What Makes a Financial Product Shariah-Compliant?
Many people think a Shariah-compliant product is simply one without interest. Avoiding interest is essential, but it is only the starting point. A product is Shariah-compliant when its purpose, its structure and the way it is carried out in practice all meet the requirements of Islamic commercial law.
Three things a product must avoid
Riba
Any guaranteed increase on a loan, or certain unequal exchanges, is riba and is prohibited. This is why an Islamic bank cannot simply lend money and charge interest on it.
Gharar
Contracts must not contain excessive uncertainty about the price, the subject matter or the delivery. Both parties should know clearly what they are agreeing to.
Maysir
Arrangements that are essentially gambling, where one party gains purely at the other's expense through chance, are not allowed.
What it must be used for
The money must also go to permissible activities. Financing a business that produces alcohol, runs gambling, or deals mainly in interest-based finance is not compliant, however well the contract is structured.
How it should be structured
Islamic finance links money to real economic activity. Profit is earned through trade, leasing or partnership, where the financier takes on some real risk, such as owning an asset before selling it or sharing in the profit and loss of a business. Each contract, whether Murabaha, Ijarah, Musharakah or another, has its own conditions, and those conditions must be met in the right order.
How compliance is kept
Finally, compliance has to be governed. A product should be reviewed and approved by qualified Shariah scholars before launch, and then checked regularly through Shariah review and audit to confirm that the approved process is followed every day.
In short, a Shariah-compliant product avoids what is prohibited, serves a permissible purpose, is structured around real activity and shared risk, and is supervised by people qualified to judge it.