Islamic Finance is an alternative means of financial intermediation to comply with the principles and laws of Islam relating to commercial transactions, sourced from the Islamic holy book: the Qur’an, the traditions of the Prophet Muhammad (peace be upon him) and the juristic analysis of Islamic scholars.

Summarily, Islam principally prohibits usury (riba), contractual ambiguity or ignorance (gharar and jahala) and unlawful activities (gambling, night clubs, intoxicants),while it encourages profit and loss sharing based on parties’ exposure to risk. Usury (riba) has a number of connotations including any increase on money lent (interest), increase on deferment, unequal trades of the same commodities and more broadly, inequitable enrichment.

The Islamic rules relating to transactions, when reviewed from a broader perspective, aims to achieve a commercial system that prevents exploitation of weaker parties, by ensuring equal bargaining power of parties to a transaction. It is for this reason Islamic Finance has sometimes been compared to ethical finance.

Islamic Financial Institutions are a contemporary phenomenon that has arisen as a result of the renewed interest of Muslims to comply with the tenets of their religion, most notably in relation to financial transactions which are often monopolized by Islamic prohibitions, particularly usury.