Islamic finance is a financial system based on principles and practices that are consistent with Islamic law (Shariah). It is an alternative to conventional finance and is designed to provide financial products and services that are compliant with Islamic principles. In Pakistan, Islamic finance is regulated by the State Bank of Pakistan (SBP) and is governed by the Islamic Financial Services Act, 2015.
There are several key principles that guide Islamic finance in Pakistan, including:
- Prohibition of interest: Islamic finance prohibits the charging of interest on loans, which is considered usurious and unethical under Islamic law. Instead, Islamic finance relies on profit and loss sharing arrangements to provide financing to individuals and businesses.
- Prohibition of speculation: Islamic finance prohibits speculation and gambling, which are considered haram (forbidden) under Islamic law. This means that Islamic finance products must be based on real economic activity and must not rely on speculation or uncertainty to generate returns.
- Ethical investments: Islamic finance requires that investments must be made in ethical and socially responsible ways. This means that investments should not be made in industries or activities that are considered harmful or unethical, such as gambling, tobacco, or alcohol.
- Risk sharing: Islamic finance emphasizes risk sharing between the lender and the borrower. This means that both parties share in the profits or losses of a financial transaction, rather than the lender receiving a fixed rate of return as in conventional finance.
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