Basic Economic Principles

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Basic Economic Principles

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Shari'a regards money as simply a means of exchange, without intrinsic or inherent value, and holds that money cannot be used to make money. Interest is the classic example of Riba. Payment or receipt of interest is therefore strictly prohibited. However, profit and loss sharing arrangements are considered acceptable provided there is real risk sharing. Interest of any kind, also read as economic injustice, more precisely, any financial situation leading to the possibility of economic injustice in society.

A transaction should be free of gharar- undefined risk, uncertainty or speculation Contracting parties must know the subject matter of the contract, the price and the effect of entering into the contract A contract will be unacceptable if there is an obligation that is conditional on the occurrence of an uncertain or ill-defined event outside the control of the parties.

Under the Shari'a, there is a general prohibition on making one contract conditional upon another contract.

Shari'a prohibits and treats as void transactions that rely on chance or speculation, rather than effort, to produce a return. This can create problems in relation to contracts that are seen as tantamount to gambling, which includes some conventional derivative transactions such as swaps, futures and options. Alcohol, pork products, gambling, arms & ammunition and the associated products and services are totally prohibited..

Islamic Banking and Finance

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