Major Prohibitions in Islamic Finance

Why are the Major Prohibitions Important?

The general Shariah principle used for transactions is that ‘everything is permitted unless specifically prohibited by Shariah’. This means that under Shariah guidelines, we can do anything, as long as it is not prohibited. Therefore, understanding the Major Prohibitions in Islamic Finance under Shariah for business transactions and contracts is very important. 

What are the Five Major Prohibitions?

Scholars have highlighted numerous Major Prohibitions in Islamic Finance over time. However, five major prohibitions are considered extremely important. These are (Usmain, 2010):

• Prohibition of Riba (which means interest or usury)
• Prohibition of Gharar (which means excessive uncertainty)
• Prohibition of Maysir and Qimar (which mean games of chances and gambling)
• Prohibition of Jahl (which means ignorance)
• Prohibition of Rishwah (which means corruption)

Details of these five major prohibitions are covered below. 

1. Prohibition of Riba

The first and arguably the most important prohibition is Riba, which can be translated to usury and interest. It should be noted that some scholars do not think that simple interest comes under the scope of Riba. They believe Riba only refers to usury.However, most scholars have a consensus that interest (whether simple or compound) comes under the scope of Riba and thus, is prohibited in the Islamic economy. The latter is the more popular opinion. The literal meaning of the word Riba is ‘growth, increase, height’, and technically, Riba is defined as any increase in the capital of a debt, against time, without any increase in the counter consideration (Mudhakkir, 2018). Scholars divide Riab into two main types: 

1. Riba-al-Jahalia (which is interest charged on loan); and
2. Riba-al-Fadl (which is interest in exchange contracts), as exchange contracts can also result in debt. 

Therefore, once the value of the debt has been established in a transaction, we cannot increase it further.An interesting point to note here is that it is not just interest that is charged on the capital of a loan. Financial institutions also charge penalties if the payments are not received per the payment schedule, for example, a fixed fee to be paid with the missed instalments.However, for Islamic financial institutions (IFIs), this also comes under the technical definition of Riba.This would imply that IFIs cannot impose prepayment penalties on foreign currency agreements. Instead, IFIs include a clause of charity in their agreements, where if the customer cannot meet the repayment terms, they will pay charity to registered charity institutions.IFIs do not record this charity as their income, as this is not paid to the IFIs. 

2. Prohibition of Gharar

Gharar means ‘excessive uncertainty’. Shariah does not prohibit uncertainty, as it would not be practically possible to eliminate all uncertainties around a transaction.For example, if someone owns a small business, he/she will be taking risks each day to generate profit; Shariah does not prohibit this risk or uncertainty. Any contract that contains an unacceptable level of uncertainty is invalid. This makes Gharar rather subjective.For example, how can we determine an acceptable degree of uncertainty, and when does this degree of uncertainty become unacceptable? Obviously, some degree of discretion is necessary.To answer such questions, we need to refer back to the aim of Shariah principles (i.e. Maqasid-al-Shariah), which in its simplest form is to remove zulm (injustice and depravity) from society. Accordingly, we must allow for any grey areas that might spark fights or other forms of blatant wickedness.

3. Prohibition of Maysir and Qimar

Maysir and Qimar are terms used for gambling and games of chances. In the opinion of many experts, speculating has no place in an Islamic economic system. Agreements and contracts are entered into with the express purpose of their being carried out, wherein the subject matter is traded for compensation.Therefore, net cash settlement is not something seen as permissible under the guidelines of Shariah by many scholars. 

4. Prohibition of Jahal

Jahal means ignorance. In simpler terms it means that all the parties to the contract should have the same level of insight and awareness. If one party knows something relevant to the contract, it should not withhold from the other party. In other words, these Major Prohibitions in Islamic Finance advocate a perfect market, where information is freely available and decisions taken by all parties are based on the same information. 

5. Prohibition of Rishwah

Rishwah is corruption. Contracts are useful for lawful purposes, and no one should be able to take advantage of their position of trust by mistreating their counterparts.

Other Prohibitions 

Scholars also identify taboos related to the use of force, the questionable legality of the subject matter, the nonexistence of the thing forbidden, etc. If you want to learn more about these rules, you should study up on them.