Islamic Finance: Core Principles & Strategies

Dr. Dalal Aassouli 8 September 2025 Hamad Bin Khalifa University
Member of Qatar Foundation

Presentation of key statistics highlighting the magnitude of the Great Recession.
Unemployment rates peaked over 9% in 2010.
Significant flow of $144.5 billion from money markets to treasury bonds.
Housing market decline: 31.8% decrease in housing prices.
Federal guarantees included:
- $30 billion for the Bear Stearns and JP Morgan Chase deal.
- $182 billion federal bailout for AIG, which resulted in a profit of $22.7 billion from the shares sold by the U.S. Treasury.
Fannie Mae and Freddie Mac's roles in guaranteeing 90% of all mortgages.
Total expenditure by the Treasury Department: $439.6 billion in bank and automobile stock purchases.
By 2010, banks paid back $442.6 billion.

Noteworthy comment from the Vatican:
- Islamic finance principles may restore banks' connections with clients and exemplify the ethical spirit intended in financial services (Source: Osservatore Romano).

Discussion on why there is a renewed interest in Islamic finance as a potential remedy for crises in conventional banking.

Clear demarcation between:
- Ibadah (devotional acts)
- Mu’amalat (commercial matters)

Free from:
- Riba' (Interest/Usury)
- Gharar (Excessive ambiguities)
- Maysir (Gambling)
- Transactions involving prohibited assets/commodities.
Profit and Loss Sharing (PLS) as a foundational aspect.
Financial transactions must be asset-backed in connection with the real economy, emphasizing that making money out of money is unacceptable.
Focus on social justice and general interest in transactions.
Legal permissibility of commercial contracts: all contracts are lawful unless they contravene Shari’ah principles.

Definition by OIC:
- “an Islamic bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principle of Shariah and to the banning of the receipt and payment of interest on any of its operation…”
Malaysian Islamic Banking Act 1983:
- “a company which carries on Islamic business. Islamic business means banking business whose aims and operations do not involve any element which is not approved by the religion of Islam…”
Conclusion: Islamic banking aligns with Shari’ah or Islamic law.

Criteria	Islamic Banking	Conventional Banking
Scope of Business	Activities approved by Shari’ah	Operates on secular principles
Activity Restrictions	Free from riba; speculative activities prohibited	No restrictions on speculation
Shari’ah Compliance	Must adhere to Shari’ah principles	No religious compliance
Bank-Customer Relationship	Depends on Shari’ah contract	Creditor-debtor relationship
Function of the Bank	Fund generator, entrepreneur, financier	Lender

Contract between two parties:
- Rabbul Mal: Investor providing capital.
- Mudharib: Entrepreneur managing the project.
Profit distributed based on a pre-agreed ratio, while losses are borne solely by the capital provider unless caused by negligence of the Mudharib.

Partnership where parties contribute capital in cash or in-kind for business ventures.
Profit and loss are shared as per capital participation ratios.
Requires joint management of the business or consented management by one party.

Contract that involves the seller disclosing the cost of a product and the profit margin to the buyer.
Distinction from regular sales comes from transparency regarding costs.
The bank buys an asset from a supplier and sells it at a marked-up price to the customer.

Lease contract where the lessor (owner) leases an asset to a client for agreed fees/period, retaining ownership.
Types include:
- Finance lease (Ijarah Muntahiyah bittamlik) ends with ownership transfer.
- Operating lease (normal Ijarah) that requires the asset to exist upon agreement.

Contract to manufacture or construct specified goods.
Involves obligations from the manufacturer to deliver agreed items to the buyer.
Includes instances of progress payments as construction progresses.

Agency agreement where an individual hires another to act on their behalf, receiving a fee for the task.
Applicable in financial services where banks charge fees for managing investments, transferring profits back to the client after expenses.

Islamic finance offers structured ethical principles that may provide greater trust and reassurance in banking practices, as highlighted by various stakeholders.