When carrying out any Islamic financial transaction, at least six fundamental principles are taken into account

These guidelines set apart an interest- or riba-based financial transaction from an Islamic banking transaction

1) Sanctity of the agreement: 

The counterparties must determine whether the transaction is halal (legal) in the perspective of Islamic Shariah before carrying out any Islamic financial transaction

This means that a transaction made by an Islamic bank cannot be void or voidable

A contract that violates Shariah law is one that does so by virtue of its very nature

On the other hand, a voidable contract is one that is legitimate in and of itself but has some illegitimate elements added

The legitimate contract will continue to be voidable unless these unlawful provisions are removed

2) Risk sharing: 

From the words of the prophet Muhammad(SAW), Islamic jurists have derived two principles. 

1. “Al-kharaj bil daman”

The right to use the property for one’s advantage in exchange for taking up the property’s upkeep 

It outlines the Islamic jurisprudential principle that the yield from an asset belongs to the person who is responsible for that asset, and that anybody who does not bear that responsibility has no right to the income

For instance, if a person purchases a property and rents it out, but later discovers a flaw and returns the house to the seller, the seller has no right to the rent paid while the house was under the buyer’s ownership

2. “Al-ghunm bi al-ghurm”

If a person is willing to take responsibility for the loss, they are entitled to a gain. The idea behind the no profit-sharing without risk-sharing rule is that making a profit is only justifiable if you are actively involved in the economy and contributing to it

3) No Riba/Interest: 

Transactions involving riba/interest are not permitted by Islamic banks

They are unable to lend money in order to profit more from it

However, it makes money by assuming risk with regard to real property, genuine services, or capital and transfers this profit or loss to its deposit holders who likewise assume risk with regard to their own capital

Every Islamic banking transaction serves a specific economic goal or activity. Islamic banking transactions are also supported by real services or movable assets

4) Economic purpose/activity: 

Every Islamic banking transaction serves a specific economic goal or activity

Islamic banking transactions are also supported by real services or movable assets

5) Fairness: 

Through its practices, Islamic banking promotes fairness. Islamic banking prohibits the inclusion of transactions based on questionable terms and conditions. 

The contract or agreement contains a complete disclosure of all terms and conditions included in the transactions

6) No invalid subject matter

It is ensured that no invalid subject matter or activity is sponsored by an Islamic financial transaction when one is carried out 

Even if some topics or actions may be legal under local law, an Islamic bank cannot finance them if they are against Shariah

The gain comes with a loss of liability

Only by assuming some risk and engaging in economic activity is making a profit justified.

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