All other aspects of Shariah-compliant transactions, which are derived from the principles detailed in the Quran and the teachings of Prophet Muhammad, aim to prevent transactions and trades deemed harmful and immoral. So in addition to alcoholic drinks, tobacco, pornography, and weapons being prohibited; any transaction between two parties where one party must lose, by definition, for the other party to gain is prohibited. This includes the prohibition of gambling, and Gharar (selling of items, the value of which is unknown at the time of sale, such as short-selling and trading futures). Since only trading is allowed, and trading by definition involves the exchange of real-world items, all transactions have to involve an underlying asset or service and if you are going to trade in an asset you have to own it first. This avoids the problem associated with short selling and the derivative products that we have seen go bad causing many banks to amount enormous losses that they did not foresee.
Back in February, after defaults in sub-prime mortgage had triggered a credit crisis causing global banks to write down $80 billion in credit market losses over a period of only four months, very few seemed to notice that Islamic financial institutions worldwide were somehow untouched by that disaster in the making. Today, after a historic $700-billion bailout from the U.S. government, and after the evaporation of confidence in the financial sector forced the governments of Britain, Russia, France and others to promise multi-billion-dollar bailouts to their failing financial institutions, the relative immunity of Islamic financial institutions is unmistakable.
Islamic- or Shariah-compliant investment has been a growing trend in the U.S. and European markets for the past few years, accounting for some $500-billion in Europe alone. The most peculiar underlying principle stated in the Quran (2:275) is "Allah (Arabic for God) has permitted trade and prohibited riba (Arabic for interest-bearing loans)."
Trade is essentially a fair transaction; the two parties exchange items they completely possess and mutually agree that their values are equal at the time of the exchange. Interest-bearing loans, however, are unfair because the transaction always favors the lender, who is usually the rich party, over the borrower, who is usually the needy party. Such an unfair transaction can only help the rich become richer.
Only real investments generating products or services that add a positive value to the economy qualify as Islamic investments. Investors can only be shareholders who have a fair share of profits or losses, and hence, they are not guaranteed to accumulate more wealth just because they already have some. Therefore, purchasing common stock is essentially allowed as long as the underlying product or service is not deemed harmful or immoral according to Shariah.
For these reasons, subprime mortgage loans are not approved by Shariah. To further complicate the matter, these loans were sold off as high-return bonds and sold to investors. This type of transaction is no doubt a form of prohibited usury, that only serves to burden the people who can barely afford loans while gearing all the interest collected from the poor toward the wealthy. However, the results of sub-prime lending have been even more disastrous; borrowers could not pay and are losing their homes, and both the lenders and investors are also becoming broke.
Money is simply a medium of exchange and does not have any real value in and of itself. Money has value as long as it is backed up with something. If our money is backed by debt, one should question the sustainability of such a system that does not hold any sort of useful trade or commodity as the crux of its means of exchange. The $700 billion bailout plan is giving a slight boost at best to the crisis that plagues our economy and cannot by any means be considered a complete solution to a problem with the economic system itself. Shariah, however, does offer a complete rethink of the way we conduct business and is attracting growing interest from intellectuals in the field of economics and business