Materiality and Validity of Transaction

Islamic finance encourages business and trade activities that generate fair and legitimate profit in which the business transaction must be accompanied by an underlying genuine trade and business-related activity. This requires a close link between financial and productive flows which underpins Islamic finance. This is to ensure the funds are being channeled into real financial business activities and will thus entail the appropriate due diligence. This has the effect of insulting the Islamic financial system from risks associated with excessive financial leveraging and speculative activities.

The central feature of the Islamic financial system is the prohibition of the payment and receipt of riba (interest). Riba refers to an increase or excess which accrues to the owner in an exchange or sale of a commodity, or, by virtue of the other party. Money in Islam is not a commodity. The prohibition of interest arises from the fact that money is only perceived as a medium of exchange, storage value and unit of measurement.

The is also the essence of the principle of no profits sharing without risk sharing (al-ghinm bi-‘I-ghurm), that the earning profit is legitimised only by engaging in an economic venture and thereby contributing to the economy.