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Islamic finance refers to the means by which corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible under this form of law.

A unique form of socially responsible investment, Islam makes no division between the spiritual and the secular, hence its reach into the domain of financial matters. Because this sub-branch of finance is a burgeoning field, in this article we will offer an overview to serve as the basis of knowledge or for further study.

Although they have been mandated since the beginning of Islam in the seventh century, Islamic banking and finance have been formalized gradually since the late 1960s, coincident with and in response to tremendous oil wealth that fueled renewed interest in and demand for Sharia-compliant products and practice.

Central to Islamic banking and finance is an understanding of the importance of risk sharing as part of raising capital and the avoidance of “Riba” (usury) and “Gharar” (risk or uncertainty).

Islamic law views lending with interest payments as a relationship that favors the lender, who charges interest at the expense of the borrower. Because Islamic law views money as a measuring tool for value and not an asset in itself, it requires that one should not be able to receive income from money (for example, interest or anything that has the genus of money) alone. Deemed “Riba”, such practice is proscribed under Islamic law (haram, which means prohibited) as it is considered usurious and exploitative. By contrast, Islamic banking exists to further the socio-economic goals of Islam.

Accordingly, Sharia-compliant finance (halal, which means permitted) consists of profit banking in which the financial institution shares in the profit and loss of the enterprise it underwrites. Of equal importance is the concept of “Gharar”. Defined as risk or uncertainty, in a financial context it refers to the sale of items whose existence is not certain. Examples of “Gharar” would be forms of insurance, such as the purchase of premiums to insure against something that may or may not occur or derivatives used to hedge against possible outcomes.

The equity financing of companies is permissible, as long as those companies are not engaged in restricted types of business, such as the production of alcohol, pornography or weaponry, and only certain financial ratios meet specified guidelines.

While Islamic finance has roots in the past but there is resurgence in past 30 years. Though Islamic finance is different from the conventional finance but it has same objective of providing economic benefits to the society.

Islamic Finance Banking or Sharia Complaint finance is banking or financing activity that complies with Sharia (Islamic law) and its practical application through the development of Islamic economies.

Since under Islamic finance money is considered as only a mean of carrying out transactions any earning on the same in form of interest (“Riba”) is strictly prohibited.