The Principles and Practices of Islamic Banking: A Comparative Analysis with Conventional Banking

The Principles and Practices of Islamic Banking: A Comparative Analysis with Conventional Banking

By Niilo Hämäläinen,

Edited by Sanaa Kadi.

Islamic banking is distinct from the conventional banking system, it stands out as a unique system guided by Shariah principles. This blog post aims to illuminate the basic differences and commonalities between Islamic banking, and its conventional counterpart, shedding light on their fundamental principles and operational frameworks.

 Islamic Banking: Principles and Practices

Islamic banking operates under the principles of Shariah, which prohibits the charging or paying of interest (riba) and promotes ethical and socially responsible financial transactions. Instead of interest-based lending, Islamic banks engage in profit- and loss-sharing (mudaraba) and asset-backed financing (murabaha), where the bank and the client share profits and risks. Additionally, Islamic banking prohibits investments in sectors deemed non-compliant with Shariah principles, such as gambling and alcohol.[1]

Conventional Banking: Principles and Practices

On the other hand, conventional banking operates within a secular framework, where interest-based transactions are common. Banks charge interest on loans and provide fixed interest rates on deposits, aiming to maximize profits for shareholders. Conventional banking focuses primarily on financial returns, with less emphasis on ethical considerations or adherence to religious principles.[2]

Comparative Analysis

A key difference between Islamic banking and conventional banking lies in the treatment of interest. While Islamic banking prohibits riba, conventional banking relies heavily on interest as a primary source of revenue. This fundamental distinction shapes various aspects of banking operations, including lending practices, investment criteria, and risk management approaches.[3]

However, despite these differences, Islamic banking and conventional banking share certain commonalities. Both systems aim to mobilize savings, allocate capital efficiently and facilitate economic growth. Moreover, both types of banks provide similar services such as deposit-taking, lending and investment management.[4]




In conclusion, Islamic banking and conventional banking represent two distinct paradigms in the financial industry, each guided by its own set of principles and practices. Islamic banking emphasizes ethical and socially responsible finance, grounded in Shariah principles, while conventional banking prioritizes profit maximization within a secular framework. Understanding the basic differences and commonalities between these two systems is essential for policymakers, investors, and consumers seeking to navigate the complexities of the global financial landscape.



[1] Bellalah, M., Chayeh, Z., & Ghayad, R. (2014) On Islamic Banking, Performance and Financial Innovations. Cambridge Scholars Publishing. Available at:  (Accessed: 18 April 2024).

[2] Lin, H.-Y., Farhani, N. H., & Koo, M. (2016) The Impact of Macroeconomic Factors on Credit Risk in Conventional Banks and Islamic Banks: Evidence from Indonesia. International Journal of Financial Research, 7(4), pp. 105–107. Available at: (Accessed: 18 April 2024).

[3] Gassouma, M. S., Ben Hamed, A., & El Montasser, G. (2021) Investigating similarities between Islamic and conventional banks in GCC countries: a dynamic time warping approach. Munich Personal RePEc Archive. Available at: (Accessed: 18 April 2024), pp. 1–7.

[4] Lin et al., (2016), p. 105–107.

Green Sukuk As an Alternative to Green Bonds – Opportunities and Challenges

Green Sukuk As an Alternative to Green Bonds – Opportunities and Challenges

By Leila Helali, 

Urgent action is needed to address the imminent threat that climate change poses to human wellbeing and biodiversity[1]. Averting the climate crisis will require a wholesale transformation to a low-carbon, climate-resilient economy, which naturally involves, and has implications, also for the financial sector[2]. This is also recognized in the 2015 Islamic Declaration on Global Climate Change, which calls on corporations, finance, and the business sector to ‘assist in the divestment from the fossil fuel driven economy and the scaling up of renewable energy and other ecological alternatives’[3]. Emerging as one alternative to conventional green financial instruments are green sukuk, or Islamic green bonds.

Sukuk (sing. sakk) are defined by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) as “certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services”[4]. Unlike conventional bonds, where an investor lends money to a borrower for a set period in exchange for regular interest payments, sukuk involve the issuer using the sukuk funds to finance an asset, project, or service, and in return, the sukuk holders gain ownership for a set period[5]. The earnings from the underlying asset are distributed among the sukuk holders according to a predetermined ratio[6] with the sukuk holders incurring either a profit or a loss depending on its performance[7]. In addition to complying with the prohibition of interest (riba), excessive risk (gharar) and speculation (maysir), the funds from sukuk should only be used for Sharia compliant activities[8].

