What is Islamic Finance?
Islamic finance is a financial system that operates in accordance with Sharia principles, prohibiting interest-based lending (riba), excessive uncertainty (gharar), and gambling (maysir), and structuring transactions around real asset-backed contracts such as murabaha, ijara, mudarabah, and musharakah.
How It Works
- Riba-free: profit replaces interest.
- Asset-backed: every transaction involves a real asset or service.
- Risk-sharing: profit and loss shared between financier and entrepreneur.
- Sharia governance: each Islamic financial institution has a Sharia supervisory board.
Saudi Context
Saudi Arabia is the world’s largest Islamic finance market by total assets, with Al Rajhi Bank as the largest Islamic bank globally. SAMA regulates Islamic banks and Islamic windows of conventional banks, while the CMA oversees sukuk and Sharia-compliant funds. The Saudi Companies Law and ZATCA frameworks accommodate Islamic finance structures without distorting their economic substance.
Example
A Saudi SME buys equipment for SAR 500,000 via a murabaha contract with an Islamic bank: the bank purchases the equipment for SAR 500,000 and resells it to the SME for SAR 550,000 payable over 24 months. The SAR 50,000 mark-up is the bank’s profit.