- Offering a fixed return on capital and charging interest is not allowed. 
- Wealth must be generated through legitimate trade only. 
- Risks and rewards must be shared.  

First, let’s look at the prohibition of interest payments. This dates back to the time of Prophet Muhammad when people made gains by lending money at extortionate rates (known as ‘Riba’) at the expense of others. Consequently,  the payment of interest was forbidden because it was deemed unjust.  

This lack of interest, however, does not mean you won’t receive returns on deposits or investments. Islamic products are structured so that the profit they make is through Shariah compliant transactions only.   

Second, wealth is expected to be generated purely through legitimate trade, and investment in assets. According to Shariah principles, this means that investment into companies linked with the alcohol, tobacco, pork products, gambling and pornography industries is prohibited. 

Third, risks and rewards must be shared. Any gains related to trading are shared between the person providing the capital and the person providing the expertise. Usually the division of profit is agreed at the outset.   

The above rules mean that many conventional forms of personal finance are restricted or prohibited in the Arab world. In recent years, however, changing demographics and rising incomes for Muslims have increased the need for savings accounts, loans, insurance, mortgages and investment vehicles. This has, in turn, led to a dramatic growth in Shariah-compliant financial products around the world.     

The main components of Islamic finance, which we shall put in context later, are: Ijara, Mudaraba, Musharaka and Murabaha. 

- Ijara is a leasing agreement whereby the bank buys an asset for a customer and leases it to them over a specific period, with the customer sometimes buying the asset outright at the end of the contract. Rentals paid during the period of the lease make up part of the purchase price and often, as a result, the final sale is just a token sum. 

- Mudaraba is an investment partnership where an investor provides the funds and an expert (Mudarib) provides the investment skill. Profits are shared between the investor and the mudarib, but investors risk losing their money if the investment is unsuccessful. The mudarib will not charge a handling fee unless a profit is made.   

- Musharaka is an investment partnership where all parties agree to jointly share risk and reward (losses and profits). Profit sharing terms are agreed in advance, and losses are always pegged to the amount invested by each individual and will never exceed this. For example, a bank manages the funds of depositors to generate profits that those depositors share.  

- Murabaha is a form of credit which allows customers to make a purchase without having to take out an interest bearing loan. The bank buys an item for the customer and sells it to them on a deferred basis (using installments), adding an agreed profit margin.