What is Shariah Compliance and Why Should We Care About It?

As a Muslim, you’ve probably heard of Shariah Law, right? If not, then no worries!

As a refresher, Shariah refers to the Islamic legal framework that governs various aspects of life, including finance and business. It is based on the principles and teachings of the Quran and the Hadith, and provides guidelines for ethical conduct and fair dealings. It is important that we understand Shariah and its application in finance in order to help us Muslims make informed decisions about managing our money in a way that aligns with our faith. Something that we may not always be able to do with conventional finance dealings.

To be Shariah-compliant, both financial transactions and investments have to align with specific rules and regulations that stem from Islamic law. These rules include:

1. Prohibition of Riba (interest): Islamic finance prohibits the payment and receipt of interest or any fixed, predetermined return on investment.

2. Prohibition of Gharar (uncertainty): Islamic finance requires that contracts be transparent and free of ambiguity, to avoid any uncertainty or unreasonable risk.

3. Prohibition of Maisir (gambling): Transactions involving speculative or gambling activities are prohibited.

4. Prohibition of Haraam (forbidden) activities: Investments in industries or businesses that are forbidden in Islam, such as alcohol and tobacco are prohibited.

5. Requirement for Zakat (charity): Islamic finance requires that a portion of income or wealth (2.5%) be donated to charitable causes annually.

Shariah compliance is monitored by Shariah supervisory boards or committees. These committees review financial products, transactions, and investments to ensure that they are Shariah-compliant and that they follow the principles of fairness and justice.

You may or may not be wondering if there is just one Shariah board that we all follow globally. The truth is, there is no single Shariah supervisory board that oversees all Islamic finance institutions and transactions worldwide. Instead, each institution typically has its own Shariah supervisory board.

I will mention though that there are several international bodies that work to promote standardization and best practices in Islamic finance and provide guidance on Shariah compliance. These include the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Financial Services Board (IFSB), and the Shariah Supervisory Board of Malaysia's Central Bank (BNM). All of these Shariah boards or committees are composed of prominent Islamic scholars and experts in finance and economics which is a plus if we are ever concerned about the legitimacy of it all.

Ultimately, the reason why we should care about Shariah compliance is that It ensures that financial transactions and investments are made to benefit individuals and society while avoiding harm to others. It's truly about the ethics of it all.