Sample Essay

Islamic finance believes that interest on consumer as well as investment or corporate loans is forbidden. It devises its rulings out of the events of Islamic history and financial transactions there in. Some salient foundations of these rulings are; the concept of profit as well as loss sharing with entities the loans are advanced to. There is no such thing as a confirmed profit in form of interest in Islamic finance. (M. I. Usmani 63). If a custodian is handed money for safekeeping he does not have limited liability but a complete liability towards the clients that handed the money or assets for safe keeping.

The custodian is allowed to invest these amounts in trade and business to earn profits on it. However, is liable to share the profits with the clients according to the ratio of the share of their capital in the entire invested capital (M. I. Usmani 62). Islamic financial practices believe only in asset backed financing and not in money as it does not have any intrinsic value. Therefore, many Islamic banks believe in entering a valid contract with the clients and engage in actual purchase of things such as houses, automobiles or consumer goods and later sell it out to client. It is imperative to understand the nature of Islamic financial terms of contract and sales too. Under these rulings a contract is void if it violates the Islamic principles governing economics, is not formed through mutual agreement and negotiation, is not part of the normal market transactions and benefits one party over another. Whereas, M. I. Usmani describes sales in Islamic banking are considered void if they do not fulfill these conditions; have a right contract, subject matter, price and possession or delivery promise at the time of transaction (71).

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