Islamic Microfinance Report

Paper
Date Published: 
Feb 2009
Author: 
Allen & Overy LLP
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Understanding basic Islamic law principles governing provision of Islamic finance

This report aims to assist the International Development Law Organisation (IDLO) in understanding basic Islamic law (Sharia) principles governing provision of Islamic finance products and services. Sharia law is meant to regulate all aspects of a Muslim's way of life, and includes commercial and financial dealings. It consists of general rules and principles derived from the Quran (the Muslim holy book), practices (sunnah) and sayings (ahadith) of the Prophet Mohammed. The key Sharia principles underpinning Islamic finance are:
  • Prohibition on usury and interest (riba);
  • Prohibition on realizing a gain from speculation (mayseer);
  • No uncertainty (gharar) in commercial transactions;
  • All activity must be for permitted purposes (halal).
 Sharia is not a codified body of law. Hence, it is open to interpretation by scholars, whose views may also change over time. The paper discuses: 
  • Supervisory and advisory role of  Sharia scholars;
  • Processes involved in obtaining Sharia approval for financing transactions and products;
  • Relationship between Sharia law and secular law in certain jurisdictions;
  • Islamic microfinance in Middle Eastern, South Asian and Southeast Asian countries;
  • Sharia-compliant financing products and structures.
Type: 
Paper