What is Shariah finance?

Shariah finance rests on a handful of rules that shape every finance option. Riba (interest on money) is not permitted, so providers earn a sale margin, rent or a share of profit instead. Gharar (excessive uncertainty) is avoided, which means contracts must be clear about price, delivery and obligations, and maysir (pure gambling or speculation) is prohibited.

Every transaction must be tied to a tangible asset or service, such as a sale, a lease or a construction contract. Sharing profit and loss is preferred over pushing all the risk onto one party, and activities considered harmful to society, such as alcohol production and gambling, are screened out. These principles also affect legal drafting, tax treatment and governance.

Each Shariah contract reaches a familiar economic result through a different legal form. Under murabaha, the financier buys the asset, discloses its cost and sells it to you at an agreed mark-up payable over time; it is widely used for home and personal finance. Ijara is a lease: the financier owns a vehicle, equipment or property and you pay rent, sometimes with ownership passing at the end of the term, much like a hire purchase.

Diminishing musharakah is shared ownership where you gradually buy out the financier's share, common for home finance. Mudarabah and musharakah are profit-sharing partnerships used for investment and project finance. Sukuk are certificates that pay returns from underlying assets rather than interest, an alternative to bonds. Salam and istisna cover forward sales and construction or manufacturing orders, and takaful is cooperative insurance with shared risk.

Credible providers have a Shariah advisory board of qualified jurists who review each finance option and issue opinions on permissibility, back this with a formal certificate, keep Shariah portfolios separate, and run Shariah audits with annual reports. Any non-compliant revenue is filtered out, often through charitable distribution.

Shariah structures still sit inside Australian law. ASIC expects clear disclosure of terms and fees, APRA supervises providers that take deposits, and the ATO looks at the substance of each transaction. Because a murabaha involves a sale and an ijara involves a lease, GST and stamp duty can fall at different points than they would under a conventional loan, and revenue may be recognised at different times. Compare the total cost schedule (payments, fees and residuals) and get specialist legal and tax advice before signing a major contract.