Nasir, Nair and Ahmed observe that environmental protection is relevant to the objectives of Sharia (Maqasid Al-Sharia),[9] relating particularly to the protection of life (nafs), protection of wealth (mal), and the protection of progeny (nasl)[10]. As the name suggests, green sukuk are sukuk used to finance environment-related projects[11] thus aligning the financial and environmental imperatives of Islamic law. Much like conventional green bonds,[12] green sukuk can be used to fund projects related, for example, to climate change adaptation, renewable energy and energy efficiency, clean transportation, pollution control, and sustainable management of resources, land, and waste[13]. Green sukuk issuance is led by Saudi Arabia, Malaysia, and Indonesia, with green sukuk comprising 1.6% of ESG bond issuance (including, not limited, to green bonds), and 6.8% of total sukuk issuance as of 2023[14].

Green sukuk have the potential to steer the growth of the Islamic finance market towards environmentally beneficial projects[15] while also benefitting investors and issuers alike.
Unsurprisingly, green sukuk are especially attractive to investors, who adhere to Islamic principles, and want to be certain that their money will be invested in assets or projects in compliance with the Sharia[16]. However, Sean Kidney, the CEO of the Climate Bonds Initiative, observes that green sukuk also attract other investors, who see green sukuk as an “extension” of the conventional green bonds market.
As such, Michael Grifferty, the president of the Gulf Capital Market Association, observes that green sukuk are an opportunity for issuers to expand their investor base beyond the Islamic demographic[17].
These factors contribute to increased funding towards projects, which have already been shown to have tangible impacts in mitigating environmental harms and facilitating the climate transition.
For example, in Indonesia, green sukuk have been used to fund the construction of over 690 kilometers of railway tracks, and the improvement solid waste management for more than 7 million households[18].

However, green sukuk are not without their problems. The sukuk market is still in a nascent stage,[19] even moreso for green sukuk, with there being a prevailing lack of awareness about the potential benefits[20]. Returning to the example of Indonesia, Abubakar and Handayani note a lack of awareness about green sukuk among stakeholders, including sukuk issuers, such as the Ministry of Finance, which creates challenges in project planning, and thus, impedes the potential benefits projects can offer[21]. Furthermore, Güçlü observes that lack of standardization “makes it difficult for investors to evaluate the environmental impacts” of projects funded by green sukuk,[22] which may turn away the most environmentally-conscious investors, who want to ascertain the climate impacts of their investment.
On the other hand, Shalhoob observes that developing the necessary frameworks to standardize and market green sukuk is a lengthy process[23] which is an issue in a market, where time is of the essence[24].

With some efforts to introduce increased standardization to the Islamic finance market possibly boiling under the surface,[25] what trajectory green sukuk ultimately take remains to be seen — although, without comprehensive data, just evaluating their performance and structure might be an uphill battle[26].


[1] Katherine Calvin and others, ‘IPCC, 2023: Synthesis Report. Contribution of Working Groups I, II and III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.’ (Intergovernmental Panel on Climate Change (IPCC) 2023) 24 <> accessed 24 April 2024.

[2]  Sina Hbous, ‘Mobilising Islamic Banking for Climate Action’ (UNEP FI, IsDB & CIBAFI, October 2023) ix <> accessed 24 April 2024.

[3] ‘Islamic Declaration on Global Climate Change’ (International Islamic Climate Change Symposium in Istanbul in 17–18) 7 <> accessed 24 April 2024.

[4] Shariʻah Standards: Full Text of Shariʻah Standards for Islamic Financial Institutions as at Safar 1437 A.H.-December 2015 A.D (Accounting and Auditing Organization for Islamic Financial Institutions 2015) 468.

[5] Mohammed Sawkat Hossain, Md Hamid Uddin and Sarkar Humayun Kabir, ‘Sukuk and Bond Puzzle: An Analysis with Characteristics Matched Portfolios’ (2021) 57 Emerging Markets Finance and Trade 3792, 3793.

[6] ibid.

[7] Fatih Güçlü, ‘The Rise of Environmental Consciousness in Islamic Finance: Green Sukuk’ in Celil Aydın and Burak Darici (eds), Handbook of energy and environment policy (Peter Lang 2019) 252.

[8] ibid 251.

[9] Norita Mohd Nasir, Mahendhiran Sanggaran Nair, and Pervaiz Khalid Ahmed, ‘Environmental Sustainability and Contemporary Islamic Society: A Shariah Perspective’ (2022) 27 Asian Academy of Management Journal 228 <> accessed 25 April 2024.

