The specific legal nature of the transaction in Islamic banking law

Abstract

Prohibitions of interest and interest based income, proscribed by the Shariah law, have forced the Islamic banks and other financial institutions to develop special models of financing. Author examines the legal nature of various financial arrangements offered by the Islamic banks which could be classified into three basic groups of contracts. Some of those transactions are the classical legal agreements based on the profit and loss sharing where the contractual conditions relating to financing, repayments and proportions are ex ante known in which case the banks act as investors. Other models of financing are structured as commercial businesses where bank takes a role of trader or service supplier.