The Theory and Practice of Profit Sharing Investment
Foundations of Islamic Finance series
Edited by Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad
‘Why this book?’ is perhaps the main question to address in this preface. Islamic finance emerged some 50 years ago as a return to ethics-anddoctrine-based practices in financial transactions in the context of modern finance. Financial transactions in Muslim-majority societies in historical times were based squarely on a set of Islamic-ethics-consistent financial practices for payment, financing and investment activities. This rediscovered modern attempt starting some 50 years ago to reshape financial transaction contracts in Islamic countries, in line with ethics and doctrines consistent with Islamic principles of fairness, equity and full disclosures, led to the creation of a body of Islamic finance literature. That literature today is mostly description of what this new niche finance is all about with no or little attempt to provide a systematic introduction to its fundamentals to link those descriptions and principles to modern financial practices, in short to financial economics. After the entry of large modern banks into Islamic finance, following the Bank of England’s landmark approval in 2002 to permit Islamic banks as new niche financial businesses, the Islamic financial product markets have grown rapidly in this niche business selling new financial products known to the world as Islamic finance, although it should be described more appropriately by such terms as ‘ethics-based financial transactions’ or ‘profit-shared finance’ to emphasize the central difference in the pricing mechanism away from interest rates. It has also become evident that there is an urgency to create authentic literature – in the classic tradition of objective inquiry using...