[10] Sina Hbous (n 2) 15–16.

[11] Hebah Shalhoob, ‘Green Sukuk in Saudi Arabia: Challenges and Potentials of Sustainability in the Light of Saudi Vision 2030’ (2023) 12 Journal of Governance and Regulation 351, 352.

[12] Marcelina Więckowska, ‘The Role Bonds in Financing Climate Resilient Economy’ (2013) 2 Copernican Journal of Finance & Accounting 153, 158.

[13] Sina Hbous (n 2) 7.

[14] ‘Green and Sustainability Sukuk Update 2023’ (LSEG Data & Analytics, London Stock Exchange, UKIFC and GEFI, 2023) 4<> accessed 25 April 2024.

[15] Sina Hbous (n 2) 5.

[16] Shalhoob (n 11) 355.

[17] Melanie Noronha, ‘A New Shade of Green: Sukuk for Sustainability’ (Economist Impact, 23 March 2020) <> accessed 25 April 2024.

[18] ‘Innovation in Islamic Finance: Green Sukuk for SDGs’ (The UK Islamic Finance Council and United Nations Development Programme, 28 September 2021) 19 <> accessed 25 April 2024.

[19] Muhamed Zulkhibri, ‘A Synthesis of Theoretical and Empirical Research on Sukuk’ (2015) 15 Borsa Istanbul Review 237, 239.

[20] Shalhoob (n 11) 355.

[21] Lastuti Abubakar and Tri Handayani, ‘Green Sukuk: Sustainable Financing Instruments for Infrastructure Development in Indonesia’, Proceedings of the 1st Borobudur International Symposium on Humanities, Economics and Social Sciences (BIS-HESS 2019) (Atlantis Press 2020) 986 accessed 25 April 2024.

[22] Güçlü (n 7) 256.

[23] Shalhoob (n 11) 351.

[24] Lee Irvine, Michael P Grifferty and Alice Cowman, ‘Green Sukuk – The Race to Be First’ Islamic Finance News (5 November 2014) <> accessed 25 April 2024.

[25] Mohamed Damak and others, ‘Global Sukuk Issuance Is Set To Increase In 2021’ S&P Global (12 January 2021) <>.

[26] Shalhoob (n 11) 5.

#Islamic finance, #Greensukuk, #GreenIslamicbonds, #climatechange 

Exploring the Limits of Contract Fulfillment in Islamic Law: When Does the Principle of ‘Pacta Sunt Servanda’ Apply?

By Russkykh Pavlo,

Edited by Sanaa Kadi


Are you familiar with the ancient Roman legal principle “Pacta sunt servanda” and its significance in European legal systems? This principle ensures that every valid contract must be fulfilled by the parties involved in good faith, promoting predictability and efficient planning. But what about Islamic business law? Does it have a similar principle, and are there instances where contracts can be violated after conclusion? In this blog post, we’ll explore the concept of contracts in Islamic business law and how it differs from the European legal tradition, shedding light on a lesser-known aspect of contract law.

No business and economic development is possible if the parties can break the contract or refuse to fulfill it. In the European legal tradition, this opinion was enshrined in the main ancient Roman legal principle “Pacta sunt servanda“. According to it, every valid contract is binding for the participants and must be fulfilled by them in good faith. It allows you to ensure predictability, which is ultimately beneficial to the parties to the contract, as it allows you to clearly plan actions and spend a minimum of effort on insurance.

This principle has become the basis of all European legal systems, on the other hand, does Islamic business law have its analogue of the principle and are there examples of contracts which parties can violate after conclusion?

Liam Patrick Nicol, Joel Väisänen and Marc Orti Carceller contend that «The Quran, which is Islam’s first fundamental source of law, includes numerous references to what is known nowadays as the pacta sunt servanda principle. This supports the claim that the notion is not foreign to Islamic law and is compatible with its norms, particularly regarding internal and international ties between Muslims and non-Muslims. » [1] However, the application of this principle is not universal and not every contract must be fulfilled. The Islamic legal tradition in the field of business regulation is based on prohibition. According to Sharia law, not every contract has the right to be concluded by the parties at all. There are exceptions, when prohibition-based contract invalidation can almost always be attributed to the two factors labeled riba and gharar [2]:

  • Gharar – uncertainty. One of the three fundamental prohibitions in Islamic finance. Gharar is a sophisticated concept that covers certain types of uncertainty or risk in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives.
  • Riba – this term literally means an increase or addition. Technically it denotes any increase or advantage obtained by the lender as a condition of the loan. Any risk-free or “guaranteed” rate of return on a loan or investment is riba.[3]

Sometimes a contract is recognized as haram, even if it does not have the signs of riba or gharar, but the subject of such a contract is impermissible and forbidden things in Islamic law (For example: drugs, pornography, alcohol).

