Islam strictly prohibits the charging or paying of interest, as it is considered exploitative. Money itself is not seen as having inherent value that should increase merely with time. Instead, Islamic finance ties financing to real assets and activities that generate legitimate returns.
Contracts with excessive uncertainty or ambiguity are forbidden in Islamic finance. All terms, conditions, and payment schedules must be clearly defined upfront to prevent disputes and protect all parties. This principle ensures transparency and fairness in financial transactions.
Islamic finance prohibits transactions involving gambling or excessive speculation. Deals should be based on real assets and genuine economic activity rather than chance or speculation. This principle encourages sound business judgment and discourages risk-taking without proper due diligence.
Islamic finance requires that financial transactions be backed by tangible assets. This linkage between financial transactions and real economic activities ensures that finance serves the real economy rather than creating paper wealth. Financing is tied to specific assets, goods, or services.
Instead of interest, Islamic finance often uses profit-and-loss sharing arrangements where both the financier and the recipient share in the outcomes of the venture. This creates a more equitable distribution of risk and return, aligning the interests of both parties.
Islamic finance prohibits investing in industries deemed harmful to society, such as alcohol, gambling, weapons, or pork-related products. This ethical dimension ensures that money is channeled toward activities that are beneficial or neutral to society, rather than harmful.
