Islamic Finance

MyNeofintech accesses corporate capital programs under the criteria of Islamic finance.

These are a type of capital activities that must comply with Sharia (Islamic Law). The concept may also refer to investments that are permitted under Sharia.

The common practices of Islamic finance and banking emerged along with the founding of Islam. However, the establishment of formal Islamic finance occurred only in the 20th century. Today, the Islamic financial sector is growing at 15% - 25% per year, while Islamic financial institutions oversee more than $2 trillion.

The main difference between conventional finance and Islamic finance is that some of the practices and principles used in conventional finance are strictly prohibited by Shariah law.

Principles of Islamic Finance

Islamic finance strictly complies with Islamic law. Contemporary Islamic finance is based on a number of prohibitions that are not always illegal in the countries where Islamic financial institutions operate:

Paying or charging interest: Islam views loans with interest payments as an exploitative practice that favors the lender at the expense of the borrower. According to Shari'a law, interest is usury (riba), which is strictly prohibited.
Investing in businesses involved in prohibited activities.Some activities, such as producing and selling alcohol or pork, are prohibited in Islam. The activities are considered haram or prohibited. Therefore, investing in such activities is also prohibited.
Speculation (maisir): Sharia law strictly forbids any form of speculation or gambling, which is called maisir. Therefore, Islamic financial institutions cannot participate in contracts where the ownership of the property depends on an uncertain future event.
Uncertainty and risk (gharar).The rules of Islamic finance prohibit participation in contracts with excessive risk and/or uncertainty. The term gharar measures the legitimacy of risk or investments of an uncertain nature. Gharar is observed with derivative contracts and short sales, which are prohibited in Islamic finance.

In addition to the above prohibitions, Islamic finance is based on two other crucial principles:

Material purpose of the transaction: each transaction must be related to an actual underlying economic transaction.
Participation in profits / losses: parties entering into contracts in Islamic finance share profit/loss and risks associated with the transaction.

No one can benefit from the transaction more than the other party.

Types of financing arrangements

Since Islamic finance is based on several restrictions and principles that do not exist in conventional banking, special types of financial arrangements were developed to meet the following principles.

Profit and Loss Sharing Association (mudarabah) Mudarabah is a profit and loss sharing partnership agreement in which one partner (financier or rab-ul mal) provides the capital to another partner (labour provider or mudarib) who is responsible for the management and investment of the capital. Profits are shared between the parties according to a previously agreed relationship.
Profit-sharing joint venture (musharakah) Musharakah is a form of joint venture in which all partners contribute capital and share profits and losses on a pro-rata basis. The main types of these joint ventures are.
Joint Venture Decline: This type of enterprise is commonly used to acquire property. The bank and the investor jointly purchase a property. The bank then gradually transfers its share of the capital in the property to the investor in exchange for payments.
Permanent Musharakah: this type of joint venture has no specific end date and continues to operate as long as the parties involved agree to continue operations. It is generally used to finance long-term projects.
Lease (Ijarah). In this type of financing arrangement, the lessor (who must own the property) leases the property to the lessee in exchange for a sequence of rental and purchase payments, ending with the transfer of ownership to the lessee.Due to the number of prohibitions set by Shariah, many conventional investment vehicles, such as bonds, options and derivatives, are prohibited in Islamic finance. The two main investment vehicles in Islamic finance are:
1. shares: Shariah permits investment in company shares. However, companies must not engage in activities prohibited by Islamic law, such as lending at interest, gambling, alcohol production or pork production. Islamic finance also permits private equity investments.
Fixed income instruments: Since Shariah prohibits loans with interest payments, there are no conventional bonds in Islamic finance. However, there is a bond equivalent called sukuk or "Shariah-compliant bonds". Bonds represent partial ownership of an asset, not a debt obligation.

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