Also, in order for a contract to be binding and enforceable, not only the subject of the contract, but also the form, must comply with Islamic law and contain:

  • ‘ijab – an offer
  • qabul – an acceptance
  • ahliyyah – capacity
  • mahal al-‘aqd – subject matter
  • Absence of ikrah– absence of duress
  • consideration [4]

Therefore, it can be argued that the doctrine of pacta sunt servanda is recognized by Islamic law, although it is rejected primarily from prohibitions. Thus, a contract that corresponds to the above components, and also does not concern the circulation of items that are haram, does not contain riba or gharar – must be performed in accordance with God’s will, which is reflected in the Qur’an.


  1. Liam Patrick Nicol, Joel Väisänen, Marc Orti Carceller, ‘The pacta sunt servanda principle in Islamic law’ 2021,
  2. El-Gamal, M.A, Islamic Finance Law, Economics, and Practice, 2006, p. 46, Cambridge University Press
  3. Glossary of terms used in Islamic Banking, by Credit Agricole Corporate and Investment Bank
  4. Abdul Jalil, Md & Khalilur Rahman, Muhammad, 2010. Islamic Law of Contract is Getting Momentum. International Journal of Business and Social Science. 1. 175-192

The Ethics behind Islamic Business Law: A Different Solution to Banking?

By Schumacher Laurenz,

Edited by Sanaa Kadi

Are you curious about the principles of Islamic Business Law and their origins? Islamic Business Law has a unique concept that stems from its ethical thought. But where do these principles come from and how do they differ from Western business practices? In this blog post, we’ll explore the main body of Islamic Law, called Sharia, and its heavy influence on Muslim religion and philosophy. The normative sources for the lawmaking process can be found in the Quran, as well as in other religious texts like the Sunna (sayings and deeds of the prophet Muhammad) and the Ijmaa (consensus).

One of the most significant differences between Islamic Business Law and its Western counterpart is how loans are seen and handled. While the Christian Church banned interest rates during the Middle Ages due to religious beliefs, the Jewish community started giving out loans with interest rates. Later on, the Christian Church changed their opinion, believing that banning interest rates is “pointless” in a modern world.

However, the Quran mentions Riba, meaning unequal exchanges and fees for borrowing. According to the Quran, trade is permitted, but usury is not. Riba would cause a person negative effects of varying severity in their life as well as in the afterlife(Quran, Surah Al-Baqarah, verse 275; Surah an-Nisa’, verse 161; Surah Ale ‘Imran, verses 130). The prohibition of Riba from the Quran is based on “helping the poor and needy,” instead of putting unreasonably high interest rates on loans to enrich themselves.

Over the centuries, several economic concepts and banking techniques evolved, including early forms of partnerships (Musharaka), limited partnerships (Mudaraba), and capital (al-mal). In the 18th century, Western influence arrived in the banking sector, with the opening of the first Western bank in Cairo. Muslim scholars agreed that interest, which was the basis of the bank’s dealings, is seen as Riba and therefore forbidden according to Sharia Law.

To address this, a different system had to be introduced – a system of loss and profit sharing (Mudaraba), in agreement with the Quran. To this day, Islamic Banking is based on Mudaraba, a system that differs widely from the Western Banking system, which is largely interest-based. Despite being prohibited during the early medieval ages, interest-based banking was finally widely adopted due to the opinion that there is no way around it in a modern world.

But because Sharia, the basis of Islamic Law, is heavily influenced by the ethics brought upon in the Quran, Islamic Banking had to find another basis for a functioning system. Nowadays, it is based on a system of common loss and profit sharing, which ensures that, unlike in the Western hemisphere, banks have an interest in the investment succeeding. This is an excellent example of a banking system that works in a modern world without usury and helps the people who need the support, based on ethics that originated in religion.


Quran, Al-Baqarah, Verse 275; Surah an-Nisa’, verse 161; Surah Ale ‘Imran, verses 130.

Presentation Slides Islamic Business Law

Exploring the ethical aspects of Islamic banking, Hasan Gilani

Implications for Islamic Finance Development in Finland: How Do Finnish Muslims Perceive Riba and Islamic Banking?

