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October 6, 2023 | BY OSMAN BAH (The Advisor)

Ethical Finance Principles in Islam


Islamic finance, deeply rooted in Shariah principles, has gained recognition worldwide for its ethical approach to financial transactions. According to research from TheCityUK, in 2021, the combined assets of the global Islamic banking sector amounted to $2.8 trillion, marking a substantial increase from $1.7 trillion in 2016. This growth represents a compound annual growth rate (CAGR) of 10.1% during the period from 2016 to 2021. Projections indicate that these assets are expected to reach a total of $4 trillion by the year 2026.

At its core, Islamic finance embodies principles that prioritize fairness, risk-sharing, and social responsibility. Let’s delve into the fundamental ethical finance principles in Islam and their significance in shaping a responsible and equitable financial system.

Risk-sharing: Encouraging Fairness and Cooperation

One of the foundational principles of Islamic finance is the promotion of risk-sharing in financial transactions. Unlike conventional financial systems that often involve lenders charging fixed interest rates, Islamic finance fosters cooperation and fairness through profit-and-loss sharing arrangements. Here's why risk-sharing matters:

Aligning Interests: By sharing both profits and losses, Islamic finance aligns the interests of parties involved in a transaction. This encourages responsible decision-making and minimizes the potential for exploitation.

Mutual Benefit: Risk-sharing ensures that all parties have a stake in the success of the transaction. This mutual benefit promotes ethical conduct and fosters a sense of responsibility

Avoidance of Interest (Riba): Upholding Fairness and Equity

One of the most distinctive features of Islamic finance is the strict prohibition of interest, known as Riba. In Islamic finance, interest-based transactions are considered exploitative and ethically unacceptable. Here's why the avoidance of interest is central to ethical finance in Islam:

Equity and Fairness: Interest is perceived as a mechanism for the wealthy to profit at the expense of the less privileged. Its prohibition ensures that wealth is distributed more equitably.

Economic Stability: Eliminating interest-based lending can contribute to economic stability by reducing the likelihood of financial bubbles and crises.

Prohibition of Gambling (Maisir): Promoting Prudent Choices

Islamic finance prohibits speculative and uncertain transactions, often referred to as Maisir or gambling. This principle discourages reckless financial behavior and ensures that transactions are based on tangible assets and real economic activities. Here's why it matters:

Financial Prudence: The prohibition of gambling promotes responsible and prudent financial choices, discouraging individuals from seeking quick gains through speculative activities.

Economic Realism: By requiring transactions to be linked to real assets or services, Islamic finance contributes to a more grounded and stable economic environment.

Social Responsibility: Prioritizing Community Welfare

One of the core ethical principles in Islamic finance is the emphasis on social responsibility. This principle recognizes that wealth is a trust from God and should be used for the benefit of the community. Key aspects of social responsibility in Islamic finance include:

Wealth Distribution: Islamic finance encourages wealth distribution and discourages hoarding of wealth. Zakat, the mandatory almsgiving, plays a significant role in redistributing wealth to those in need.

Supporting the Vulnerable: Islamic finance promotes the welfare of the less fortunate by supporting charitable initiatives, providing interest-free loans to those in need, and offering financial assistance during emergencies.

Ethical finance principles in Islam serve as a moral compass for responsible financial transactions. These principles emphasize fairness, equity, responsibility, and social welfare, creating a financial system that prioritizes the well-being of both individuals and the community. As ethical finance gains recognition globally, its principles continue to inspire responsible financial practices that promote economic stability and social justice.

By embracing these principles, not only can the financial industry become more ethical and sustainable, but individuals and organizations can also contribute to a more just and equitable world. Islamic finance offers valuable insights into how financial systems can be designed to prioritize ethics and fairness, setting a positive example for the broader finance industry

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