For as long as human needs remain infinite, (and the financial resources to provide them remain limited), there will always be the need to augment an individual’s financial capability to purchase services and goods or provide the same to other end users. In the Western world, this often means that individuals seek loans from financial entities to pursue their financial goals or execute business projects. While this would appear to cover the immediate need for finances, it throws up a greater problem – that of debt.

However, the concept of “interest” is alien to Islam as it represents Riba (usury) which Allah (SWT) has warned us about in Quran 2.275.

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stand who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” Quran 2.275

Interest is especially injurious to the borrower as it puts undue pressure on him to ensure the capital yields enough profit for him to repay both the interest and capital. Things are further worsened by the fact that most times, the outcome of the investments he has made is uncertain and entirely out of his hands. This goes against the Islamic ideals of fairness, justice, and equity in business dealings.

What then is the Islamic Solution to provide Muslims (and even Non-Muslims) with halal transactions that do not put undue strain or stress on any of the parties involved?

Islamic Finance/Ethical finance is a sharia’h-compliant set of guidelines that allow individuals and even large corporate organizations to engage in peaceful trade to bridge any financial gap or satisfy the needs in a market in return for lawful profits.
Islamic Finance, as launched in the early 1970s has continued to gain immense popularity worldwide due to its non-complicated nature and its ability to equitably share risks among trading partners. At its core are 3 principles that can help minimize the chances that debts may occur.

  1. Avoidance of Riba (Interest)
  2. Avoidance of Gharaar (Uncertainty, Excessive Risk) and
  3. Avoidance of Maysir (Speculation)
  1. Avoidance of Riba (Interest)
    Riba as the central tenet of conventional banking systems is the largest contributor to debt portfolios in the world. Apart from being expressly prohibited in Islam, Riba disregards the dire straits that push borrowers into making loan requests and puts them under additional fitna’h. Islamic finance has no space for interests and presupposes that “the exact amount borrowed is the amount to be repaid.” This is valid for all transactions unless they are business transactions where profit (and not interest) is expected.
  2. Avoidance of Gharaar (Uncertainty, and Excessive Risk)
    Islamic finance also discourages Excessive Risk to protect financial resources and prevent debts. Every business contains an element of risk but when the risks involved become so huge that one party cannot accurately estimate their chances of success, Gharaar ensues. An example of Gharaar is a contract that rides on the supply of fishes yet to be caught or eggs yet to hatch. So, by protecting us from being tempted by huge risks, Islamic finance prevents debts likely to be generated.
  3. Avoidance of Maysir (Speculation)
    Maysir (Speculation) is also expressly frowned upon by Islamic finance. The literal implication of Maysir is gambling, and indeed, gambling has contributed to the loss of huge fortunes. Allah expressly commands Muslims to avoid gambling in (Quran 5:90).

    “O you who believe! Intoxicants and gambling, dedication of stones, and divination by arrows, are an abomination of Satan’s handwork. Eschew such abomination, that you may prosper” (Quran 5:90)

    Maysir often requires one or more parties to a transaction to lose entirely for the other to make profit. Even at first glance, that violates Islamic and moral ideals. This is why trading in options and futures is not permissible under Islamic Finance. Indeed, there are better alternatives for individuals than gambling and uncertain transactions, and some of them will be briefly discussed here.

Permitted Financial Structures in Islamic Finance

  • Mudaarabah, involves two parties, the Rob al-Mal (financier) who provides the capital for a business idea and the (Mudaarib) who sues his time, skills and efforts to carry on the business. Profits are then shared in an equitable manner.
  • Mushaarakah, which is joint-venture partnership that allows all parties to contribute both capital and effort into the business. Profit-sharing is then based on the predetermined ratio.
  • Muraabahah, where a party in need of an asset asks another party to purchase the same asset and then sell it to him. The most important feature is that the second party must disclose the original price at which he bought the asset before selling it to the party in need at a profit.
  • Musaawamah, which is similar to Muraabahah but the second party is not under obligation to disclose the original price of the commodity. This is the most common form of trading structure as seen in even markets.

These Islamic finance models (and others including Tawarruq, Ijaarah, Istisnaa’ and Bay Salaam) minimize debts and provide a level financial playing ground for all individuals in a shariah-compliant setting.

On the other hand, Maysir, Gharaar, and Riba as promoted by conventional banking (and financial structures) are at the heart of most debts. While the former two create an atmosphere for huge financial losses to be recorded, the latter impoverishes the borrower and makes it hard for them to repay the capital they have borrowed.

By being built on the avoidance of all three, Islamic Finance offers a cost-effective financial system that guarantees gradual profits, equitable distribution of resources, and ease of the process. Most importantly, it stands as a viable panacea to our debt problems as a society.