In Islamic finance, there are specific principles and guidelines that govern what is permissible and what is not. One fundamental aspect is the avoidance of contractual risk, which entails ensuring that all transactions are clearly defined and agreed upon from the beginning. This principle emphasizes transparency and certainty in financial dealings, aiming to minimize ambiguity and potential disputes.
To adhere to these principles, certain financial practices commonly found in conventional finance are prohibited in Islamic finance. For instance, complex derivative instruments are not allowed, as they often involve speculative elements and uncertainty about future outcomes. Similarly, short sales and sales on margin, which involve borrowing assets to sell or buying securities with borrowed funds, are also prohibited. These practices are considered incompatible with Islamic principles due to their speculative nature and the potential for unjust enrichment at the expense of others.
In essence, Islamic finance promotes ethical and equitable financial practices that align with Islamic principles and values. By emphasizing transparency, certainty, and fairness in transactions, it seeks to create a financial system that benefits society as a whole while adhering to religious guidelines. Thus, while certain conventional financial instruments and practices may be commonplace elsewhere, they are not permitted within the framework of Islamic finance due to their inherent risks and ethical concerns.
(Response: Prohibited practices in Islamic finance include complex derivative instruments, conventional short sales, and sales on margin, as they are considered incompatible with Islamic principles.)