By Sanaa Kadi


Islamic banking and finance (IBF) has gained significant attention in recent years, including in Finland where a growing Muslim community has created a demand for Islamic financial products. This research aims to explore the perceptions of Muslims in Finland towards riba and IBF and the implications for the development of IBF in Finland. The study employs survey research utilizing a questionnaire for a sample of Muslims living in Finland about the reasons for not taking usurious loans and their reluctance to pay interest, which affects significantly the Muslim community and leads to their financial exclusion, such as preventing them from owning a dwelling in Finland or investing their money in projects that follow their belief.
The results were exclusive and reflect the reality experienced by
the Muslim minority in Finland. The findings reveal that while Muslims in Finland are generally aware of the concept of riba and the importance of avoiding interest-based transactions, there is a lack of understanding of the broader principles of IBF. In addition to the interesting results observed, the non-existence of Islamic banking institutions in Finland makes this research unique because it highlights the challenges facing the development of IBF in Finland, including the lack of awareness and education about IBF, the lack of access to Islamic financial products, and regulatory and legal barriers.
The study concludes that there is a need for increased awareness and education about Islamic finance in Finland, as well as greater efforts to promote the development of a regulatory framework that is favorable to the growth of IBF, this study provides valuable insights into the perceptions of Muslims in Finland towards riba and IBF and the implications for the development of IBF in Finland.
The article is available here:
European Journal of Islamic Finance -ISSN:2421-2172
How to cite:
Kadi, S. (2023). Islamic Finance in Finland: Perceptions of the Muslim Minority about Riba and Islamic Banking. European Journal of Islamic Finance10(1), 44-60.

Gharar in a Nutshell

By Guanyi Lyu

Edited by Sanaa Kadi

What is gharar? 

Although the Prophet Muhammad (pbuh) prohibits the sale of fish in the water and birds in the sky, defining gharar in a legal context remains controversial. There are mainly two opinions. The primary view links gharar to risk or uncertainty. This suggests that minor gharar must be allowed, as Islam accepts genuine risks in business. The maxim “gain comes with risk-taking” supports this perspective.[1] On this point, Murat Çizakça argues that not only excessive risks render a commercial transaction illegal, but also the fact that risks are not fairly shared between the parties.[2]

Scholars like Nehad A and A Khanfar, however, believe that gharar must not be confined to the concept of uncertainty but instead stands for misrepresentation, deceit, or delusion. Unlike common law, which distinguishes between innocent, negligent, and fraudulent misrepresentation, Islam considers all misrepresentation as “serious moral wrong.” Therefore, interpreting gharar as misrepresentation implies that all gharar is haram (prohibited).[3]

How does gharar work?

Assuming the most commonly believed definition of excessive uncertainty, gharar is typically categorised into gharar yasir (minor) and gharar fahish (excessive). Various parameters have been proposed for the categorising practice.

Avoidance ability – If the gharar element is hardly avoidable, it is considered gharar yasir. For example, when purchasing a conceiving animal, uncertainty exists regarding the number and health of the babies to be delivered in the future. However, it is permissible because obtaining information to clarify the uncertainty requires the parties to undergo hardship.[4]

Abundance – If the amount of gharar is small, it is considered gharar yasir. For instance, using a public washroom for payment creates uncertainty regarding the amount of water and paper left for use by each user. Still, it is permissible because the gharar element is minor.[5]

What is gharar to the conventional concept of “uncertainty”, then?

One must bear in mind that all jurisdictions, more or less, prohibit certain uncertainty in transactions; added together, they constitute a spectrum called “the law of uncertainty”. It thus begs to ask: Is gharar just one of the more-prohibited uncertainty, located on the less-risks-allowed end of the spectrum? Or, does it form a distinct genre of law, not located on this spectrum at all but reveals something fundamentally unique?

Team “They are the same thing” – Islamic acknowledgement of certain uncertainty being inevitable in commercial transactions is precisely the reason why certain gharar is permissible. In this sense, both gharar and the conventional “uncertainty” are a matter of extent.

Team “They are distinct concepts” – The permissibility of the permissible gharar is based upon “let’s share the risk”, instead of “alright, these risks we can handle”. In other words, it is not the level of risks that matters, i.e., it is not a matter of extent, but the fairness of the transaction. Moreover, a breach of conventional uncertainty mostly constitutes a breach of contract or legal requirements, whereas the breach of gharar is a breach of Sharia, parallel to being unconstitutional.



[1] Atikullah Abdullah, ‘Islamic Law on Gambling and Some Modern Business Practices’ (2017) 7 International Journal of Academic Research in Business and Social Sciences 738, 742.

