Funding agreements have to be backed by real assets in the form of property or profit flows. The esoteric financial instruments called “collateralised debt obligations” – the main cause of the 2008 global financial crisis – are not allowed in Islamic finance.

This is another important principle in Islamic finance: the avoidance of excessive risk. This puts many of the speculative techniques of modern conventional markets – derivatives and short-selling – in the “haram” (forbidden) category in Islamic finance.

The only part of Islamic finance that receives any media attention is that interest is forbidden in Islam. There are many other aspects such as partnerships, minimising risk, ban on speculation and tolerance shown to those who fall behind in instalments, that are not mentioned. This article discusses the fact that had principles of Islam been in operation the 2008 financial collapse would not have happened.

Original Source: The National