By Dr. Ghada Gomaa A. Mohamed

We basically use the term "Islamic Finance" metaphorically to refer to the Islamic ethical regulations of the financial transactions.

Institutions and countries that utilize those types of regulations call them Sharia compliant regulations. Actually the term Sharia compliant regulations should be changed because of the complexity of the term `"Sharia" itself and its intertwined skepticism with the term "Islamism". In simple words, Islamic Finance is all about the application of the ethical values of Islam on financial transactions. The main sources of those regulations are the Quraàn (Muslims' holy book), Sunnah; the prophet of Islam's legacy, and Ejtihad (the Islamic scholars' intellectual diligence).

As a matter of fact, many Islamic financial regulations are congruent with the Jewish financial regulations because they are all related to the Abrahamic ethical legacy.

In a very simple exposition, we can bound financial transactions within two deterministic bands; halal (permissible) and haram (impermissible) according to Islam as a religion. Between those two bands many transactions fall without obvious categories and they are considered ambiguous transactions in terms of their permissibility according to Islam. Conferences on Islamic finance are being held regularly by scholars to give an input regarding those types of ambiguous financial transactions.

In other simple words; any financial transaction is considered "halal" (permissible) if it satisfies the following Islamic ethical regulations:

1. The transaction must be transparent and cannot include any type of inequity.

2. The transaction must be applied only on permissible goods and services considered halal in Islam.

3. The transaction must be done according to the spot financial market but if it's related to forward markets, the contract must be written and signed by both parties, and hedged and secured against exposure to financial risk and all types of fluctuations to avoid potential damage of interests.

4. The transactions must be applied on existing goods and services and not as a reservation for potential processing.

5. The transactions must not be with an intention of monopolizing goods and services.

6. The transaction must be done by a neutral medium of exchange; i.e., money.

7. The price must be fair – “the fair price is the price that reflects at its maximum the real value of the good or the service.”

Otherwise; the transaction cannot be considered fully halal to Muslims.

On the other hand, there are ethical regulations in Islam regarding financial investments. Hence, the financial investment is considered halal in Islam if it satisfies the following Islamic ethical regulations:

1. The permissible investment could not generate interest but it can generate profits.

2. The permissible investment cannot be related to haram goods and haram services and activities according to Islam.

3. All parties related to the permissible investment must share the profits and the losses according to the percentage of shares unless the investment is secured against the loss by the financial intermediary or by the state.

Otherwise, the investment cannot be considered fully halal to Muslims.

The most important Islamic financial instruments are the Islamic bonds (Sukuk). The main criterion that differentiates the Islamic bonds from the conventional bonds is that the Islamic bonds are mainly asset-based investment not just asset-backed investment. In other words, they are not just about debt and loans secured by collateral but they are types of shares in the financed asset that guarantees justice and censorship in financial transactions. However; the Islamic bonds hold political risk if it's expanded to international transactions. (Ghada Mohamed, Islam, Islamism & Islamic Finance: Decoding the Dilemma (Forthcoming.)

Nowadays almost all Western countries trade in Islamic bonds and trillions of dollars are circulated in all international financial markets out of those sukuk.

It is also worth mentioning that in 2009, the S&P/TSX 60 Sharia Index was launched.

On the other hand, almost all giant important international industries deal with such type of Islamic financial instruments.

While it sounds that the Islamic financial regulations are already well established worldwide, many people are still skeptical regarding its link to international terrorism.  This is a problematic issue. Many people cannot believe the good intentions behind such international transactions involving tons of Islamic money. Actually, skepticism based on the rigorous premise that prominent Islamists own Islamic shares in some of those international businesses and their names are truly related to international terrorism according to the announced intelligence data in many countries that fight terrorism . Yet, free international financial markets are fertile environments for all types of money laundering and financial crimes.

To me, the problem is not with the Islamic financial regulations, because as stated above, they are all about ethical financial regulations.  However, the problem is with the loosely international financial system that enables all types of financial crimes to happen without a hermetic financial control to be seriously adopted by all countries collectively.

The question still left is should we consider substituting the conventional financial system with a pure Islamic financial system? The answer to this question is very simple because it is not about a system, it's all about ethical financial regulations according to Islam as a religion.  It can therefore be applied within the existing conventional financial system. The Islamic bonds and all Islamic financial products can be just provided as alternative instruments even in conventional banks, as it already happens in many Western banks that deal with all types of Islamic financial transactions. It is all about demand and supply. If there is a demand for such type of financial instruments, the bank provides them to the demanders if the transaction is profitable to the bank. We also need to not forget that the conventional financial system considers all standards of business and financial ethics.  If there are mistakes, they can be related to bad applications, not to the system itself. Islamic financial products are very flexible to be traded within any type of conventional financial system because they are well wrapped for distinction and they can be picked up from any financial vendor.