[2] Murat Çizakça, ‘Risk Sharing and Risk Shifting: An Historical Perspective’ (2014) 14 Borsa Istanbul Review 191, 193.

[3] Nehad A and A Khanfar, ‘A Critical Analysis of the Concept of Gharar in Islamic Financial Contracts: Different Perspective’ (2016) 37(1) Journal of Economic Cooperation and Development 1, 2.

[4] Nadhirah Nordin and others, ‘Contracting with Gharar (Uncertainty) in Forward Contract: What Does Islam Says?’ (2014) 10 Asian Social Science 37, 41.

[5] Ibid 42.


By Salma Bouzoubaa, 

Edited by Sanaa Kadi

The concept of Murabaha originates from the Islamic legal principle of “Bay’ al-Murabaha”, which is a type of sales contract allowed in Islamic law. This concept is rooted in the Quran and the Hadith (sayings and actions of Prophet Muhammad). In Islamic finance, Murabaha has been adapted as a financing tool to meet the needs of customers who require credit to purchase goods and assets (Muhammad Yusuf Saleem 2012). The use of Murabaha in Islamic finance is also in line with the principles of Shariah law, which prohibits the charging of interest (Riba) on loans. Instead of charging interest, the bank earns a profit by purchasing the asset on behalf of the customer and then selling it at a marked-up price (Usmani 2002). This allows the bank to earn a profit while also providing a useful service to customers who require financing for their purchases.

Figure: Murabaha transaction

Source: Sanaa Kadi

Murabaha is widely used in Islamic banking as a means of providing financing for the purchase of goods and assets. According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), “Murabaha is a contract in which a bank or a financial institution buys a commodity from a supplier and sells it to the client at an agreed-upon price, which includes the cost of the commodity plus a profit margin.” The customer pays the bank for the commodity in installments, usually over a period of months or years. The marked-up price is the profit that the bank earns on the transaction, which is agreed upon at the time of the sale. Indeed, regardless of the circumstances, the price that was set before the sale can no longer be changed.

The Islamic finance concept of Murabaha is based on the principles of profit and risk sharing. The bank assumes the risk of the transaction, and the customer pays for the commodity over time, with the profit earned by the bank being shared between the bank and the customer. Murabaha is a widely accepted form of Islamic finance and is used in a variety of industries, including:

  • Real Estate: The bank purchases a property on behalf of the customer and then sells it to the customer at a markup. The customer then pays the bank back over a period of time. (The same system is used in all the other categories)
  • Automotive
  • Consumer Finance
  • Trade Finance

With Murabaha, customers can make purchases over time while providing a profit for the bank and sharing risk between the parties involved.

However, there may be differences between the theory and the real application of the principle of Murabaha. Here are some examples:

  • Transparency: In theory, Murabaha transactions should be transparent, and the bank should disclose the actual cost of the commodity and the profit margin to the customer. However, in practice, some banks may not fully disclose this information, leading to confusion or misunderstandings about the transaction. This lack of transparency can lead to trust issues between the bank and the customer.
  • Risk: In theory, Murabaha transactions involve the sharing of risk between the bank and the customer. However, in practice, the bank may place most or all of the risk on the customer. For example, if the customer is unable to make the payments on time, the bank may charge additional fees or penalties, which may make it difficult for the customer to repay the debt.
  • Purpose: In theory, Murabaha should be used for financing the purchase of goods and assets. However, in practice, some banks may use Murabaha for other purposes, such as refinancing or working capital. This can lead to confusion about the purpose of the transaction and whether it is compliant with Shariah law.
  • Commodity: In theory, Murabaha should involve the purchase of a physical commodity, such as gold or grain, that is owned by the bank. However, in practice, some banks may use virtual commodities or financial instruments, which may not be compliant with Shariah law.

Moreover, from the Sharia perspective, the bank is required to acquire ownership of the asset and the risks attached to ownership in transit. But as we said earlier, in Islamic finance practice, the risks attached to ownership in transit of the bank are minimal if existent at all. First, the contracts normally provide for an allocation of risk that is like the one under a conventional loan agreement. And second, instead of acquiring a specific asset, the bank often sells certain commodities to the customer, who immediately turns them into cash on the commodities exchange.

This structure—called Tawarruq—provides the customer with liquid funds and is thus even closer to a conventional loan structure. Permissibility of these structures from a Sharia perspective is not uncontroversial, to say the least—with the effect that there is always a chance that a fatwa will be issued according to which the transaction is not permissible.

