Principles and Products of Islamic Finance

This short paper begins by succinctly discussing the key principles of Islamic finance, such as partnership and solidarity. It notes that the principles are laid down in the sharia, Islamic law. Furthermore, it highlights that Islamic finance, comprising financial transactions in banks and non-bank financial institutions, formal and non-formal financial institutions, is based on the concept of a social order of brotherhood and solidarity.

The paper then moves on to consider the typology of Islamic financial institutions in Indonesia, where at national and institutional levels, Islamic finance is supervised by sharia supervisory boards (SSB). In Indonesia, Islamic finance comprises two types of institutions: (i) Islamic banking institutions, which fall under the banking law, and (ii) Islamic financial cooperatives, which are not part of the formal financial sector.

Finally the paper provides a typology of Islamic financial products. A clear table format gives a brief explanation of each of the key products, broken down between financial products (profit-sharing and advance purchase products), deposit products and insurance products. The meanings of selected Islamic banking terminology is also given.

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