FM Technical Article Podcast: Islamic Finance

Islamic Finance in ACCA FM – key principles & instruments

• Background
 – In syllabus: Section E3 (knowledge level)
 – Modern Islamic finance since 1970s (Saudi, UAE, Bahrain, Malaysia)
 – Around $1 trillion assets managed globally

• Core principles
 – Wealth must come from legitimate trade and assets (not money from money)
 – Investments should have social and ethical benefits
 – Risk-sharing is essential
 – Harmful (haram) activities must be avoided

• Prohibitions
 – Riba (interest): lender cannot earn a fixed return regardless of outcome
 – Excessive debt: debt ratio above 33% breaches Shariah
 – Haram sectors: alcohol, gambling, pork, pornography, etc.
 – Uncertainty/speculation: no futures, options, conventional insurance, or short-selling

• Permitted techniques (Shariah-compliant instruments)
 – Murabaha: cost plus fixed markup trade credit
 – Ijara: lease financing (e.g. Islamic mortgages, Emirates Airlines aircraft finance)
 – Mudaraba: equity-style profit-sharing (bank funds, client expertise)
 – Musharaka: joint venture with shared profits/losses
 – Sukuk: Islamic bonds – asset-based returns instead of interest

• Governance
 – Shariah board ensures compliance, approves products, issues rulings
 – No single global authority, so practices differ by bank/jurisdiction
 – AAOIFI (Bahrain) works toward standards, widely adopted in Middle East and Asia

• Exam tips
 – Focus on principles, prohibitions, and instruments (not deep technical details)
 – Be clear on how sukuk differs from conventional bonds
 – Remember the ethical/social justice focus of Islamic finance

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