The chance that an Islamic financing transaction is challenged on grounds that it does not comply with Islamic law is called “Sharia risk.” Since the emergence of the first Islamic finance cases, the issue has attracted a lot of attention. Sharia risk illustrates the changed role of Islamic law in Islamic finance. In the world of finance, law (and lawyers) normally serve to make the transaction enforceable in court. Law provides transaction security. In Islamic finance, in contrast, the role of the Sharia is reversed. Sharia is a risk, which allows the transaction to be attacked on the basis that it did not conform to Islamic legal principles (Kilian Bälz 2008).

This phenomenon shows us that even though the Murabaha contract should be a contract that avoids risks, in fact, the very use of Sharia can cause problems leading to the cancellation of the contract.

However, to mitigate Sharia risk, Islamic financing transactions normally contain a so-called “waiver of Sharia defense” clause. In this clause, although worded slightly differently from one transaction to the other, the borrower normally waives the right to bring any defense based on the non-compliance of the transaction with Sharia principles (Kilian Bälz, 2008). In addition, the clause may also provide for an explicit statement on Sharia compliance, pursuant to which the parties agree to follow the interpretation of the bank’s own Sharia board as far as the transaction is concerned.

To conclude, while the principle of Murabaha in Islamic finance is based on clear principles, its application in practice can be more complex and may vary between institutions. It is important for banks to ensure that their Murabaha transactions are transparent, fair, and compliant with Shariah law, and for customers to be aware of their rights and obligations in these transactions. For this reason, the AAOIFI provides guidance on the proper use of Murabaha in Islamic finance, including the need for transparency and fair pricing.


  • Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Shariah Standards for Islamic Financial Institutions. 2018.
  • Kilian Bälz; Sharia Risk? How Islamic Finance Has Transformed Islamic Contract Law; (Occasional Publications 9 September 2008)


The Concept of Riba in Islamic Banking and Finance

By Aishat Adegboyeva,

Edited by Sanaa Kadi


Rules and injunctions abound under Islamic Law that guides the Islamic way of life. As rightly believed by most Muslims, Shari’ah – especially the Quran and the Sunnah was revealed to guide the path of morality and conscientiousness, with matters such as ribā being seen as contrary to the injunctions of the Quran. Against this backdrop, more research is being conducted on these injunctions, especially regarding ribā, to determine how it juxtaposes modern conventional banking.

This blog post would address the concept of ribā, modern conventional principles, and whether ribā interoperates with current conventional banking or Islamic banking principles.

Understanding Ribā

Ribā is an Arabic word meaning “to increase” or ‘to exceed’, which is often used in reference to unequal exchanges or charges and fees for borrowing.[1] Matters on ribā still cause a major stir amongst scholars and Muslim jurists, especially as there exist different Islamic schools of law. Generally, ribā is considered haram (sinful) and impermissible with a strong consensus on ribā being forbidden under Sharia law.

Conventional Banking Principles – Trade or Ribā?

Ribā is synonymous with usury, which is the lending of money with an unreasonably high-interest rate.[2] Even though Islam does not prohibit banking, trading, and/or investment,[3] in Islamic banking and finance, investment, or commercial activities that return interest are considered haram (sinful) and therefore not allowed.[4] With the advent of the 20th century ushering in the practice of Islamic banking, there began the proponent of converting conventional interest-based banking and loans with the replacement of profit and loss-sharing investments.[5] The position of States choosing to set their own respective usury laws rather than prohibit them in their entirety is evidence of the prominence usury is having in modern conventional banking. The way Islamic banking has navigated this aspect especially is to provide financial transactions without charging interest rates, and in cases of advancing loans, enter a contract based on either partnership (e.g., Musharakah and Mudaraba) or sale base modes (e.g., Murabaha).[6]

Interest and loans appear to be widely accepted in conventional banking both in theory and practice,[7] which is in contrast with Islamic injunctions according to Muslim scholars.


[1] M.H. Khatkhatay and Shariq Nisar, ‘Sharī’ah Compliant Equity Investments: An Assessment of Current Screening Norms’ (2007) 15 Islamic Economic Studies 1.

[2] John Munro, ‘Usury, Calvinism, and Credit in Protestant England: From the Sixteenth Century to the Industrial Revolution’ (2011) <> accessed 26 February 2023.

[3] Choudhury Masudul Adam, Rahman Asmak and Hasan Abul, ‘Trade Versus Riba in the Qur’an with a Critique of the Role of Bank Saving’ (2018) 60 International Journal of Law and Management 701.

[4] Khatkhatay and Nisar (n1).

