Islamic Finance - Shari'ah compliance and the equities market
In contrast to the equity market, the difference between Islamic finance and conventional finance is more pronounced in banking and insurance products as well as in fixed income instruments. While traditional insurance contracts are predicated on the selling of an indemnity for a premium that carries a significant amount of uncertainty, traditional banking and fixed income instruments are fundamentally based on interest. However, it is more difficult to distinguish between the Islamic and Western equities markets because the banned features are found in transaction-based activities rather than in the design of the relevant contracts. Since the equities market investment contract is fundamentally founded on the profit and loss sharing principle, there is no Shari'ah difficulty with it. In other words, purchasing shares on any stock exchange is acceptable since it represents a Musharakah agreement between the shareholders. The contract itself complies. Shari'ah objections, however, mostly relate to the operations of the businesses that receive funds through the purchase of shares. The sale or purchase of goods and services that are prohibited by Shari'ah rules, such as the sale or purchase of non-Halal food and beverages, may be one of these activities. Non-approved activities can include those that affect the company's balance sheet, such as borrowing money or raising more funds through interest-based transactions like overdrafts and traditional bonds. Islamic commercial law is also pertinent to the transactional actions of the companies in the area of investment, where money must be put into actual economic activities. This demonstrates how Islamic financing differs from traditional finance in that compliance is crucial at both the contractual and transactional levels.
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