Islamic Finance: Shariah-Compliant Contracts, Prohibitions and Governance
Domain overview
The Islamic Finance domain of the IFMP Islamic Finance Certification tests how transactions are structured to comply with Shariah. It covers the core prohibitions, the contract mechanics that make profit legitimate, and the governance arrangements that keep products compliant in Pakistan.
Core rules
- Riba is any contractually stipulated increase on a loan of money. It is prohibited regardless of the rate. Money is a medium of exchange, not an asset that earns income by itself.
- Profit must arise from trade, leasing, or shared risk in real assets. Ownership and risk must genuinely pass through the transaction.
- Key contracts: Murabaha (cost-plus sale with cost and profit disclosed), Mudarabah (capital from the rabb-ul-mal, effort from the mudarib; financial loss falls on capital unless the mudarib is negligent), Musharakah (joint capital; losses shared pro rata to capital), Ijarah (lease of usufruct), Salam (advance payment for a precisely defined future good), Istisna (manufacturing order), and Sukuk (asset-backed certificates).
- Governance requires a Shariah Supervisory Board at the institution, the State Bank of Pakistan's Shariah Advisory Committee for banking matters, and ongoing Shariah audit and compliance review. One-time product approval is not enough.
Worked example
A firm needs PKR 1,000,000 of working capital for six months. The bank buys eligible goods for PKR 1,000,000, bears ownership risk, and then sells them to the firm under Murabaha for PKR 1,100,000 payable at maturity. The PKR 100,000 is trade profit, not interest, because it is fixed in a sale after the bank owned the goods. The bank cannot add a late-payment charge to its income; any penalty is donated to charity.
Traps
Calling Murabaha a loan with interest; treating a profit rate as a riba rate; ignoring ownership risk; allocating Musharakah losses by ratio rather than by capital; using Salam without specifying quality, quantity and date; assuming Shariah approval is permanent without audit.