[5] Muhammad Zahid Siddique, ‘Modern Money and Islamic Banking in the Light of Islamic Law of Riba’ (2022) 27 International Journal of Finance and Economics 993.

[6] 6 Ibid.

[7] Ismail Abdul Ghafar, Possumah Bayu Taufiq and Ali Mohd Akil Muhamed, ‘What You Sell Is What You Lend? Revealing Complexity of Riba in Loan Contract’ (2018) 45 European Journal of Law and Economics 591


Currency Exchange in Islamic Law

By Emilie Marjatta Earl,

Today’s blog post is focused on al-sarf or currency exchange in Islamic law. The first section will explain why currency exchange could be considered as going against Islamic law. After this, the text will focus on historical developments and in the end explain how currency exchange can be conducted.

To begin the word Sharia is an Arabic term that has been translated into Islamic Law in English, while its actual meaning is “the way”. The Sharia provides Muslims with guidelines on how to live their lives in accordance with God’s Will. Within Sharia, there is a prohibition of Riba. Riba is the Arabic term for Usury. Sharia prohibits unjust enrichment through interest payment. Riba is in most cases referred to when discussing loans, as banks tend to apply an extra fee (interest) on loans, which grows while the person pays back the loan. Islamic banks do not, therefore, use interest in their loans, as they cannot make an unjust profit according to Sharia. However, this same train of thought is applied to al-sarf (currency exchange) as well, which I will explain below.

Historically people did not always have money to acquire the things they wanted, instead, they used trading methods, for example, gold. In Islamic states, they used gold and silver before money, and they held a certain value that was widely accepted in the community.[1] This meant that they could use silver and gold in exchange for something else, but they could not exchange gold for more gold, or then they would have made an unjust profit and that would have made the gold into a commodity and therefore caused Riba.[2]

When money emerged in the Islamic states, the same principles for gold and silver were applied to it. This means that money should only be used as a means of exchange, and this was also apparent from the early economic thought of Al-Ghazali who believed that a currency functions “as a basis of value, medium of exchange and value for savings”.[3]

Now you may be thinking how it is then possible to exchange money without Riba, as different currencies hold different values. In order to make it possible Islamic Scholars have within Sharia provided a Bai’ al-sarf (sale contract for currency exchange). This provides that different currencies can be exchanged if the following rules are applied: the exchange will be done then and there in full, and the exchange will be done with the existing rate or with another rate if it is mutually greedy and it needs to be done physically (cash) or by constructive possession (from the bank account directly).[4]

In conclusion, even though al-sarf (currency exchange) can cause Riba (usury), as long as the Bai’ al-sarf (sale contract for currency exchange) is followed, al-sarf (currency exchange) is accepted under Sharia according to most Islamic scholars.


[1] Saleem, Muhammad Y. Islamic Commercial Law. John Wiley & Sons Singapore, 2013, chapter 3,

[2] Ibid.

[3] Samsuddin, Nur, et al. “Islamic Economic Thoughts of Prominent Muslim Scholars in the Abbasid Era.” International Journal of Academic Research in Business and Social Sciences. P.31

[4] Bai` al-Sarf (Currency Exchange) What is Bai’ al-sarf? Illustration of Bai’ al-sarf application Component Bai’ al-sarf, Accessed 23 February 2023.

“Exploring Islamic Finance in a Masterpiece: The student Blog Presentations Held in the Iconic University of Helsinki Main Building”

By Sanaa Kadi,

The Islamic business law course offered by the Faculty of Law at the University of Helsinki from 6.2-3.3. 2023 was held in the university’s main building, which is a true masterpiece of architecture in Helsinki. 

The main building is not only a stunning work of art, but it also offers a rich academic environment, providing a conducive atmosphere for learning and discovery. The building is equipped with modern facilities, including lecture halls, seminar rooms, and study areas, which offer a comfortable and convenient learning environment for students.

The Islamic business law course, held in this historic and iconic building, was a unique opportunity for students to not only learn about Islamic finance and its principles but also to experience the academic and cultural richness of Helsinki’s university buildings.

To further enhance their learning, the law students were asked at the end of the course to present a blog post about one of the topics of Islamic business law. These blog posts are progressively published in this blog, Islamic Business and Financial Law. A law student said:

“I initially had knowledge of how business law operated from the purview of conventional commercial banking, but learnt more of that from the Islamic law perspective as well.”

Overall, the Islamic business law course held in the University of Helsinki’s main building was a unique and enriching experience for law students, providing them with an opportunity to learn in a beautiful and inspiring environment, while also expanding their knowledge and understanding of Islamic finance and its principles.