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Introduction to Islamic Finance: Principles and Practices

Islamic finance is founded on principles deeply rooted in Sharia law, emphasizing ethical, fair, and transparent financial transactions. One of the fundamental principles of Islamic finance is the prohibition of Riba (interest), which is expressly condemned in the Quran in verse 2:275: “Those who devour usury will not stand except as stand one whom the Devil has driven to madness by (a touch of) madness. That is because they say: ‘Trade is just like usury,’ but Allah hath permitted trade and forbidden usury.”

Additionally, the Quranic verse 2:276 reinforces this prohibition and highlights the importance of conducting business in a just and ethical manner: “Allah will deprive usury of all blessing, but will give increase for deeds of charity: for He loveth not creatures ungrateful and wicked.”

In the Hadith, the Prophet Muhammad (peace be upon him) emphasized ethical conduct in financial transactions. He said, “The buyer and the seller have the option of canceling or confirming the bargain unless they separate, and if they spoke the truth and made clear the defects of the goods, then they would be blessed in their bargain, and if they told lies and hid some facts, their bargain would be deprived of Allah’s blessings” (Sahih al-Bukhari).

Islamic finance also encourages profit-and-loss sharing and risk-sharing mechanisms, exemplified by Musharakah and Mudarabah contracts, which promote cooperation and fairness among participants.

In summary, Islamic finance is built upon the principles of avoiding Riba, conducting ethical business, and promoting just and transparent financial transactions, as supported by Quranic verses and Hadiths.

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