Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 1The Islamic Finance Space

As a historical religion, Islam has been in existence for 1,400 years. The word religion comes from the Latin word religio, which means to bind oneself.¹ Religious principles bind mankind to a way of life that is meant to be pleasing to God. Human history provides enough evidence that mankind has not always followed religious principles in their true spirit and has had to pay the consequences from time to time.

Finance has been around as long as man has inhabited this earth. The most basic form of finance in prehistory was money lending and remains so today. All the Semitic religions of Christianity, Judaism, and Islam warn mankind against the practice of usury, which allows interest to be the reward for money lent. Islam is not the only religion to forbid the taking of interest. The word used in the Quran is riba,²

Finance was also an integral part of the Muslim empires of the Ummayads, the Abbasids, the Fatimids, the Mamlukes, the Seljuks, and also of the Ottomans. Islam dawned on Arab traders (most previous Prophets were either craftsmen or farmers). The Prophet ([saw] peace be upon him) himself was a trader. Trade has such an importance on the fabric of Islam that the Quran itself endorses trade or bai.³

What kind of trade did Islam permit? Certainly Islam permitted certain trade practices and forbade others, like hoarding of goods,⁴ inflating prices by meeting merchants outside city walls and buying their goods before they come to market, ...