Islamic finance: what is it?

What is it?

The term Islamic finance covers all transactions and financial products compliant with the principles of Islamic law, the sharia. It distinguishes two financing modes: financing 'with participation', based on risk-sharing, and 'without participation', which mainly concerns commercial operations.

The 5 principles of Islamic finance

• The prohibition of interest, of uncertainty linked to speculation, and of investment in sectors deemed illicit
• Respect for the principle of sharing losses and profits
• The existence of an underlying asset
• No guarantee is required
• Assistance and support for the project owner

Differences with conventional finance

The bank is a co-investor with the borrower; repayment takes the form of payments increased by a profit margin, and no late-payment penalties can be charged. This margin is not equivalent to interest: it corresponds to the transformation of a short-term payment into a long-term one, permitted by Islamic law.