Islamic finance follows the rules of Shariah, or Islamic law. The Islamic legal code is drawn from the Koran and the sayings of the Prophet Muhammad. It advises on everything from dietary laws to penalties for theft. Common Shariah terms relevant to finance include the following:
Riba?The charging of interest in any form regardless of the rate is forbidden by the Koran.
Murabaha?Murabaha, or cost-plus financing, replaces interest. Murabaha is a flat fee agreed upon by both buyer and seller. It is used instead of a traditional mortgage.
Takaful?Takaful systems are an insurance alternative and are structured as pools of money in which losses are evenly distributed.
Sukuk?A sukuk involves creating a legal entity around a specific asset, such as a building, that creates returns and distributes payments similar to those of a Western-style bond.
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