The document summarizes an international conference on Islamic finance held in Mauritius in 2011. It provides background on the principles and rationale of Islamic finance, including prohibitions on interest (riba), risk sharing, and speculative behavior. It also discusses how Islamic finance upholds social justice and requires transactions to be backed by real assets. The conference aimed to demonstrate how an economic system without interest can function, determining returns based on economic outcomes rather than an ex ante fixed rate. It also differentiated Islamic finance from conventional systems based on debt.

1. International Conference onIslamic Microfinance in Mauritius Organized By : CENTER OF ISLAMIC BANKING & ECNOMICS

2. The fundamentals of Islamic Finance;what are its rationale? 5 April 2011 GMBC LTD 2 International Conference on Islamic Finance & Banking in Mauritius

3. 3 GMBC LTD The theory of Riba could be summarised as follows: ‘The stipulation of an excess for the lender in loan is prohibited, and it amounts to Riba, whether the excess is in terms of quality or quantity or whether the excess in a tangible thing or a benefit, and whether the excess is stipulated at the time of contract or while determining the period of delay for satisfaction or during the period of delay and, further, whether the stipulation is writing or is part of customary practice.’ Qur’an 2:275. AAOIFI Shari’ah Standard, No. (19), Qard (loan), 4.4/1

4. What could a system of finance that originated in the desert over a thousand years ago have to offer to such a world? And how could it possibly compete?

6. Money as “potential” capital. Money is not a commodity, but a medium of exchange, a store value and a unit of measurement. Money represents purchasing power and cannot be utilised to increase the purchasing power without any productive activity. Islamic finance advocates the creation of wealth through trade and commerce.

7. Risk sharing. Because interest is prohibited, suppliers of funds become investors, rather than creditors.

8. Prohibition of speculative behaviour. Islamic finance discourages hoarding and prohibits transactions featuring extreme uncertainties (gharar), and gambling (maysir).5 An Introduction to Islamic Finance – 19 January 2011 – FSC Ebene GMBC LTD

10. Sharia approved activities. Only those business activities that do not violate the rules of the Sharia qualify for investment. For example, any investment in a business dealing with alcohol or gambling is prohibited.

11. Social justice. Any transaction leading to injustice and exploitation is prohibited.

12. The asset-backing principle. Each financial transaction must refer to a tangible, identifiable underlying asset.6 An Introduction to Islamic Finance – 19 January 2011 – FSC Ebene GMBC LTD

14. The failure to assume an ex ante positive nominal fixed interest rate—that is, no debt contract—does not necessarily mean that there has to be zero return on capital.

15. The return on capital is determined ex post, and the magnitude of the return on capital is determined on the basis of the return to the economic activity in which the funds are employed.

16. The expected return is what determines investment.

17. The expected rate of return—and income—is what determines savings. Therefore, there is no justification for assuming that there will be no savings or investment.

18. Positive growth is possible in such a system.

19. Monetary policy would function as in the conventional system, its efficacy depending on the availability of instruments designed to manage liquidity.

21. In the process of demonstrating the analytical viability of Islamic financial system, research also clearly differentiated it from the conventional system. In the conventional system, which is based on debt contracts, risks and rewards are shared asymmetrically, with the debtor carrying the greatest part of the risk and with governments enforcing the contract. Such a system has a built-in incentive structure that promotes moral hazard and asymmetric information. It also requires close monitoring, which can be delegated to an institution acting on behalf of the collectivity of depositors and investors; hence the need for banking institutions.

22. Thank You CENTER OF ISLAMIC BANKING & ECNOMICS Head Office: 192- Ahmad Block, New Garden Town , Lahore, Pakistan Ph: +92-42-35913096-8, 35858990, 38407850 Fax: +92 -42-35913056E-mail : info@alhudacibe.com Web: www.alhudacibe.com