the lessee or not) (e.g., a car lease or house lease). The rental payments are for the lender’s profit. To be Shariah compliant and to share the risks, both parties must enter a formal, signed agreement, whereby the consumer (lessee) agrees to maintain the asset (insurance, repairs) even though the lessor still owns it. This duty is not implied as it is with a conventional lease; instead, it is explicitly stated. |
| Pension and Retirement Plans These plans can be invested in Shariah-compliant (halal) assets. Per “Shariah principles, an investment must exhibit many qualities – including environmental and ethical considerations and excluding interest and excessive debt” (Manulife 2024, para.1). |
| sukuk |
A sukuk is an Islamic investment certification (an Islamic asset-backed bond). However, instead of a bond that earns interest (the consumer has a debt obligation), with a sukuk (a profit/risk sharing instrument), the consumer owns a piece of the asset linked to the investment. Sukuk holders receive a portion of the asset’s earnings instead of interest from loaning their money to an investor (conventional bond). Sukuks are halal (permitted) for pension plans because they are invested in Shariah-compliant investment activities and are structured, so they avoid both (a) consumer indebtedness and (b) interest payments (riba) as a source of investment income. |
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| Taxation |
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| zakat |
Islamic finance does not tax personal income or inheritances. It taxes wealth instead; this wealth tax is also called zakat, 2.5% (see Charitable Giving and Donations section). This tax leaves consumers with more short-term disposable income but exposes them to taxation on what is left at the end of the year, which must be planned for. Islam considers this tax a form of economic justice. The rate varies according to the type of property owned – cash, cattle, agricultural produce, minerals, or capital invested in industry and business. |
| kharaj |
This is a mandated individual tax on agricultural land. |
| ushr |
This is an individual land tax on the harvests (agricultural produce) from irrigated land (10%), rain-watered (10%) land, or land dependent on well water (5% tax). |
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| Charitable Giving and Donations |
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| zakat maal and nisab |
Muslims are obligated to donate a certain portion (minimum 2.5%) of personal savings and wealth (currency, gold, silver, and property) to charitable causes. This mandatory process is a form of worship in that it purifies earnings exceeding those essential to a person or family (zakat means purify). Until a person reaches a certain financial threshold or exemption limit (nisab – equates to 85gms of gold, 600gms of silver, or equivalent currency), the payment of zakat maal is not required. |
| zakat fitrah |
Zakat fitrah (fast breaking) is the obligatory payment of alms after Ramadan (fasting month). |
| sadaqah |
This Arabic word refers to voluntarily giving charitable gifts (material or nonmaterial) out of kindness or generosity (regardless of nisab). |
| infaq |
This Arabic word refers to voluntarily giving material goods to only charitable causes (regardless of nisab). |
| waqf |
Similar to an endowment fund, a waqf is a donation made to a fund manager (muta wail/nazir) who generates profits that are in turn used to support socioeconomic development initiatives. Waqfs are strongly encouraged in Islam as contributions to society. |
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| Estate Planning |
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| faraid and wasiya |
Faraid is the law of inheritance – the distribution of an estate among heirs according to Allah and the Holy Qur’an using a wasiya (will, testament, and/or bequest). Islam holds that individuals should manage their financial affairs based on care and love toward others (ta’awun – helping each other, and tabarru’ – sincere donations). Managing finances (including wills and estate planning) should benefit all parties. |
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