The rules governing Islamic Finance are derived from the Shariah. The Shariah provides the framework for a set of rules and laws, governing economic, social, political, and cultural aspects of Islamic societies.

The Shariah is a framework of Islamic Jurisprudence derived from the primary Sources of the Muslim Holy Scripture called The Quran and the Prophetic traditions and teachings of the Holy Prophet Mohammad (Peace and Blessings of God be Upon Him) known as the Sunnah. In addition to which there is a dynamic secondary source of Common Law Rulings and scholarly interpretations referred to as Fatwa's.

The philosophical foundation of an Islamic financial system goes beyond the interaction of factors of production and economic behavior. Whereas the conventional financial system focuses primarily on the economic and financial aspects of transactions, the Islamic system places equal emphasis on the ethical, moral, social, and religious dimensions, to enhance equality and fairness for the good of society as a whole. The system can be fully appreciated only in the context of Islam's teachings on the work ethic, wealth distribution, social and economic justice, and the role of the state.

The rules of Islamic Finance centre on the following broad principles of avoiding Maysir & Qimar which are gambling and speculation along with Gharar which is uncertainty coupled with exploitation and unfairness. This closes the door to the concept of interest and precludes the use of debt-based instruments. The system encourages risk-sharing, promotes entrepreneurship, discourages speculative behavior, and emphasises the sanctity of contracts.

At the core of the rules governing Islamic finance is the avoidance of Riba a term literally meaning "an excess" and interpreted as "any unjustifiable increase of capital whether in loans or sales" is the central tenet of the system. More precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of principal (i.e., guaranteed regardless of the performance of the investment) is considered riba and is prohibited.

This prohibition is based on arguments of social justice, equality, and property rights. Islam encourages the earning of profits but forbids the charging of interest because profits, determined after the event, symbolize successful entrepreneurship and creation of additional wealth whereas interest, determined before the event, is a cost that is accrued irrespective of the outcome of business operations and may not create wealth if there are business losses. Social justice demands that borrowers and lenders share rewards as well as losses in an equitable fashion and that the process of wealth accumulation and distribution in the economy be fair and representative of true productivity.

The general consensus among Islamic scholars is that riba covers not only usury but also the charging of "interest" as widely practiced. It is for that reason that conventional mortgages are not acceptable to many Muslims as the payment of interest conflicts with their ethical and religious principles. Islamic Finance has therefore provided a means for many people to purchase their own home in accordance with their beliefs, which was previously not available to them.

Islamic Finance offers different instruments to satisfy providers and users of funds in a variety of ways. Basic instruments include cost-plus financing (murabaha), profit-sharing (mudaraba), leasing (ijara), partnership (musharaka), and forward sale (bay' salam). These instruments serve as the basic building blocks for developing a wide array of more complex financial instruments, suggesting that there is great potential for financial innovation and expansion in Islamic financial markets

How does it work?

The main principle of Islamic Finance is that in return for providing the finance, the Bank purchases the major interest in the property and becomes the registered proprietor. The Bank then grants a Lease to the customer.

The customer makes monthly repayments to the Bank which comprises of part capital and part rent as stipulated by the Lease. Therefore the customer does not pay interest on the finance, but instead pays the Bank a rent for living in a property owned by them, until he has paid back the entire capital amount borrowed.

There are two main types of Shariah compliant finance products in use today in the UK residential market:

• Ijara - the Bank purchases the property and grants a lease to the customer for a term of seven years (Manzil). However, the term of the finance can be much longer.
• Diminishing Musharaka - the same as Ijara but the Lease is for the same time as the length of the finance (typically 25 years). There is also the added protection of a Trust. Each month when a payment is made the proportions in which the property is held alters accordingly. (Amanah, Alburaq and Home Purchase Plan)

What products are available?

There are currently four main products available in the residential property market:

• HSBC Amanah Home Finance - provided by HSBC Bank Plc
• Alburaq - provided by Bank of Ireland in partnership with Arab Banking Corporation (ABC)
• Manzil - provided by Ahli United Bank
• Home Purchase Plan - provided by Islamic Bank of Britain

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