ages the community to lend to one another out of goodwill, rather than because of some expected profit (Al-Qaradawi, 1980).
The prohibition against interest also helps spread the risk between the lender and the borrower. In traditional Western banking, the lender receives a promise to receive a specific amount of money--more than was borrowed--at a point in the future. If the borrower cannot pay, the lender takes the collateral. The risk is borne entirely by the borrower. Under Islamic banking, the lender shares in the risk associated with the loan, and if the venture is profitable, the lender receives part of the profit. If the venture is not profitable, the lender shares in the losses (Willis, 2003).
There are generally accepted guidelines which determine whether specific products or instruments are in keeping with sharia law. To begin with, the business underlying the transaction must itself be acceptable under sharia law. It is important to note that owning equities is an acceptable investment in Islam since the shareholder shares in the risk of the enterprise as well as in the profit. Thus a hotel company that operates casinos would not be an acceptable investment. Similarly, a company such as Philip Morris that participates in both acceptable (food items) as well as unacceptable goods (alcoholic beverages) would not be an acceptable investment. If the main business is acceptable, but the company invests in interest bearing investments or borrows money to be repaid with interest, it is the shareholder's responsibility to object to the practice. This can be accomplished at the annual meeting of shareholders or through other standard forms of communication between shareholder and management ("Summary," 2003).
If an equity pays a dividend and also invests in interest bearing investments, the proportion of the income in the dividend that comes from the investment is to be paid to charity. This requires some diligen...